<PAGE>
As filed with the Securities and Exchange Commission on August 17, 1999
Registration No. 333-82577
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO.1
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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FOUNDRY NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 3576 77-0431154
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
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680 W. Maude Avenue, Suite 3
Sunnyvale, CA 94086
(408) 530-3300
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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Bobby R. Johnson, Jr., President and Chief Executive Officer
FOUNDRY NETWORKS, INC.
Sunnyvale, CA 94086
(408) 530-3300
(Name, Address Including Zip Code, and Telephone Number Including Area Code,
of Agent for Service)
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Copies to:
Joshua L. Green Jorge del Calvo
David C. Lee Karen A. Dempsey
Robert S. Schlossman Davina K. Kaile
Russ K. Yoshinaka Karen M. Yan
VENTURE LAW GROUP PILLSBURY MADISON & SUTRO LLP
A Professional Corporation 2550 Hanover Street
2800 Sand Hill Road Palo Alto, CA 94304
Menlo Park, CA 94025
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title Of Each Class Of Maximum Aggregate Amount Of
Securities Amount To Offering Price Offering Price Registration
To Be Registered Be Registered Per Share (1) Fee
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<S> <C> <C> <C> <C>
Common Stock, par value
$.0001 per share....... 5,750,000 $16.00 $92,000,000 $25,576 (2)
</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act.
(2) Of which $23,978 was paid with the initial filing on July 9, 1999.
Therefore, a fee of $1,598 accompanies this filing.
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated August 17, 1999
[LOGO]
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5,000,000 Shares
Common Stock
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This is the initial public offering of Foundry Networks, Inc. We are offering
5,000,000 shares of our common stock. We anticipate the initial public
offering price will be between $14.00 and $16.00 per share.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "FDRY."
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
<TABLE>
<S> <C> <C> <C>
Underwriting
Price to Discounts Proceeds to
Public and Commissions Foundry Networks, Inc.
Per share $ $ $
Total $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to 750,000
additional shares to cover any over-allotments.
Deutsche Banc Alex. Brown
Merrill Lynch & Co.
J.P. Morgan & Co.
The date of this prospectus is , 1999
<PAGE>
[INSIDE FRONT COVER]
Depicted on this page are enterprise and Internet service provider networks with
Foundry products.
The following statements appear on this page:
. Product Breadth: A full suite of award-winning Gigabit Ethernet Layer
2, Layer 3 and Layer 4-7 products for enterprises and ISPs
. Performance: Non-blocking, wire-
speed performance that scales across the
LAN, MAN and LAN/WAN
. Intelligence: Support for unpredictable traffic flows, bandwidth
intensive applications and dynamic end-user needs
. Leading Price Points: Superior performance and network intelligence
capabilities at leading price points
. Flexible Architecture: Protects customer's networking equipment
investment with a consistent hardware and software architecture
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 2
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 17
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 32
Management............................................................... 46
Principal Stockholders................................................... 56
Certain Transactions..................................................... 58
Description of Capital Stock............................................. 60
Shares Eligible for Future Sale.......................................... 63
Underwriting............................................................. 65
Legal Matters............................................................ 67
Experts.................................................................. 67
Additional Information Available to You.................................. 67
Index to Financial Statements............................................ F-1
</TABLE>
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Foundry Networks, NetIron, TurboIron and our gear logo are registered
trademarks, and FastIron, BigIron and IronView are trademarks of Foundry. All
other brand names or trademarks appearing in this prospectus are the property
of their respective holders.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should carefully read the
entire prospectus including "Risk Factors" and the financial statements, before
making an investment decision.
Our Business
Foundry Networks designs, develops, manufactures and markets a comprehensive
suite of high performance networking products for enterprises and Internet
service providers. Our Gigabit Ethernet Layer 2, Layer 3 and Layer 4-7 switches
enable our customers to build and maintain efficient, high performance
networks. Gigabit Ethernet is a networking standard that transmits data at
1,000 million bits per second. Layer 2 switches provide dedicated use of
network throughput capacity, or bandwidth, while Layer 3 switches route network
traffic. Layer 4-7 switches, a new generation of networking devices, provide
the intelligence to control information delivery. Our products provide
solutions for many types of networks, including local area networks or LANs,
metropolitan area networks or MANs, and wide area networks or WANs. This
product breadth allows us to provide solutions throughout a customer's network,
from the geographically dispersed offices of an enterprise LAN to the core of
the LAN, and from an Internet service provider's point of entry to the WAN to
its network of Internet servers.
By using customized semiconductors, known as application-specific integrated
circuits, we provide switching products that offer better performance at a
lower cost than traditional routers which rely on software to provide
comparable functionality. Our Layer 2 and Layer 3 switches provide the
bandwidth required to support the increasing use of bandwidth-intensive and
Internet-based applications. Our high performance Layer 4-7 switching products
allow enterprises and Internet service providers to direct traffic flow more
efficiently, based on application type and end user, while also allowing
Internet service providers to offer their customers differentiated, fee-based
quality of service. By providing high levels of performance and network
intelligence capabilities at leading price points we provide a comprehensive
solution to address the rapidly growing networking market.
The emergence of the Internet and bandwidth-intensive applications has posed
new demands on the networks of enterprises and Internet service providers. The
number of Internet users and volume of network traffic have grown
exponentially, with the majority of traffic now traversing LAN boundaries to
WANs and the Internet. In addition, the complexity of traffic has also
increased with the pervasiveness of new applications that incorporate
increasing amounts of data, voice, video and graphics. To satisfy these
demands, enterprises and Internet service providers require networking
solutions with superior performance and intelligence capabilities, resulting in
the emergence of a large market for a broad range of high performance, cost-
effective switching solutions with network intelligence capabilities.
Collaborative Research, an independent research and consulting firm
specializing in the Layer 4-7 switching market, estimates in a February 1999
report that the Layer 4-7 switching market totaled $130 million in 1998 and is
expected to grow to $1 billion in 2002. Dell'Oro Group, an independent
networking industry research and consulting firm, estimates in a March 1999
report that the Layer 3 LAN switching market totaled $637 million in 1998 and
is expected to increase to $3.9 billion in 2002.
2
<PAGE>
Our solution to address this market provides the following benefits:
Breadth of Product Line. We are one of the few networking companies to
provide a full suite of Gigabit Ethernet Layer 2, Layer 3 and Layer 4-7
products applicable to LANs, MANs and WANs, enabling us to provide solu-
tions throughout a customer's network.
Performance. Our products provide a high level of performance to allow
enterprises and Internet service providers to build highly reliable
networks that support unpredictable traffic flows, bandwidth-intensive
applications and dynamic end-user needs.
Intelligence. Our products provide the intelligence required to transport
unpredictable traffic and bandwidth-intensive applications, which improves
the performance, reliability and manageability of networks.
Leading Price Points. Our products are designed to offer superior perfor-
mance and network intelligence capabilities at leading price points.
Flexibility of Architecture. Our products are based on a uniform hardware
architecture that is compatible with all major existing network products.
This allows customers to integrate our products into their networks without
an extensive and expensive replacement of their existing network
components.
We sell our products through a direct sales force, resellers and an OEM. Our
products have been deployed in enterprises spanning many industries,
educational institutions and government agencies and in Internet service
providers.
We were incorporated in Delaware on May 22, 1996, and changed our name to
Foundry Networks, Inc. on January 22, 1997. Our principal executive offices are
located at 680 W. Maude Avenue, Suite 3, Sunnyvale, CA 94086. Our telephone
number at that location is (408) 530-3300. References in the prospectus to
"we," "our," and "us" refer to Foundry. Our web site is located at
www.foundrynetworks.com. The information contained on our web site does not
constitute part of this prospectus.
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Unless otherwise indicated, this prospectus assumes:
. that the underwriters have not exercised their option to purchase
additional shares;
. a three-for-two forward split of our outstanding shares of common stock
and preferred stock to be effected prior to this offering; and
. conversion of all shares of preferred stock into shares of common stock
upon completion of this offering.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Foundry.... 5,000,000 shares
Common stock to be outstanding
after this offering............... 55,635,929 shares
Use of proceeds.................... For working capital and general corporate
purposes. See "Use of Proceeds" on page 17
for more detailed information.
Proposed Nasdaq National Market
symbol............................ "FDRY"
</TABLE>
The number of shares of common stock to be outstanding upon completion of
this offering is based on the number of shares outstanding as of June 30, 1999.
This number excludes as of June 30, 1999: (1) 5,263,453 shares subject to
outstanding options and 443,002 shares available for future option grants under
our 1996 Stock Plan; (2) 529,500 shares subject to non-plan options; and (3)
45,000 shares subject to warrants to purchase Series A preferred stock which
will convert to warrants to purchase common stock upon completion of this
offering. This number also excludes 1,425,000 shares reserved for issuance
under our 1999 Directors' Stock Option Plan and 1999 Employee Stock Purchase
Plan and 3,000,000 additional shares available for future option grants under
our 1996 Stock Plan which were authorized in July 1999.
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
May 22, 1996 Six Months
(Inception) Year Ended Ended
to December 31, June 30,
December 31, --------------- ----------------
1996 1997 1998 1998 1999
------------ ------ ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue, net.................... $ -- $3,381 $17,039 $ 4,203 $39,487
Gross profit.................... -- 1,546 8,606 2,121 21,146
Income (loss) from operations... (2,140) (9,129) (9,765) (4,443) 3,991
Net income (loss)............... (2,013) (9,007) (9,352) (4,230) 3,011
Weighted average shares used in
computing diluted net
income (loss) per share........ 13,488 52,320
Diluted net income (loss) per
share.......................... $ (0.69) $ 0.06
Weighted average shares used in
computing pro forma
basic net income (loss) per
share.......................... 34,323 40,755
Pro forma basic net income
(loss) per share............... $ (0.27) $ 0.07
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
(unaudited)
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................ $12,340 $12,340 $ 81,125
Working capital.................................. 21,297 21,297 90,082
Total assets..................................... 36,453 36,453 105,238
Total stockholders' equity (deficit)............. (9,373) 21,712 90,497
</TABLE>
See Note 2 of the Notes to Financial Statements beginning on page F-7 for an
explanation of the determination of the number of shares and share equivalents
used in computing pro forma per share amounts.
The pro forma balance sheet data summarized above assumes the conversion of
all outstanding shares of preferred stock into common stock upon completion of
this offering on a one-to-one basis. The pro forma as adjusted data above
adjusts the pro forma amounts to reflect the application of the net proceeds
from the sale of 5,000,000 shares of common stock offered by Foundry at an
assumed initial public offering price of $15.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
4
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest in shares of our common stock. Any
of the following risks could cause the trading price of our common stock to
decline.
We have a history of losses and may not be profitable in the future.
We have incurred net losses of $2.0 million from inception through December
31, 1996, $9.0 million in 1997 and $9.4 million in 1998. We had net income of
$3.0 million for the six months ended June 30, 1999. As of June 30, 1999, we
had an accumulated deficit of $17.4 million. We expect to incur increased costs
and expenses related to:
. sales and marketing, including expansion of our direct sales operation
and distribution channels;
. product development;
. customer support;
. expansion of our corporate infrastructure; and
. facilities expansion.
Our ability to remain profitable depends on our ability to generate and
sustain substantially higher revenue while maintaining reasonable cost and
expense levels. We may not be able to sustain or increase profitability on a
quarterly or annual basis in the future.
We may not meet quarterly financial expectations, which could cause our stock
price to decline.
Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. Delays in generating or
recognizing forecasted revenue could cause our quarterly operating results to
be below the expectations of public market analysts or investors, which could
cause the price of our common stock to fall.
We may experience a delay in generating or recognizing revenue for a number
of reasons. Orders at the beginning of each quarter typically do not equal
expected revenue for that quarter and are generally cancelable at any time.
Therefore, we depend on obtaining orders in a quarter for shipment in that
quarter to achieve our revenue objectives. In addition, the failure to ship
products by the end of a quarter may negatively affect our operating results.
Our reseller agreements typically provide that the reseller may delay scheduled
delivery dates without penalty. Further, our customer purchase orders and
reseller agreements sometimes provide that the customer or reseller may cancel
orders within specified time frames without significant penalty.
We also plan to significantly increase our operating expenses to expand our
sales and marketing efforts, expand our customer support capabilities, finance
increased levels of research and development, build our operational and
administrative infrastructure and obtain a larger facility. We base our
operating expenses on anticipated revenue trends and a high percentage of our
expenses are fixed in the short term. As a result, any shortfall in revenue
relative to our expectations could cause a significant decline in our quarterly
operating results.
Intense competition in the market for network solutions could prevent us from
increasing revenue and sustaining profitability.
The market for network solutions is intensely competitive. In particular,
Cisco maintains a dominant position in this market and several of its products
compete directly with our products.
5
<PAGE>
We also compete with other large public companies, such as 3Com and Nortel
Networks, as well as other smaller public and private companies. Many of our
current and potential competitors have longer operating histories and
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and larger installed customer
bases than we do. Additionally, we may face competition from unknown companies
and emerging technologies that may offer new LAN, MAN and LAN/WAN solutions to
enterprises and Internet service providers.
In order to remain competitive, we must, among other things, invest
significant resources in developing new products with superior performance at
lower prices than our competitors. We must also enhance our current products
and maintain customer satisfaction. If we fail to do so, our products may not
compete favorably with those of our competitors and our revenue and
profitability could suffer. See "Business--Competition" on page 43 for more
detailed information regarding our competitors.
Our ability to increase our revenue depends on expanding our North American
direct sales operation and reseller distribution channels and continuing to
provide excellent customer support.
Our inability to effectively expand, train and retain our domestic sales and
support staff or establish our indirect distribution channels could harm our
ability to grow and increase revenue. Our expansion of our direct sales
operation may not be successfully completed and the cost of our expansion may
exceed the revenue generated. In addition, we have recently increased our sales
force in advance of sales, and if this increase does not result in an increase
in sales, our business may suffer.
If we fail to develop relationships with significant resellers, or if these
resellers are not successful in their sales efforts, sales of our products may
decrease and our operating results would suffer.
We need to increase our customer service and support staff to support new and
existing customers and resellers. The design and installation of networking
products can be complex and our customers, particularly our Internet service
provider customers, require a high level of sophisticated support and services.
Hiring highly trained customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of our products. See
"Business--Sales and Marketing" on page 40 and "Business--Customer Service and
Support" on page 41 for more detailed information regarding our sales and
customer support operations.
If we fail to introduce new products with superior performance in a timely
manner, our ability to sustain and increase our revenue could suffer.
The current life cycle of our products is typically 18 to 24 months. To
remain competitive, we need to introduce new products in a timely manner that
offer substantially greater performance and support a greater number of users
per device, all at lower price points. We have experienced, and may in the
future experience, delays in developing and releasing new products and product
enhancements. This has led to, and may in the future lead to, delayed sales,
increased expenses and lower quarterly revenue than anticipated. During the
development of our products, we have also experienced delays in the prototyping
of our ASICs, which in turn has led to delays in product introductions. In
addition, when we announce new products or product enhancements that have the
potential to replace or shorten the life cycle of our existing products,
customers may defer purchasing our existing products. This could harm our
operating results by decreasing sales, increasing our inventory levels of older
products and exposing us to greater risk of product obsolescence.
6
<PAGE>
We depend on large purchases from a few significant customers, and any loss,
cancellation or delay in purchases by these customers could cause a shortfall
in revenue.
To date, a limited number of customers and resellers have accounted for a
significant portion of our revenue. If any of these customers stop or delay
purchases, our revenue and profitability could suffer. In 1998, Mitsui & Co.
(U.S.A.) accounted for 21% of our revenue. For the six months ended June 30,
1999, America Online, Hewlett-Packard and Mitsui accounted for 17%, 15% and 10%
of our revenue, respectively.
While our financial performance depends on large orders from a few
significant customers and resellers, we do not have binding commitments from
any of them. For example:
. our reseller agreements generally do not require minimum purchases;
. our customers can stop purchasing and our resellers can stop marketing
our products at any time;
. our reseller agreements generally are not exclusive and are for one year
terms, with no obligation of the resellers to renew the agreements; and
. our reseller agreements provide for discounts based on expected or
actual volumes of products purchased or resold by the reseller in a
given period.
Because our expenses are based on our revenue forecasts, a substantial
reduction or delay in sales of our products to, or unexpected returns from
customers and resellers, or the loss of any significant customer or reseller
could harm our business. Although our largest customers may vary from period-
to-period, we anticipate that our operating results for any given period will
continue to depend to a significant extent on large orders from a small number
of customers.
Our success depends upon sales to Internet service providers, whose
unpredictable demands, requirements and business models subject us to potential
adverse revenue fluctuations.
We have recently introduced products specifically targeted at the Internet
service provider market and currently have under development other products
that will address their requirements. As a result, our success depends on
increased sales to Internet service providers. Although we expect these sales
to increase, we believe that there are a number of risks arising from doing
business with Internet service providers which may not arise in our
relationships with our other customers, including:
. Internet service providers demonstrate a low level of brand loyalty and
may switch to another supplier which provides superior performance;
. any failure of an Internet service provider's service to its customers,
particularly in the case of our largest Internet service provider
customer, America Online, that is correctly or incorrectly attributed to
our products could lead to substantial negative publicity and undermine
our efforts to increase our sales in both this market and other markets;
. we may lose Internet service provider customers if they fail due to the
highly competitive nature of their business or if they do not survive as
a result of mergers and acquisitions in the Internet service provider
industry; and
. if the Internet does not continue to expand as a widespread
communications medium and commercial marketplace, the growth of the
market for Internet infrastructure equipment may not continue and the
demand for our products could decline.
Due to these factors, we may not successfully increase our penetration of the
Internet service provider market or maintain our current level of sales in this
market.
7
<PAGE>
Hewlett-Packard is a major customer and our sole OEM, and the termination of
our relationship with Hewlett-Packard could harm our business.
For the six months ended June 30, 1999, Hewlett-Packard, currently our sole
OEM, accounted for 15% of our revenue, and we anticipate that it will continue
to account for a significant percentage of our revenue. In addition to
providing revenue through sales of our products to Hewlett-Packard, we believe
that this relationship is important to facilitate broad market acceptance of
our products and enhance our sales, marketing and distribution capabilities.
Therefore, in addition to directly affecting our revenue, the cancellation of
our agreement with Hewlett-Packard could harm our ability to market and sell
our products to potential customers.
In addition, if we were to default under conditions specified in the
agreement, Hewlett-Packard could use our source code to develop and manufacture
competing products. This could harm our performance and ability to compete.
This agreement creates the potential that we and Hewlett-Packard may compete
for sales to the same customer. If this situation occurs, it could harm our
relationship with Hewlett-Packard and also harm our business. See "Business--
Sales and Marketing" on page 40 for a discussion of the material terms of our
agreement with Hewlett-Packard.
We expect the average selling prices of our products to decrease which may
reduce gross margins or revenue.
Our industry has experienced rapid erosion of average product selling prices
due to a number of factors, particularly competitive pressures and rapid
technological change. We may experience substantial period-to-period
fluctuations in future operating results due to the erosion of our average
selling prices. We also anticipate that the average selling prices of our
products will decrease in response to competitive pressures, increased sales
discounts, new product introductions by our competitors or other factors.
If we are unable to hire additional qualified personnel as necessary or if we
lose key personnel, we may not be able to successfully manage our business or
achieve our objectives.
We believe our future success will depend in large part upon our ability to
identify, attract and retain highly skilled managerial, engineering, sales and
marketing, finance and manufacturing personnel. Competition for these personnel
is intense, especially in the San Francisco Bay Area, and we have had
difficulty hiring employees in the timeframe we desire, particularly engineers.
We may not succeed in identifying, attracting and retaining personnel. The loss
of the services of any of our key personnel, the inability to identify, attract
or retain qualified personnel in the future or delays in hiring required
personnel, particularly engineers and sales personnel, could make it difficult
for us to manage our business and meet key objectives, such as timely product
introductions. In addition, companies in the networking industry whose
employees accept positions with competitors frequently claim that competitors
have engaged in unfair hiring practices. We have received one claim like this
from another company and we may receive additional claims in the future. We
could incur substantial costs in defending ourselves against any such claims,
regardless of the merits of such claims.
Our success also depends to a significant degree upon the continued
contributions of our key management, engineering, sales and marketing, finance
and manufacturing personnel, many of whom would be difficult to replace. In
particular, we believe that our future success depends on Bobby R. Johnson,
Jr., President, Chief Executive Officer and Chairman of the Board, and H. Earl
Ferguson, Vice President, Hardware Engineering. We do not have employment
contracts or key person life insurance covering any of our personnel.
8
<PAGE>
Our ability to increase our international sales is subject to a number of risks
we do not control.
Our success will depend, in part, on increasing international sales and
expanding our international operations. Our international sales primarily
depend on our resellers, including Boreal and Mitech in Europe, Mitsui in Japan
and Samsung in Korea. Although we expect international revenue to increase as a
percentage of our total revenue, the failure of our resellers to sell our
products internationally would limit our ability to sustain and grow our
revenue. In particular, our revenue from international sales depends on
Mitsui's ability to sell our products and on the strength of the Japanese
economy which has been weak in recent years.
There are a number of risks arising from our international business,
including:
. potential recessions in economies outside the United States, such as
Japan;
. longer accounts receivable collection cycles;
. difficulties in managing operations across disparate geographic areas;
. difficulties associated with enforcing agreements through foreign legal
systems;
. import or export licensing requirements;
. potential adverse tax consequences; and
. unexpected changes in regulatory requirements.
Our international sales currently are denominated in U.S. dollars. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive on a price basis in
international markets. In the future, we may elect to invoice some of our
international customers in local currency, which could subject us to
fluctuations in exchange rates between the U.S. dollar and the local currency.
In January 1999, the new "Euro" currency was introduced in European countries
that are part of the European Monetary Union ("EMU"). During 2002, all EMU
countries are expected to completely replace their national currencies with the
Euro. Because a significant amount of uncertainty exists as to the effect the
Euro will have on the marketplace and because all of the final rules and
regulations have not yet been defined and finalized by the European Commission
regarding the Euro currency, we cannot determine the effect this will have on
our business.
Our reliance on single or limited sources for key components may inhibit our
ability to meet customer demand.
We currently purchase several key components used in our products from single
or limited sources and depend on supply from these sources to meet our needs.
Our principal suppliers of key components include Celestica-Asia, Texas
Instruments, Toshiba, Hewlett-Packard, Molex and Intel. We acquire these
components through purchase orders and have no long-term commitments regarding
supply or price from these suppliers. We may encounter shortages and delays in
obtaining components in the future which could impede our ability to meet
customer orders. Our principal limited-sourced components include:
. dynamic and static random access memories, commonly known as DRAMs and
SRAMs;
. printed circuit boards; and
. microprocessors.
9
<PAGE>
We depend on anticipated product orders to determine our material
requirements. Lead times for single- or limited-sourced materials and
components can be as long as six months, vary significantly and depend on
factors such as the specific supplier, contract terms and demand for a
component at a given time. If orders do not match forecasts, we may have either
excess or inadequate inventory of materials and components, which could
negatively affect our operating results and financial condition. From time to
time, we have experienced shortages in allocations of components, resulting in
delays in filling orders. See "Business --Manufacturing," on page 42 for a
discussion of components supplied by a single supplier.
Our reliance on third-party manufacturing vendors to manufacture our products
may cause a delay in our ability to fill orders.
We currently subcontract substantially all of our manufacturing to two
companies, Celestica-Asia, located in San Jose, California, which assembles and
tests our printed circuit boards, and Hadco Corporation, located in Santa
Clara, California, which assembles and tests our backplane products. We do not
have long-term contracts with either of these manufacturers. We have
experienced delays in product shipments from our contract manufacturers, which
in turn delayed product shipments to our customers. We may in the future
experience similar delays or other problems, such as inferior quality and
insufficient quantity of product, any of which could harm our business and
operating results. We intend to regularly introduce new products and product
enhancements, which will require us to rapidly achieve volume production by
coordinating our efforts with those of our suppliers and contract
manufacturers. We attempt to increase our material purchases, contract
manufacturing capacity and internal test and quality functions to meet
anticipated demand. The inability of our contract manufacturers to provide us
with adequate supplies of high-quality products or the loss of either of our
contract manufacturers, or the ability to obtain raw materials, could cause a
delay in our ability to fulfill orders.
Due to the lengthy sales cycles of some of our products, the timing of our
revenue is difficult to predict and may cause us to miss our revenue
expectations.
Some of our products have a relatively high sales price, and often represent
a significant and strategic decision by an enterprise or Internet service
provider. As a result, the length of our sales cycle in these situations can be
as long as 12 months and may vary substantially from customer to customer.
While our customers are evaluating our products and before they may place an
order with us, we may incur substantial sales and marketing expenses and expend
significant management effort. Consequently, if sales forecasted from a
specific customer for a particular quarter are not realized in that quarter, we
may not meet our revenue expectations.
10
<PAGE>
The timing of the adoption of industry standards may negatively impact
widespread market acceptance of our products.
Our success depends in part on both the adoption of industry standards for
new technologies in our market and our products' compliance with industry
standards. Many technological developments occur prior to the adoption of the
related industry standard. The absence of an industry standard related to a
specific technology may prevent market acceptance of products using the
technology. For example, we introduced Gigabit Ethernet products in May 1997,
over a year prior to the adoption of the industry standard for this technology.
We intend to develop products using other technological advancements, such as
10 Gigabit Ethernet, and may develop these products prior to the adoption of
industry standards related to these technologies. As a result, we may incur
significant expenses and losses due to lack of customer demand, unusable
purchased components for these products and the diversion of our engineers from
future product development efforts. Further, we may develop products that do
not comply with the eventual industry standard, which could hurt our ability to
sell these products. If the industry evolves to new standards, we may not be
able to successfully design and manufacture new products in a timely fashion
that meet these new standards. Even after industry standards are adopted, the
future success of our products depends upon widespread market acceptance of
their underlying technologies.
If our products contain undetected software or hardware errors, we could incur
significant unexpected expenses and lost sales and be subject to product
liability claims.
Our products are complex and may contain undetected defects or errors,
particularly when first introduced or as new enhancements and versions are
released. Despite our testing procedures, these defects and errors may be found
after commencement of commercial shipments. Any defects or errors in our
products discovered in the future or failures of our customers' networks,
whether caused by our products or another vendors' products could result in:
. negative customer reactions;
. product liability claims;
. negative publicity regarding us and our products;
. delays in or loss of market acceptance of our products;
. product returns;
. lost sales; and
. unexpected expenses to remedy errors.
Continued rapid growth will strain our operations and will require us to incur
costs to upgrade our infrastructure.
We have experienced rapid growth which has placed, and continues to place, a
significant strain on our resources. For example, we had 131 full-time
employees as of June 30, 1999 compared to 55 full-time employees as of June 30,
1998, an increase of 138%. Our management team has limited experience managing
rapidly growing companies on a public or private basis. As a result, we may
make mistakes in operating our business, such as inaccurately forecasting our
sales, which may result in unanticipated fluctuations in our operating results.
To accommodate anticipated growth, we must:
. improve existing and implement new operational and financial systems,
procedures and controls;
11
<PAGE>
. hire, train and manage additional qualified personnel, including in the
near future, a significant number of new sales personnel; and
. effectively manage multiple relationships with our customers, suppliers
and other third parties.
Our current or planned personnel systems, procedures and controls may not be
adequate to support our future operations. Any delay in the implementation of
or disruption in the transition to new or enhanced systems, procedures or
controls, could harm our ability to accurately forecast sales demand, manage
our supply chain and record and report financial and management information on
a timely and accurate basis.
If we fail to lease adequate additional space, our ability to expand our
business could suffer.
We believe that by the end of 1999, we will need additional space to
accommodate our growth. The commercial real estate market in the San Francisco
Bay Area is volatile and unpredictable in terms of available space, rental
fees, occupancy rates and preferred locations. If we fail to lease new space on
reasonable terms, our ability to expand our business may be negatively affected
or our operating results could be harmed. In addition, if not handled
appropriately, the transition to a new facility could disrupt our operations.
See "Business--Facilities" on page 45 for a discussion of the facilities leased
by us.
Failure to comply with domestic, foreign or international regulations could
prevent us from selling our products.
In the United States, our products must comply with various regulations and
standards defined by the Federal Communications Commission and Underwriters
Laboratories. Internationally, products that we develop may be required to
comply with standards established by telecommunications authorities in various
countries as well as with recommendations of the International
Telecommunication Union. If we do not comply with existing or evolving
standards and regulations or if we fail to obtain timely domestic or foreign
regulatory approvals or certificates, we would not be able to sell our products
where these standards or regulations apply, which may prevent us from
sustaining our revenue or maintaining profitability.
We may engage in future acquisitions that could result in the dilution of our
stockholders, cause us to incur substantial expenses and harm our business if
we cannot successfully integrate the acquired business, products, technologies
or personnel.
As part of our business strategy, we may review acquisition prospects that
would complement our existing business or enhance our technological
capabilities. Future acquisitions by us could result in large and immediate
write-offs, the incurrence of debt and contingent liabilities or amortization
expenses related to goodwill and other intangible assets, any of which could
negatively affect our results of operations. Furthermore, acquisitions involve
numerous risks and uncertainties, including:
. difficulties in the assimilation of products, operations, personnel and
technologies of the acquired companies;
. diversion of management's attention from other business concerns;
12
<PAGE>
. risks of entering geographic and business markets in which we have no or
limited prior experience; and
. potential loss of key employees of acquired organizations.
Although we do not currently have any agreements or plans with respect to any
material acquisitions, we may make acquisitions of complementary businesses,
products or technologies in the future. We may not be able to successfully
integrate any businesses, products, technologies or personnel that might be
acquired in the future, and our failure to do so could harm our business.
We may need additional capital to fund our future operations which may not be
available to us on favorable terms when required or at all.
We believe that our existing working capital together with the proceeds from
this offering and cash available from credit facilities and future operations
will enable us to meet our working capital requirements for at least the next
12 months. However, if cash from future operations is insufficient, or if cash
is used for acquisitions or other currently unanticipated uses, we could be
required to raise substantial additional capital. Additional capital, if
required, may not be available on acceptable terms, or at all. If we are unable
to obtain additional capital, we may be required to reduce the scope of our
planned product development and marketing efforts, which could harm our
business, financial condition and operating results. To the extent that we
raise additional capital through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to our
existing stockholders. If additional funds are raised through the issuance of
debt securities, these securities would have rights, preferences and privileges
senior to holders of common stock and the terms of debt securities could impose
restrictions on our operations.
Problems arising from use of our products together with other vendors' products
could disrupt our business and harm our financial condition.
Our customers generally use our products together with products from other
vendors. As a result, when problems occur in the network, it may be difficult
to identify the source of the problem. These problems may cause us to incur
significant warranty and repair costs, divert the attention of our engineering
personnel from our product development efforts and cause significant customer
relation problems.
If we fail to protect our intellectual property, our business and ability to
compete could suffer.
Our success and ability to compete are substantially dependent upon our
internally developed technology and know-how. We do not own any patents nor do
we have any patent applications pending. We may not have taken actions that
adequately protect our intellectual property rights.
We provide software to customers under license agreements included in the
packaged software. These agreements are not negotiated with or signed by the
licensee, and thus may not be enforceable in some jurisdictions. Despite our
efforts to protect our proprietary rights
13
<PAGE>
through confidentiality and license agreements, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology. These
precautions may not prevent misappropriation or infringement of our
intellectual property. Monitoring unauthorized use of our products is difficult
and the steps we have taken may not prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States.
We may be subject to intellectual property infringement claims that are costly
to defend and could limit our ability to use certain technologies in the
future.
Our industry is characterized by the existence of a large number of patents
and frequent claims and related litigation regarding patent and other
intellectual property rights. In particular, leading companies in the
networking markets have extensive patent portfolios with respect to networking
technology, while we do not currently own any patents or have any patent
applications pending.
We recently received a letter from Resonate, Inc. alleging that our
ServerIron products infringe one of its patents. Although we intend to contest
this claim vigorously, these kinds of disputes are subject to inherent
uncertainties and, therefore, we cannot assure you that we will prevail in our
objection to this claim, nor can we assure you that this dispute will not
result in litigation or that an adverse result or judgment will not adversely
affect our financial condition.
From time to time, other third parties, including leading companies, have
asserted against others and may assert against us exclusive patent, copyright,
trademark and other intellectual property rights to technologies and related
standards that are important to us. Third parties may assert claims or initiate
litigation against us or our manufacturers, suppliers or customers alleging
infringement of their proprietary rights with respect to our existing or future
products. Any of these claims, with or without merit, could be time-consuming,
result in costly litigation and diversion of technical and management
personnel, or require us to develop non-infringing technology or enter into
royalty or license agreements. These royalty or license agreements, if
required, may not be available on acceptable terms, if at all. If there is a
successful claim of infringement or if we fail to develop non-infringing
technology or license the proprietary rights on a timely basis, our business
could be harmed.
Our stock price may be extremely volatile and you may not be able to resell
your shares at or above the offering price.
Equity markets, particularly the market for technology companies, have
recently experienced significant price and volume fluctuations that are
unrelated to the operating performance of individual companies. These broad
market fluctuations may cause the market price of our common stock to decline.
In addition, the market price of our common stock is likely to be highly
volatile. In the past, securities class action litigation has often been
instituted against companies following periods of volatility in the market
price of their securities. This litigation could result in substantial costs
and a diversion of management's attention and resources.
Our year 2000 compliance efforts may involve significant time and expense, and
our business could suffer if we, our customers, resellers, suppliers, contract
manufacturers, service providers or other third parties do not adequately
address year 2000 risks.
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous
14
<PAGE>
results by, at or beyond 2000. As a result, the networks which incorporate our
products and our own internal networks could fail, leading to disruptions in
operations and business activities. As a result of the year 2000 problem, we
believe that we face potential risks which could harm our business in the
following areas:
. disruption in our customer relationships or in our sales efforts because
of failures of our customers' networks which are correctly or
incorrectly attributed to the non-compliance of our products;
. claims from our customers based on alleged breach of warranties
concerning the year 2000 compliance of our products;
. disruption of our business resulting from failure of systems we use to
run our business;
. disruption of our business resulting from failure of systems used by our
suppliers, customers and potential customers; and
. the potential reduced spending by companies on networking solutions as a
result of significant information systems spending on year 2000
remediation.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Year 2000" on page 29 for more detailed information regarding
our year 2000 compliance efforts.
Our executive officers and directors will continue to have substantial control
over Foundry after the offering which could delay or prevent a merger or other
change in control of Foundry.
Our executive officers, directors and entities affiliated with them will, in
the aggregate, will beneficially own approximately 49% of our outstanding
common stock upon completion of this offering. These stockholders, if acting
together, would be able to significantly influence the election of directors
and all other matters requiring approval by our stockholders. This
concentration of voting control could have the effect of delaying or preventing
a merger or other change in control, even if it would benefit our other
stockholders. See "Principal Stockholders" on page 56 for more detailed
information regarding share ownership of our officers and directors.
Some provisions of our charter documents may have anti-takeover effects that
could discourage a change in control, even if an acquisition would be
beneficial to our stockholders.
Some provisions of our certificate of incorporation and bylaws could make it
more difficult for a third party to acquire us even if a change of control
would be beneficial to our stockholders. See "Description of Capital Stock--
Delaware Anti-Takeover Law and Charter and Bylaw Provisions" on page 61 for
more information regarding anti-takeover matters.
Future sales of our common stock may depress our stock price.
Upon completion of this offering, we will have 55,635,929 shares of common
stock outstanding. All the shares sold in this offering can be freely traded.
The remaining 50,635,929 shares of common stock outstanding after this offering
are subject to lock-up agreements that prohibit the sale of the shares for 180
days after the date of this prospectus. Immediately after the 180 day lock-up
period, 46,711,010 of these shares will become available for sale. The
remaining shares of our common stock will become available at various times
thereafter upon the expiration of one-year holding periods and/or the lapse of
our repurchase option. Sales of
15
<PAGE>
a substantial number of shares of common stock in the public market after this
offering or after the expiration of the lock-up and holding periods could cause
the market price of our common stock to decline. See "Shares Eligible for
Future Sale" on page 63 for a discussion of potential future sales of our
common stock.
The purchasers in the offering will immediately experience substantial dilution
in net tangible book value.
The initial public offering price is substantially higher than the net
tangible book value per share of the outstanding common stock immediately after
the offering. As a result, purchasers of shares will experience immediate and
substantial dilution of approximately $13.37 in net tangible book value per
share, or approximately 89% of an assumed offering price of $15.00 per share.
In contrast, existing stockholders paid an average price of $0.68 per share.
16
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements include statements under the
captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus. You should not rely on these
forward-looking statements which apply only as of the date of the prospectus.
These statements refer to our future plans, objectives, expectations and
intentions. We use words such as "believe," "anticipate," "expect," "will,"
"intend," "estimate" and similar expressions to identify forward-looking
statements. This prospectus also contains forward-looking statements attributed
to third parties relating to their estimates regarding the growth of certain
markets. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus. Our actual
results could differ materially from those discussed in these forward-looking
statements. Factors that could contribute to these differences include those
discussed in the preceding pages and elsewhere in this prospectus.
USE OF PROCEEDS
The net proceeds to us from the sale of the 5,000,000 shares being offered by
us at an assumed initial public offering price of $15.00 per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, are estimated to be $68.8 million, or $79.2 million if the
underwriters' over-allotment option is exercised in full. We expect to use the
net proceeds of this offering for working capital and general corporate
purposes, including increased spending on sales and marketing, customer
support, research and development, expansion of our operational and
administrative infrastructure, and the leasing of additional facilities.
Specific amounts for these purposes have not yet been determined. In addition,
we may use a portion of the net proceeds to acquire or invest in complementary
businesses, technologies, product lines or products. However, we have no
current plans, agreements or commitments with respect to any such acquisition,
and we are not currently engaged in any negotiations with respect to any such
transaction. Pending these uses, we intend to invest the net proceeds in short-
term, interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation of its business and do not anticipate paying any cash
dividends in the foreseeable future. Furthermore, our credit agreement
prohibits the payment of cash dividends.
17
<PAGE>
CAPITALIZATION
The following table shows:
. our actual capitalization as of June 30, 1999;
. our capitalization as of that date on a pro forma basis to give effect
to the conversion of all preferred stock outstanding at June 30, 1999
into common stock, on a one-to-one basis, upon the completion of this
offering; and
. our capitalization on a pro forma as adjusted basis to reflect our
receipt of the net proceeds from the sale of shares of common stock
offered by us at an assumed initial public offering price of $15.00 per
share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
June 30, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands, unaudited)
<S> <C> <C> <C>
Bank line of credit............................. $ 2,000 $ 2,000 $ 2,000
------- ------- -------
Current portion of capital lease obligations.... 90 90 90
------- ------- -------
Redeemable convertible preferred stock, $0.0001
par value per share, 22,750,431 shares
authorized, 22,674,885 issued and outstanding,
actual; 5,000,000 shares authorized, none
issued or outstanding pro forma and pro forma
as adjusted.................................... 31,085 -- --
------- ------- -------
Stockholders' equity (deficit):
Common stock, $0.0001 par value per share,
75,000,000 shares authorized, 27,961,044
shares issued and outstanding, actual;
200,000,000 shares authorized, 50,635,929
shares issued and outstanding pro forma;
200,000,000 shares authorized and 55,635,929
shares issued and outstanding pro forma as
adjusted...................................... 3 5 6
Treasury stock.................................. (6,480) (6,480) (6,480)
Additional paid-in capital...................... 28,728 59,811 128,595
Notes receivable from stockholders.............. (859) (859) (859)
Deferred stock compensation..................... (13,404) (13,404) (13,404)
Accumulated deficit............................. (17,361) (17,361) (17,361)
------- ------- -------
Total stockholders' equity (deficit)........... (9,373) 21,712 90,497
------- ------- -------
Total capitalization......................... $23,802 $23,802 $92,587
======= ======= =======
</TABLE>
The number of shares of capital stock referenced above excludes as of June
30, 1999: (1) 5,263,453 shares subject to outstanding options and 443,002
shares available for future option grants under our 1996 Stock Plan; (2)
529,500 shares subject to non-plan options; and (3) 45,000 shares subject to
warrants to purchase Series A preferred stock which will convert to warrants to
purchase common stock upon completion of this offering. This number also
excludes 1,425,000 shares reserved for issuance under our 1999 Directors' Stock
Option Plan and 1999 Employee Stock Purchase Plan and 3,000,000 additional
shares available for future option grants under our 1996 Stock Plan which were
authorized in July 1999. See Note 5 of Notes to Financial Statements beginning
on page F-13 for more information regarding our equity structure.
18
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. We calculate net tangible book value per
share by dividing the net tangible book value (total assets less intangible
assets and total liabilities) by the number of outstanding shares of common
stock.
Our pro forma net tangible book value at June 30, 1999, was approximately
$21.7 million, or $0.43 per share, based on 50,635,929 shares of our common
stock outstanding after giving effect to the conversion of all outstanding
shares of our preferred stock into common stock upon the closing of this
offering.
After giving effect to the sale of the 5,000,000 shares of common stock by us
at an assumed initial public offering price of $15.00 per share (less the
estimated underwriting discounts and commissions and estimated offering
expenses payable by us), our pro forma as adjusted net tangible book value at
June 30, 1999, would be $90.5 million, or $1.63 per share. This represents an
immediate increase in the pro forma as adjusted net tangible book value of
$1.20 per share to existing stockholders and an immediate dilution of $13.37
per share to new investors, or approximately 89% of an assumed initial public
offering price of $15.00 per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $15.00
Pro forma net tangible book value per share before the
offering................................................... $0.43
Increase attributable to new investors...................... 1.20
-----
Pro forma as adjusted net tangible book value after the
offering..................................................... 1.63
------
Dilution per share to new investors........................... $13.37
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999, the
differences between the existing stockholders and new investors with respect to
the number of shares of common stock purchased from us, the total consideration
paid to us and the average price per share paid.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 50,635,929 91.0% $ 34,337,137 31.4% $ 0.68
New investors............. 5,000,000 9.0 75,000,000 68.6 15.00
---------- ----- ------------ -----
Totals.................. 55,635,929 100.0% $109,337,137 100.0%
========== ===== ============ =====
</TABLE>
The information in the table is based upon an assumed initial public offering
price of $15.00 per share before deducting estimated underwriting discounts and
commissions and offering expenses payable by us. The information concerning
existing stockholders is based on the number of shares of common stock
outstanding on June 30, 1999 and gives effect to the conversion of all
outstanding shares of preferred stock into common stock upon completion of this
offering. The information presented with respect to existing stockholders
excludes as of June 30, 1999: (1) 5,263,453 shares subject to outstanding
options and 443,002 shares available for future option grants under our 1996
Stock Plan; (2) 529,500 shares subject to non-plan options; and (3) 45,000
shares subject to warrants to purchase Series A preferred
19
<PAGE>
stock which will convert to warrants to purchase common stock upon completion
of this offering. This information also excludes 1,425,000 shares reserved for
issuance under our 1999 Directors' Stock Option Plan and 1999 Employee Stock
Purchase Plan and 3,000,000 additional shares available for future option
grants under our 1996 Stock Plan which were authorized in July 1999. The
issuance of common stock in connection with the exercise of these options and
warrants will result in further dilution to new investors. See Note 5 of Notes
to Financial Statements beginning on page F-13 for more information regarding
our equity structure.
20
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The selected financial data set forth below should be read together with the
financial statements and related notes, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the other information
contained in this prospectus. The selected balance sheet data at December 31,
1997 and 1998 and the selected statement of operations data for the period from
inception of Foundry, May 22, 1996, until December 31, 1996 and for the years
ended December 31, 1997 and 1998 are derived from, and qualified by reference
to, our audited financial statements and notes thereto included elsewhere in
this prospectus. The selected balance sheet data at December 31, 1996 is
derived from Foundry's audited balance sheet not included herein. The selected
balance sheet data at June 30, 1999 and the selected statement of operations
data for the six months ended June 30, 1998 and 1999 are derived from our
unaudited financial statements included elsewhere in this prospectus. Our
unaudited financial statements have been prepared on a basis consistent with
the audited financial statements appearing elsewhere in this prospectus and, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation of such data. The
historical results of operations are not necessarily indicative of results to
be expected for any subsequent period.
<TABLE>
<CAPTION>
Period from
May 22, 1996 Six Months
(Inception) Year Ended Ended
to December 31, June 30,
December 31, ---------------- ----------------
1996 1997 1998 1998 1999
------------ ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue, net.................. $ -- $ 3,381 $17,039 $ 4,203 $39,487
Cost of revenue............... -- 1,835 8,433 2,082 18,341
------- ------- ------- ------- -------
Gross profit................ -- 1,546 8,606 2,121 21,146
Operating expenses:
Research and development..... 1,914 5,403 8,797 3,250 3,625
Sales and marketing.......... -- 3,419 7,258 2,745 6,973
General and administrative... 226 1,853 1,589 569 1,655
Amortization of deferred
stock compensation.......... -- -- 727 -- 4,902
------- ------- ------- ------- -------
Total operating expenses.... 2,140 10,675 18,371 6,564 17,155
------- ------- ------- ------- -------
Income (loss) from opera-
tions........................ (2,140) (9,129) (9,765) (4,443) 3,991
Interest income, net.......... 127 122 413 213 24
------- ------- ------- ------- -------
Income (loss) before provision
for income taxes............. (2,013) (9,007) (9,352) (4,230) 4,015
Provision for income taxes.... -- -- -- -- 1,004
------- ------- ------- ------- -------
Net income (loss)............. $(2,013) $(9,007) $(9,352) $(4,230) $ 3,011
======= ======= ======= ======= =======
Basic net income (loss) per
share........................ $ (0.99) $ (1.33) $ (0.69) $ (0.35) $ 0.17
Diluted net income (loss) per
share........................ $ (0.99) $ (1.33) $ (0.69) $ (0.35) $ 0.06
Weighted average shares--
basic(a)..................... 2,024 6,785 13,488 12,044 18,246
Weighted average shares--
diluted(a)................... 2,024 6,785 13,488 12,044 52,320
Pro forma basic net income
(loss) per share............. $ (0.27) $ 0.07
Weighted average shares--pro
forma basic(a)............... 34,323 40,755
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------- -----------
1996 1997 1998 1999
------- -------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............ $ 3,823 $ 3,182 $ 4,567 $12,340
Working capital...................... 3,505 4,076 10,663 21,297
Total assets......................... 4,557 6,988 19,238 36,453
Long term obligations, less current
portion............................. 344 178 -- --
Total stockholders' deficit.......... (1,903) (10,509) (18,926) (9,373)
</TABLE>
- --------
(a) See Note 2 of the Notes to Financial Statements beginning on page F-7 for
an explanation of the determination of the number of shares and share
equivalents used in computing per share amounts.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read together with "Selected Financial Data" and our
financial statements and related notes appearing elsewhere in this prospectus.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. The actual results may differ materially
from those anticipated in these forward-looking statements as a result of many
factors, including but not limited to those set forth under "Risk Factors" and
elsewhere in this prospectus.
Overview
Foundry designs, develops, manufactures and markets a comprehensive suite of
high performance networking products for enterprises and Internet service
providers. From our inception in May 1996 through April 1997, we were engaged
primarily in research and development activities and did not generate any
revenue. A substantial portion of our operating expenses during this period was
related to the design and development of our custom ASICs, software development
and testing prototype designs. We commenced commercial shipments of our
FastIron workgroup Layer 2 switch in May 1997, the initial product released in
our family of stackable products. We shipped NetIron, our first generation
Layer 3 switch, in June 1997. During the second quarter of 1998, we shipped the
first products in our Layer 4-7 ServerIron family. We shipped BigIron, our
second generation of midsize and large-scale chassis-based products, in the
third quarter of 1998. Since the first quarter of 1998, our revenue has
increased every quarter, and we were profitable for the first two quarters of
1999, although we cannot assure you that these results will be indicative of
future performance.
We derive our revenue substantially from sales of our stackable and chassis-
based products, including fees for customer support services related to our
products. We market and sell our products primarily through a direct sales and
marketing organization and, to a lesser extent through resellers and through
our OEM relationship with Hewlett-Packard. We have sales representatives in the
United States, Canada, France, Germany, Taiwan and the United Kingdom. We have
made significant investments to expand our international operations and expect
international revenue to increase as a percentage of total revenue. Currently,
all of our international sales are denominated in U.S. dollars. We generally
recognize product revenue upon shipment to customers. Revenue from customer
support services is deferred and recognized on a straight-line basis over the
contractual period.
We expect the average selling price of our products to decline due to a
number of factors, including competitive pricing pressures and rapid
technological changes. Our gross margins may be affected by price declines if
we are unable to reduce costs. Furthermore, our gross margins may be affected
by fluctuations in manufacturing volumes, component costs, the mix of product
configurations sold and the mix of distribution channels through which our
products are sold. We generally realize higher gross margins on direct sales to
the end user than on sales through resellers or our OEM. Any significant shift
in revenue through resellers or our OEM, or the loss of any large customer,
reseller or our OEM, could harm our gross margins, operating results and
financial condition.
We rely on two third-party manufacturing vendors that produce different
assemblies for our products. Prior to the first quarter of 1999, we performed
final assembly, testing, quality assurance, manufacturing engineering,
documentation control and repairs of our products at our Sunnyvale facility. In
the first quarter of 1999, we began transitioning assembly and testing
functions from our Sunnyvale facility to one of our manufacturing partners. We
expect to realize lower costs and higher volume efficiencies as a result of
this transition. However, these price reductions may not occur or this
manufacturer may not adequately fulfill its
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<PAGE>
obligations. The failure to obtain cost reductions or this manufacturer's
failure to meet its obligations could harm our gross margins and operating
results.
In connection with the grant of stock options to employees, we recorded
deferred stock compensation of $4.7 million in 1998 and $14.3 million for the
six months ended June 30, 1999, representing the difference between the
exercise price and the deemed fair market value of our common stock on the date
these stock options were granted. This amount is included as an increase in
stockholders' deficit and is being amortized to operations ratably over the
respective vesting periods. We recorded amortization of deferred stock
compensation expense of approximately $727,000 for the year ended December 31,
1998 and $4.9 million for the six months ended June 30, 1999. At June 30, 1999
we had approximately $13.4 million remaining to be amortized over the
corresponding vesting period of each respective option, generally four years.
The amortization expense relates to options granted to employees and directors.
Since inception we have incurred significant losses and, as of June 30, 1999,
we had an accumulated deficit of $17.4 million. These losses have resulted
primarily from our activities to develop our products, establish brand
recognition and to develop our sales channels.
Results of Operations
The following table sets forth selected items from our statement of
operations as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
-------------- --------------
1997 1998 1998 1999
------ ----- ------ -----
(unaudited)
<S> <C> <C> <C> <C>
Revenue, net................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenue.............................. 54.3 49.5 49.5 46.4
------ ----- ------ -----
Gross profit................................ 45.7 50.5 50.5 53.6
------ ----- ------ -----
Operating expenses:
Research and development.................... 159.8 51.6 77.3 9.2
Sales and marketing......................... 101.1 42.6 65.3 17.6
General and administrative.................. 54.8 9.3 13.6 4.2
Amortization of deferred stock
compensation............................... -- 4.3 -- 12.4
------ ----- ------ -----
Total operating expenses................... 315.7 107.8 156.2 43.4
------ ----- ------ -----
Income (loss) from operations................ (270.0) (57.3) (105.7) 10.2
Interest income, net......................... 3.6 2.4 5.1 --
------ ----- ------ -----
Income (loss) before provision for income
taxes....................................... (266.4) (54.9) (100.6) 10.2
Provision for income taxes................... -- -- -- 2.5
------ ----- ------ -----
Net income (loss)............................ (266.4)% (54.9)% (100.6)% 7.7%
====== ===== ====== =====
</TABLE>
Six Months Ended June 30, 1999 and 1998
Revenue. Revenue increased to $39.5 million for the six months ended June
30, 1999 from $4.2 million for the six months ended June 30, 1998. The increase
in revenue was primarily due to the introduction of our BigIron products in the
third quarter of 1998 and, to a lesser degree, the introduction of our
ServerIron products in the second quarter of 1998. Our product introductions
coincided with broad market acceptance of Gigabit Ethernet technology resulting
from the adoption of the Gigabit Ethernet standard in June 1998.
For the six months ended June 30, 1999, sales to America Online, Hewlett-
Packard and Mitsui accounted for 17%, 15% and 10% of revenue. Hewlett-Packard
is both an OEM and an end user.
23
<PAGE>
Cost of revenue. Cost of revenue consists primarily of material, labor,
overhead and warranty costs. Cost of revenue increased to $18.3 million for the
six months ended June 30, 1999 from $2.1 million for the six months ended June
30, 1998, primarily due to the related increase in revenue. As a percentage of
revenue, cost of revenue was 46.4% for the six months ended June 30, 1999 and
49.5% for the six months ended June 30, 1998. The decrease as a percentage of
revenue is primarily due to a change in the mix of products sold. Included in
the cost of revenue is the provision for excess and obsolete inventory. We
provide the excess and obsolete inventory reserve based upon a specific
quarterly analysis of units on hand by product subcomponent type. The provision
for excess and obsolete inventory was $1.1 million for the six months ended
June 30, 1999 and $34,000 for the six months ended June 30, 1998. The increase
in the provision is primarily due to increased inventory levels and,
specifically, an increase in evaluation units at customer sites.
Gross profit. Gross profit increased to $21.1 million for the six months
ended June 30, 1999 from $2.1 million for the six months ended June 30, 1998,
primarily due to a significant increase in revenue. As a percentage of revenue,
gross profit was 53.6% for the six months ended June 30, 1999 and 50.5% for the
six months ended June 30, 1998. We expect gross profit, as a percentage of
revenue, to fluctuate from period to period primarily due to the mix of
products sold.
Research and development. Research and development expenses consist
primarily of salaries and related personnel expenses, prototype expenses
related to the development of our ASICs, software development and testing
costs, and the depreciation of property and equipment related to research and
development activities. Research and development expenses increased to $3.6
million for the six months ended June 30, 1999 from $3.3 million for the six
months ended June 30, 1998, primarily due to the addition of engineering
personnel and related costs. Research and development costs are expensed as
incurred. As a percentage of revenue, research and development expenses
decreased from 77.3% to 9.2% because of the significant increase in revenue. We
believe continued investment in product enhancements and new product
development is critical to attaining our strategic objectives, and as a result,
we expect research and development expenses to continue to increase in absolute
dollars.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related expenses for personnel engaged in marketing,
sales and customer support functions, as well as trade shows, advertising,
promotional expenses and the cost of facilities. Sales and marketing expenses
increased to $7.0 million for the six months ended June 30, 1999 from $2.7
million for the six months ended June 30, 1998, primarily due to the addition
of sales and marketing personnel and increased commission expenses resulting
from significantly higher sales. As a percentage of revenue, sales and
marketing expenses decreased from 65.3% to 17.6% because of the significant
increase in revenue. We expect these expenses to increase significantly in
absolute dollars as we continue to build our field sales and support
organizations and expand sales and marketing activities in the future.
General and administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance and
administrative personnel, facilities expenses and other general corporate
expenses. General and administrative expenses increased to $1.7 million for the
six months ended June 30, 1999 from $569,000 for the six months ended June 30,
1998, primarily due to an increase in the allowance for doubtful accounts, the
addition of personnel necessary to support the increase in revenue and general
corporate expenses consistent with the increased scale of operations. The
provision for doubtful accounts for the six months ended June 30, 1999 was
$675,000 compared to $89,000 for the six months ended June 30, 1998. The
increase in this provision is attributable to the
24
<PAGE>
increase in revenue and the corresponding increase in accounts receivable. Our
provision for doubtful accounts is based on a specific credit review using the
collection history of our customers and the aging of account balances. We
expect general and administrative expenses to continue to increase in absolute
dollars as we continue to build the infrastructure necessary to support the
growth of our business and operate as a public company.
Interest income. Interest income is the net result of the interest earned on
the funds we keep on deposit in an interest bearing account less any interest
expense incurred on our revolving bank line of credit and capital lease
obligations. Interest income decreased to $24,000 for the six months ended June
30, 1999 from $213,000 for the six months ended June 30, 1998, primarily due to
the offset of interest expense related to borrowing on our revolving line of
credit against interest earned from cash balances in our money market account.
During the six months ended June 30, 1998, we had no borrowings against our
line of credit and had larger cash balances in an interest bearing account
resulting from the proceeds of our financing in March 1998.
Income taxes. We have recorded income tax expense for the six months ended
June 30, 1999 of $1.0 million. This reflects an effective tax rate of 25%,
based upon the estimated annualized tax rate. We have provided a full valuation
allowance against our deferred tax assets, consisting primarily of net
operating loss carryforwards, because of the uncertainty regarding their
realization. When we are able to conclude that our deferred tax assets are
likely to be realized, our income tax provision will reflect a one-time credit
eliminating the valuation allowance.
Net income. Net income increased to $3.0 million for the six months ended
June 30, 1999 from a net loss of $4.2 million for the six months ended June 30,
1998. This increase was primarily due to significantly higher revenue.
Years Ended December 31, 1998 and 1997
Revenue. Revenue increased to $17.0 million for the year ended December 31,
1998 from $3.4 million for the year ended December 31, 1997. The significant
increase was primarily due to the introduction of new products during 1998,
including our BigIron products and, to a lesser degree, our ServerIron
products. In 1997, sales to Mitsui and Incyte Pharmaceuticals, Inc. accounted
for 49% and 14% of revenue, and sales to Mitsui accounted for 21% of revenue in
1998.
Cost of revenue. Cost of revenue increased to $8.4 million for the year ended
December 31, 1998 from $1.8 million for the year ended December 31, 1997,
primarily due to the related increase in revenue. As a percentage of revenue,
cost of revenue decreased to 49.5% for the year ended December 31, 1998 from
54.3% for the year ended December 31, 1997, primarily due to the mix of
products sold, particularly related to the introduction of our BigIron products
in the third quarter of 1998. Included in the cost of revenue is the provision
for excess and obsolete inventory of $1.0 million for the year ended December
31, 1998 and $106,000 for the year ended December 31, 1997. The increase in the
provision is primarily due to increased inventory levels.
Gross profit. Gross profit increased to $8.6 million for the year ended
December 31, 1998 from $1.5 million for the year ended December 31, 1997,
primarily due to the significant increase in revenue. As a percentage of
revenue, gross profit increased to 50.5% for the year ended December 31, 1998
from 45.7% for the year ended December 31, 1997, primarily as a result of
spreading manufacturing costs over a greater number of units sold.
25
<PAGE>
Research and development. Research and development expenses increased to $8.8
million for the year ended December 31, 1998 from $5.4 million for the year
ended December 31, 1997, primarily due to the addition of engineering personnel
and increased costs associated with launching our new BigIron products in the
third quarter of 1998. In particular, we incurred significant premium charges
in the third quarter of 1998 to expedite delivery of semiconductors, printed
circuit board assembly and reworking associated with our prototype BigIron
products. As a percentage of revenue, research and development expenses
decreased due to significantly higher revenue.
Sales and marketing. Sales and marketing expenses increased to $7.3 million
for the year ended December 31, 1998 from $3.4 million for the year ended
December 31, 1997, primarily due to the addition of sales and marketing
personnel and increased commission expenses resulting from higher sales.
General and administrative. General and administrative expenses decreased to
$1.6 million for the year ended December 31, 1998 from $1.9 million for the
year ended December 31, 1997, primarily due to costs incurred in 1997 relating
to the settlement of a lawsuit of approximately $750,000. This cash settlement
related to our employment of certain individuals and claims made by another
party with regard to a nonsolicitation agreement that has subsequently expired.
The charge recorded by us related to the settlement amount under the agreement
and legal fees associated with this matter. Excluding the $750,000 incurred in
1997, general and administrative expenses would have increased by $450,000 for
the year ended December 31, 1998 over the same period in 1997. The increase was
a result of the increase in allowance for doubtful accounts and addition of
personnel related to significantly higher revenue. The provision for doubtful
accounts for the year ended December 31, 1998 was $389,000 compared to $10,000
in the prior year. The increase in this provision is attributable to the
increase in revenue and the corresponding increase in accounts receivable.
Interest income. Interest income increased to $413,000 for the year ended
December 31, 1998 from $122,000 for the year ended December 31, 1997, as a
result of greater cash balances generated from the sale of preferred stock in
March 1998.
Net loss. Net loss increased to $9.4 million for the year ended December 31,
1998 from $9.0 million for the year ended December 31, 1997, as a result of the
amortization of deferred stock compensation in 1998 in the amount of $727,000
which was offset by significantly increased revenue together with increased
expenses related to the addition of personnel, engineering prototype expenses
and costs related to expanding our operations.
26
<PAGE>
Quarterly Results of Operations
The following tables set forth our statement of operations data for each of
the six quarters ended June 30, 1999, including these amounts expressed as a
percentage of total revenue. This unaudited quarterly information has been
prepared on the same basis as our audited financial statements and, in the
opinion of management, reflects all adjustments, consisting only of normal
recurring entries, necessary for a fair presentation of the information for the
periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30,
1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- --------
(in thousands, unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue, net............ $ 1,842 $ 2,361 $ 4,030 $ 8,806 $15,425 $24,062
Cost of revenue......... 915 1,167 1,918 4,433 7,707 10,634
------- ------- ------- ------- ------- -------
Gross profit.......... 927 1,194 2,112 4,373 7,718 13,428
Operating expenses:
Research and
development........... 1,383 1,867 3,705 1,842 1,746 1,879
Sales and marketing.... 1,209 1,536 1,887 2,626 2,717 4,256
General and
administrative........ 251 318 365 655 670 985
Amortization of
deferred stock
compensation.......... -- -- 233 494 1,054 3,848
------- ------- ------- ------- ------- -------
Total operating
expenses............. 2,843 3,721 6,190 5,617 6,187 10,968
------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (1,916) (2,527) (4,078) (1,244) 1,531 2,460
Interest income, net.... 40 173 135 65 24 --
------- ------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes.................. (1,876) (2,354) (3,943) (1,179) 1,555 2,460
Provision for income
taxes.................. -- -- -- -- 389 615
------- ------- ------- ------- ------- -------
Net income (loss)....... $(1,876) $(2,354) $(3,943) $(1,179) $ 1,166 $ 1,845
======= ======= ======= ======= ======= =======
<CAPTION>
Quarter Ended
--------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30,
1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Percentage of Revenue:
Revenue, net............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 49.7 49.4 47.6 50.3 50.0 44.2
------- ------- ------- ------- ------- -------
Gross profit.......... 50.3 50.6 52.4 49.7 50.0 55.8
Operating expenses:
Research and
development........... 75.1 79.1 91.9 20.9 11.3 7.8
Sales and marketing.... 65.6 65.1 46.8 29.8 17.6 17.7
General and
administrative........ 13.6 13.4 9.1 7.5 4.4 4.1
Amortization of
deferred stock
compensation.......... -- -- 5.8 5.6 6.8 16.0
------- ------- ------- ------- ------- -------
Total operating
expenses............. 154.3 157.6 153.6 63.8 40.1 45.6
------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (104.0) (107.0) (101.2) (14.1) 9.9 10.2
Interest income, net.... 2.2 7.3 3.4 0.7 0.2 --
------- ------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes.................. (101.8) (99.7) (97.8) (13.4) 10.1 10.2
Provision for income
taxes.................. -- -- -- -- 2.5 2.5
------- ------- ------- ------- ------- -------
Net income (loss)....... (101.8)% (99.7)% (97.8)% (13.4)% 7.6% 7.7%
======= ======= ======= ======= ======= =======
</TABLE>
27
<PAGE>
Our revenue increased in each quarter since the first quarter of 1998 as a
result of the introduction of new products, significant growth in our market,
increasing market acceptance of Gigabit Ethernet Layer 3 and Layer 4-7
switching and the expansion of our sales force. Gross profit has ranged from
49.7% to 55.8%, as a percentage of revenue, in the quarters presented and
fluctuates from quarter to quarter due to the mix of products sold. Revenue
grew more slowly than we planned in the second and third quarters of 1998 as a
result of a delay in the introduction of our BigIron products. However, revenue
increased significantly beginning late in the third quarter of 1998 when we
began shipping our BigIron products.
Our research and development expenses increased in absolute dollars and as a
percentage of revenue in the first three quarters of 1998 primarily due to
development costs related to bringing our BigIron products to market. We were
committed to completing the prototype development of our BigIron products in
the third quarter of 1998. In particular, we incurred significant premium
charges in the third quarter of 1998 to expedite delivery of semiconductors,
printed circuit board assembly and reworking associated with the prototype
BigIron products. Upon completion of our BigIron prototype in the third quarter
of 1998, our research and development expenses, in absolute dollars, in the
fourth quarter of 1998 returned to approximately the same level experienced in
the second quarter of 1998. We currently do not expect that the introduction of
new products in the near future will have as significant an impact on our
research and development expenses as did the introduction of BigIron.
Our operating results have varied significantly in the past and revenue and
operating results may vary significantly in the future due to a number of
factors, including: fluctuations in demand for our products and services,
particularly in Europe and Asia; the cancellation or rescheduling of
significant orders; our ability to develop, introduce, ship and support new
products and product enhancements and manage product transitions; announcements
and introductions of new products by our competitors and us; our ability to
build infrastructure to support increased growth; our ability to achieve
required cost reductions; our ability to obtain sufficient supplies of sole- or
limited-sourced components for our products; increases in the prices of the
components we purchase; our ability to attain and maintain production volumes
and quality levels for our products; the mix of products sold and the mix of
distribution channels through which they are sold; and costs relating to
possible acquisitions and integration of technologies or businesses. See "Risk
Factors--We may not meet quarterly financial expectations, which could cause
our stock price to decline" on page 5 for a discussion of the risk of
fluctuations in operating results.
Liquidity and Capital Resources
We have funded our operations to date primarily through the private sales of
common and preferred stock for net proceeds of approximately $33.4 million and,
to a lesser extent, from a capital equipment lease line and bank line of
credit. For the six months ended June 30, 1999, we have satisfied our liquidity
requirements primarily through cash flow generated from operations.
Cash provided by operating activities was $3.4 million for the six months
ended June 30, 1999. Cash utilized in operating activities was $13.2 million in
1998 and $9.8 million in 1997. The cash utilized in 1998 and 1997 was due to
net losses, as well as working capital required to fund our growth in
operations, including accounts receivable and inventory.
Cash utilized in investing activities was $145,000 for the six months ended
June 30, 1999, $414,000 in 1998 and $526,000 in 1997. These amounts primarily
represented purchases of property and equipment, specifically computers and
electronic test equipment. From inception through June 30, 1999, we have
invested a total of approximately $1.8 million in property and equipment.
28
<PAGE>
Financing activities provided $4.6 million in cash for the six months ended
June 30, 1999, consisting primarily of principal repayments on capital lease
obligations, offset by proceeds from sale of our capital stock and the exercise
of stock options and proceeds from the bank line of credit. In 1998, we
generated $15.0 million of cash and in 1997, we generated $9.6 million of cash,
in each case primarily from an equity financing and the exercise of stock
options, offset by principal repayments on capital lease obligations.
Our principal source of liquidity as of June 30, 1999 consisted of $12.3
million in cash. We currently have a bank line of credit that provides for up
to $10.0 million in borrowings. We can borrow up to 80% of eligible accounts
receivable against this line, which is collateralized by substantially all of
our assets and provides for interest at the bank's prime rate, which was 8.0%
at June 30, 1999. This line of credit contains provisions requiring us to
maintain certain minimum financial ratios measured on a monthly basis, and
expires in February 2000. As of June 30, 1999, there have been borrowings of
$2.0 million under this line of credit. Additionally, the bank has issued a
standby letter of credit in the amount of $1.0 million to one of our contract
manufacturers against the line of credit.
As of June 30, 1999, we did not have any material commitments for capital
expenditures. However, we expect to incur capital expenditures as we expand our
operations in the near future. Although we do not have any current plans or
commitments to do so, from time to time, we may also consider the acquisition
of, or evaluate investments in, products and businesses complementary to our
business. Any acquisition or investment may require additional capital.
Although it is difficult for us to predict future liquidity requirements with
certainty, we believe that the net proceeds from this offering, together with
our existing cash balances and anticipated funds from operations, will satisfy
our cash requirements for at least the next 12 months. Thereafter, we may
require additional funds to support our working capital requirements or for
other purposes and may seek additional funds through public or private equity
financings or from other sources. Additional financing may not be available to
us or, if available, financing may not be available on terms favorable to us
and our stockholders.
Year 2000
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. As a result, the networks which incorporate our products and our own
internal networks could fail leading to disruptions in operations and business
activities.
State of Readiness. Our business may be affected by year 2000 issues arising
from our products or related to non-compliant internal systems developed by us
or by third party vendors. Our Chief Financial Officer is responsible for
coordinating and monitoring the status of our year 2000 evaluation and
remediation efforts and reporting the status of our efforts to our board of
directors. We continue to assess the potential effect and costs of remediating
the year 2000 problem for our internal systems. To date, we have not obtained
verification or validation from any independent third parties of our processes
to assess and correct any of our year 2000 problems or the costs associated
with these activities. We expect to complete our evaluation and, as necessary,
resolve our year 2000 concerns by October 1, 1999.
Our internal Quality Assurance Department has tested our current products and
intends to test any new products or modified versions of our current products
for year 2000 problems. To date, we have not discovered any year 2000 problems
with our products. We believe that our
29
<PAGE>
products and our architecture are year 2000 compliant. However, our products
are generally integrated into larger networks involving sophisticated hardware
and software products supplied by other vendors. If the software products of
these vendors have year 2000 problems, the performance of our products may be
negatively affected. For example, the software components included in some of
our products rely upon dates generated by other network components which are
supplied by other vendors. Each network in which our products are installed
involves different combinations of third party products. We cannot evaluate
whether every product which may interact with our products is year 2000
compliant. Therefore, we may face claims based on year 2000 problems in other
companies' products or based on year 2000 issues arising from the integration
of multiple products within the overall network. Regardless of the merits of
such claims, we may be required to incur substantial expenses and to devote
substantial resources to legal proceedings resulting from such claims. We have
represented to our customers, resellers and our OEM that our products are year
2000 compliant. If this is not true, these parties may make claims against us
for breach of our representations. At this time, no such claims have been made
by companies who have installed our products in their networks.
We believe that we have identified approximately 230 personal computers and
servers and 36 software applications, including our enterprise resource
planning system, used in connection with our internal operations that will need
to be evaluated to determine if they must be modified, upgraded or replaced to
minimize the possibility of a material disruption to our business. Of all of
our systems, our most important system to our continuing operations is our
enterprise resource planning software. We have installed the necessary
modifications to our enterprise resource planning software which has been
certified by the vendor to be year 2000 compliant; however, we have not
conducted any independent tests to confirm year 2000 compliance of this
software. In addition, we are still in the process of evaluating and replacing
or modifying, as necessary, our other internal systems.
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, telephone switches, security
systems and other common devices, may be affected by the year 2000 problem. We
are currently assessing the potential effect and costs of remediating the year
2000 problem with the office and facility equipment used at our headquarters in
Sunnyvale, California. We are also currently assessing the potential effect and
costs of remediating the year 2000 problem with the office and facilities
equipment, personal computers and software applications used by our more than
ten domestic and international field sales offices and our approximately 35
sales representatives who work from home offices.
If our suppliers, customers, resellers, contract manufacturers, service
providers or other third parties fail to correct year 2000 problems in their
products or internal systems, these failures could result in an interruption
in, or failure of, our normal business activities or operations. To date, we
believe all critical components that we obtain from third party suppliers are
year 2000 compliant based on letters from our significant suppliers
representing that they are or will be year 2000 compliant. In addition, we are
in the process of evaluating the year 2000 readiness of other parties,
including our customers, resellers, contract manufacturers and service
providers. We are checking the web sites of these parties to determine if they
are certifying that they are year 2000 compliant. However, we have not
contacted any of these parties. We expect that we will be able to resolve any
significant year 2000 problems with these parties; however, these parties may
not resolve any or all year 2000 problems before the occurrence of a material
disruption to the operation of our business.
Costs. We have funded our year 2000 efforts from operating cash flows and
have not separately accounted for these costs in the past. To date, these costs
have not been material.
30
<PAGE>
We will incur additional costs related to our year 2000 efforts for
administrative personnel to manage our efforts, engineering personnel to test
and remediate our products and internal systems, sales and marketing personnel
to address customer concerns and outside contractors to assist in our efforts.
Since we have already reviewed the material systems in our operations which
could be affected by the year 2000 problem, we do not anticipate that these
expenses will be material; however, if these expenses are higher than
anticipated, our results of operations and financial condition could be harmed.
Risks. We believe that it is not possible to determine with complete
certainty that all year 2000 problems affecting us have been identified or
corrected. In addition, no one can accurately predict how many year 2000
problem-related failures will occur or the severity, duration or financial
consequences of these perhaps inevitable failures. As a result, we believe that
the following consequences are possible:
. a significant number of operational inconveniences and inefficiencies
for us, our contract manufacturers and our customers that will divert
management's time and attention and financial and human resources from
ordinary business activities;
. business disputes and claims for pricing adjustments or penalties due to
year 2000 problems by our customers, resellers and our OEM; and
. a number of serious business disputes alleging that we failed to comply
with the terms of contracts or industry standards of performance, some
of which could result in litigation or contract termination.
Contingency Plans. We have not yet developed a contingency plan to address
any situation that may result if we are unable to solve our year 2000 issues,
and we do not anticipate the need to do so. If we must develop a contingency
plan, the development and implementation of this plan could harm our business.
Recently Issued Accounting Standards
See Note 2 of Notes to Financial Statements for recently adopted and recently
issued accounting standards.
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BUSINESS
Foundry Networks designs, develops, manufactures and markets a comprehensive
suite of high performance networking products for enterprises and Internet
service providers. Our Gigabit Ethernet Layer 2, Layer 3 and Layer 4-7 switches
enable our customers to build and maintain efficient, high performance
networks. Our products provide solutions for all types of networks, including
LANs, MANs and WANs. This product breadth allows us to provide solutions
throughout a customer's network, from the geographically dispersed offices of
an enterprise LAN to the core of the LAN, and from an Internet service
provider's point of entry to the WAN to its network of Internet servers. Our
Layer 2 and Layer 3 switches provide the bandwidth required to support the
increasing use of bandwidth-intensive and Internet-based applications. Our high
performance Layer 4-7 switching products with network intelligence capabilities
allow enterprises and Internet service providers to direct traffic flow more
efficiently, based on application type and end user, while also allowing
Internet service providers to offer their customers differentiated, fee-based
quality of service. We sell our products through a direct sales force,
resellers and an OEM. Our products have been deployed in enterprises spanning
many industries, educational institutions and government agencies and in
Internet service providers. By providing high levels of performance and network
intelligence capabilities at leading price points, we provide a comprehensive
solution to address the rapidly growing networking market.
Industry Background
The pervasiveness of computing by businesses, organizations and individuals,
and the need to interconnect computing devices to enable widespread
communication, have given rise to the multi-billion dollar computer networking
industry. The explosive growth of the Internet and corporate internal and
external communications needs are driving the recent growth in enterprise and
Internet service provider networks. The complexity of information traveling
over networks is also rapidly increasing with the adoption of bandwidth-
intensive applications that include increasing amounts of data, voice, video
and graphics. The increase in users, coupled with these new bandwidth-intensive
applications, has resulted in exponential growth in network traffic. This
growth has led to a demand by enterprises and Internet service providers for
networking solutions with superior performance and intelligence capabilities.
Evolution of Market Needs
Early data networks were adopted to connect a limited number of computers
within close proximity, allowing users to share simple, common services, such
as file servers and printers. In these networks, called local area networks or
LANs, traffic patterns were predictable because the majority of traffic resided
within the LAN and remained local to a specific part of the LAN. Widespread
Internet usage, the proliferation of client-server applications and the
adoption of new bandwidth-intensive applications have increased traffic loads
and created unpredictable traffic patterns. Today, the majority of traffic
traverses the boundaries of the LAN to networks outside of the LAN. Such
communication traditionally required an organization to utilize costly long
distance carrier services that often provided inadequate performance. As a
result of today's traffic flows, enterprises increasingly require low cost,
high performance networking equipment to enable effective communications across
geographically dispersed networks, known as MANs and WANs.
Challenges to enterprise network performance are magnified when applied to
Internet service providers. As their customers have increasingly become
dependent on Internet access, Internet service providers demand networking
solutions that ensure the highest levels of performance and scalability.
Similar to enterprise needs, Internet service providers require low
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cost, high performance solutions for both their internal networks and access to
the Internet. The exponential growth of Internet traffic, combined with the
business critical nature of the services that Internet service providers
provide, necessitates heightened requirements for reliability.
Evolution of Network Solutions
Early LANs consisted of hubs, which enabled multiple users to share network
resources, and software-based routers, which supported multiple protocols and
moved traffic around the network. Increased use of bandwidth-intensive
applications and a larger number of users strained these early network
infrastructures, making it increasingly difficult for them to handle new
applications while still performing at an acceptable speed. Network devices
known as Layer 2 switches replaced hubs to provide dedicated bandwidth to
users, while Fast Ethernet technology was introduced to provide data
transmission speeds of 100 Mbps, or ten times faster than original hubs.
Despite these improvements, the installed base of traditional routers, relying
on software to analyze network traffic, was unable to accommodate increased
data speeds and changing traffic patterns and became the new network
bottleneck.
Two new technologies, Gigabit Ethernet, capable of data transmission speeds
of 1000 Mbps, and Layer 3 switching, evolved in parallel to handle growing and
unpredictable traffic patterns and address the performance needs of bandwidth-
intensive applications. Gigabit Ethernet-based Layer 3 switches combine Gigabit
transmission speeds with the forwarding capabilities of software-based routers.
In Layer 3 switches, the software forwarding capabilities that enabled early
routers to move traffic around the network are performed in hardware,
integrated on application-specific integrated circuits, or ASICs, built into
the switch. This integration enables manufacturers to develop Layer 3 switches
at lower costs while improving network performance.
Next Generation Needs and Solutions
As enterprises and Internet service providers seek to accommodate network
user needs, adding bandwidth alone is not an adequate solution. Due to the
increased use of multiple traffic types for many applications, enterprises and
Internet service providers have an acute need for solutions that provide
network intelligence to distinguish among and prioritize different types of
traffic and regulate the network response to traffic. Particularly for Internet
service providers, network intelligence allows them to maintain network
reliability and offer differentiated, fee-based quality of service.
To address these needs for network intelligence, a new class of device, Layer
4-7 switches, has emerged as a complement to the performance capabilities of
existing Layer 3 switches. These switches provide increased network
intelligence, and therefore greater network efficiency, by utilizing
information about the application and the end user. Both classes of switches
are necessary components of a comprehensive networking solution. Layer 3
switches provide the bandwidth and routing needed to support new applications
while Layer 4-7 switches give enterprises and Internet service providers the
intelligence to control information delivery. Key Layer 4-7 switching
capabilities include the ability to:
. enhance server performance and reliability by distributing traffic
across multiple servers that support Internet applications;
. increase network security by detecting, stopping and identifying the
source of a hacker attack;
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. improve Internet response time by inspecting an end user's web site
address and sending traffic to a specific server that hosts the desired
content; and
. reduce WAN operating costs and improve Internet response time by
redirecting web traffic destined for remote Internet hosts to a group of
local cache servers.
The challenge to the networking company is to provide cost-effective, higher
bandwidth solutions and the increased intelligence required to meet new network
demands placed on enterprises and Internet service providers. Alternatives to
Gigabit Ethernet technology, such as asynchronous transfer mode, are complex
and expensive, and do not utilize existing networking investments or provide
network intelligence capabilities. Although existing Layer 2 and Layer 3
switches utilize Gigabit Ethernet technology, they often do not scale to span
the entire network or provide the performance required by today's network
users. Existing Layer 3 switches, although essential to the performance of the
network, do not incorporate the Layer 4-7 network intelligence capabilities
necessary to provide traffic direction.
A large market has emerged for a broad range of high performance, cost-
effective switching solutions with network intelligence capabilities that
address the needs of enterprises and Internet service providers. Collaborative
Research, an independent research and consulting firm specializing in the Layer
4-7 switching market, estimates in a February 1999 report that the Layer 4-7
switching market totaled $130 million in 1998 and is expected to grow to $1.0
billion in 2002. Dell'Oro Group estimates in a March 1999 report that the Layer
3 LAN switching market totaled $637 million in 1998 and is expected to increase
to $3.9 billion in 2002.
Solution
We offer a comprehensive suite of Gigabit Ethernet Layer 2, Layer 3 and Layer
4-7 products for enterprises and Internet service providers. Our solution
provides the following benefits:
Breadth of Product Line. We are one of the few networking companies to
provide a full suite of Gigabit Ethernet Layer 2, Layer 3 and Layer 4-7
products applicable to LANs, MANs and WANs. This product breadth is
attractive to customers who desire a single source for their high
performance networking solutions. Our products allow us to provide
solutions throughout a customer's network, from the wiring closet edge of
an enterprise LAN to the LAN core, and from the WAN edge of an Internet
service provider to its network of Internet servers.
Performance. Our products provide a high level of performance and a non-
blocking architecture across multiple types of networks. A non-blocking ar-
chitecture allows all users attached to the switch to access the network
simultaneously without any negative impact on performance. We believe that
we currently offer the highest-performing non-blocking switches in the mar-
ket. The performance of our products allows enterprises and Internet serv-
ice providers to build highly reliable networks that support unpredictable
traffic flows, bandwidth-intensive applications and dynamic end-user needs.
Intelligence. Our products provide the intelligence required to transport
unpredict- able traffic and bandwidth-intensive applications, improving the
performance, reliability and manageability of networks. Our products direct
traffic using information about the application and end user, enabling
enterprises and Internet service providers to control information delivery
and realize benefits such as increased revenue through application- or
availability-based service fees.
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<PAGE>
Leading Price Points. Our products are designed to offer superior
performance and network intelligence capabilities at leading price points.
According to testing conducted in April 1999 by the Tolly Group, an
independent test firm, and Network World, an independent networking
publication, our BigIron 4000 and 8000 products offer the best cost per
Gigabit of throughput for Layer 3 Gigabit Ethernet switches. Unlike other
low-priced switches that provide limited functionality, our products offer
customers higher value for their networking equipment investment by
providing a comprehensive feature set while maintaining low price points.
Flexibility of Architecture. Our products are based on a uniform hardware
architecture that is compatible with all major existing network products
without any significant loss of performance or functionality. Our
architecture is designed to support the emerging standards for 10 Gigabit
Ethernet and Gigabit Ethernet over copper. Our architecture is also
designed to support emerging technologies such as wave division
multiplexing. As a result, our customers can integrate our products into
their networks without an extensive and expensive replacement of their
existing network components.
Strategy
Our objective is to be the leading provider of next generation high
performance network solutions. We intend to achieve this objective by providing
a broad suite of the most cost-effective, highest-performing network switching
products for enterprises and Internet service providers. Key elements of our
strategy include:
Leverage Product Breadth to Both Enterprises and Internet Service
Providers. We intend to continue leveraging our comprehensive product
breadth to offer solutions to the enterprise and Internet service provider
markets. Our end-to-end network solution spans the LAN, MAN and LAN/WAN
with high levels of performance and functionality, at leading price points.
We intend to continue to offer value-added feature sets that provide for
redundancy, ease of use and management of the network.
Achieve a Market Leadership Position in Layer 4-7 Switches. We believe
the demand for Layer 4-7 intelligent capabilities will be a very important
growth area for Internet service providers and an area of increasing
importance to enterprises. We intend to maintain a leadership position in
this market by continually improving the performance and functionality of
our Layer 4-7 products. Our products are designed to provide the
performance and network intelligence capabilities that enable Internet
service providers to rapidly deliver new revenue-generating applications
and services to end-user customers, while providing a high degree of
service reliability.
Maintain Technology Leadership. We intend to maintain our technology
leadership, based on price, performance and features, through continual
enhancements of existing products and ongoing development of new products
that provide higher levels of performance and intelligence. We also intend
to pursue cost reduction efforts that will allow us to remain highly
competitive while offering customers leading price points. We intend to
ensure that our hardware and software architectures are flexible and
extensible and are designed to support emerging technologies such as 10
Gigabit Ethernet, Gigabit Ethernet over copper and wave division
multiplexing.
Expand Global Sales Organization. We intend to expand our global sales
presence with our direct sales organization in the United States, strategic
channel partners outside the United States and select original equipment
manufacturers. In addition, we intend to work with resellers in the United
States to penetrate select vertical markets such as small Internet service
providers. We intend to increase our worldwide sales force and establish
additional channel partner relationships to build greater worldwide sales
presence.
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Deliver World Class Service and Support. We intend to expand our service
and support infrastructure to meet the needs of our growing customer base.
Our goal is to minimize our customers' network downtime by offering a wide
range of service and support programs to meet individual customer needs,
including prompt onsite hardware repair and replacement, twenty-four hour,
seven day-a-week web and telephone support, system software and network
management software upgrades and technical documentation updates.
Products
We provide a comprehensive line of network switches designed to meet the
price, performance, reliability and feature requirements of enterprises and
Internet service providers. Our product suite includes Gigabit Ethernet edge
switches, Gigabit Ethernet and Internet protocol over synchronous optical
network (also known as IP over SONET) core switches and Gigabit Ethernet
intelligent network service switches for server farms. Edge switches are used
to connect individuals and groups of workstations to the network. Core switches
are the most critical network component and serve as the convergence point for
the majority of network traffic. Layer 4-7 switches are used in server farms to
provide centralized collection points for server-based applications used by
enterprises and Internet service providers.
<TABLE>
<CAPTION>
Product/First Area of List Price per Port
Date of Deployment/ (as of June 30,
Shipment Product Type Configuration Options Performance 1999)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FastIron LAN edge 24 10/100 Mbps ports 3 Mpps $ 149
May 1997 Layer 2 24 10/100 Mbps ports $ 199
+1 Gigabit Ethernet port
24 10/100 Mbps ports $ 240
+ 2 Gigabit Ethernet ports
- -----------------------------------------------------------------------------------------------
FastIron II LAN edge 72 10/100 Mbps ports 23 Mpps $ 195
October 1998 Layer 2/3 + 2 Gigabit Ethernet ports
72 10/100 Mbps ports $ 243
+ 4 Gigabit Ethernet ports
72 10/100 Mbps ports $ 331
+ 8 Gigabit Ethernet ports
- -----------------------------------------------------------------------------------------------
NetIron LAN edge and core 16 10/100 Mbps ports 3 Mpps $ 562
June 1997 Layer 2/3 24 10/100 Mbps ports $ 416
1 Gigabit Ethernet port $ 1,995
2 Gigabit Ethernet ports $ 1,847
- -----------------------------------------------------------------------------------------------
TurboIron/8 LAN edge and core 8 Gigabit Ethernet ports 12 Mpps $ 1,249
July 1998 Layer 2/3/4-7
- -----------------------------------------------------------------------------------------------
BigIron 4000 LAN edge and core 88 10/100 Mbps ports 48 Mpps $ 465
August 1998 LAN/WAN edge 32 Gigabit Ethernet ports $ 2,280
Layer 2/3/4
- -----------------------------------------------------------------------------------------------
BigIron 8000 LAN edge and core, 184 10/100 Mbps ports 96 Mpps $ 450
September 1998 LAN/WAN edge 64 Gigabit Ethernet ports $ 2,296
Layer 2/3/4
2 port OC-3 IP over SONET $12,497
4 port OC-3 IP over SONET $ 8,748
2 port OC-12 IP over SONET $22,497
- -----------------------------------------------------------------------------------------------
ServerIron LAN server farm 8 10/100 Mbps ports 3 Mpps $ 786
April 1998 Layer 2/4-7 16 10/100 Mbps ports $ 624
24 10/100 Mbps ports $ 791
</TABLE>
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Foundry Edge Switching Solutions
FastIron. The FastIron workgroup switch provides Fast Ethernet and Giga-
bit Ethernet switching. Designed to accelerate workgroup and server perfor-
mance in enterprises, the FastIron workgroup switch offers redundancy,
bandwidth management for delay-intensive applications and complete network
management support.
FastIron II. The FastIron II is a redundant, chassis-based wiring closet
switch that offers non-blocking Fast Ethernet and Gigabit Ethernet
performance of up to 23 million packets per second. FastIron II is offered
in Layer 2 and Layer 3 configurations and supports all major industry
standard routing protocols. This protocol support is necessary to ensure
interoperability with installed enterprise applications and equipment.
Foundry Switching Solutions for the Network Core
NetIron and TurboIron/8. Our NetIron and TurboIron/8 switches allow small
and medium-sized enterprises to increase performance at their network core
with multi-protocol Layer 3 switching. NetIron provides Ethernet, Fast
Ethernet and Gigabit Ethernet connectivity, while TurboIron/8 offers all
Gigabit Ethernet Layer 2, Layer 3 and Layer 4-7 switching. Both products
support a full suite of industry standard routing protocols. We also offer
multi-layer switching that enables NetIron and TurboIron/8 switches to
transparently perform processing-intensive Internet protocol and Internet
protocol exchange (IPX) traffic forwarding, freeing existing routers to
handle non-IP and IPX traffic and to manage and communicate with other
routers. This capability reduces the workload of routers and the need for
costly upgrades, and improves the overall network performance.
BigIron 4000 and BigIron 8000. Our BigIron 4000 and BigIron 8000 switches
are designed for the core of large enterprises and Internet service
providers. BigIron switches can be deployed in collapsed backbone data
centers and server farms of local area and metropolitan area networks.
BigIron also can be used as a high performance local and wide area network
router. BigIron provides Ethernet, Fast Ethernet and Gigabit Ethernet Layer
2, Layer 3 and Layer 4 switching, multi-protocol support and Packet over
SONET on a single platform. We believe our BigIron switches provide the
industry's highest non-blocking Gigabit Ethernet port density and
performance with up to 64 Gigabit Ethernet ports and 96 million packets per
second performance. In addition to supporting the full range of industry
standard routing protocols, BigIron supports BGP4, a necessary protocol for
Internet service providers that require high performance connectivity to
the Internet.
Foundry Intelligent Network Service Switching Solutions for the Server Farm
ServerIron. Our ServerIron switches provide Internet service providers
and enterprises with high performance Layer 4-7 switching that improves the
availability, performance and scalability of Internet services such as
content publishing, web hosting and e-commerce. ServerIron is compatible
with all major server vendors and operating systems and requires no special
server agent software. As a switch-based hardware platform, ServerIron is
designed to provide the high performance, high port density, scalable
capacity and multiple levels of redundancy required by users of mission
critical Internet applications. Our TurboIron/8 switch can also be upgraded
with Layer 4-7 capabilities.
IronView Network Management Solutions
IronView. Our IronView network management solution provides a
comprehensive set of easy-to-use tools to simplify management of our
switches. A command line interface streamlines local and remote management
and configuration. Industry standard simple
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network management protocol and configuration applications are available on
major platforms for graphical user interface management, including HP OpenView
for Sun Solaris, Windows NT and stand-alone Windows NT. Our switches also
include a user-friendly web interface. Industry standard remote monitoring
simplifies network monitoring and a mirror port is included for network tracing
and troubleshooting.
Hardware and Software Architecture
IronCore
All of our products are based on the IronCore hardware architecture. We
believe that IronCore allows us to provide customers with consistent
performance, reliability and features, as well as the ability to leverage their
networking equipment investment. We also believe that the IronCore architecture
allows us to quickly bring new products to market that meet customer needs and
interoperate with existing networking equipment.
The IronCore architecture reflects our expertise in custom designed
programmable ASICs. These ASICs are designed to provide high performance and
integrated Layer 2, Layer 3 and Layer 4 switching capabilities. We believe this
programmable design allows us to offer customers the flexibility of field-
upgradeable software features without compromising performance. We have
developed 13 custom ASICs used throughout our product portfolio.
The IronCore chassis architecture consists of a high-speed data highway that
incorporates a backplane and crosspoint switching fabric and supports up to
eight interface modules. The crosspoint switching fabric allows all lines of
communication to intersect with one another. Our implementation of the
crosspoint switching fabric includes custom designed, high speed ASICs that
provide throughput of up to 128 Gigabits and 96 million packets per second.
This amount of throughput allows each module connected to the switch to support
simultaneous communication among all workstations connected to the switch,
while all workstations connected to the switch can operate at maximum
performance. We believe these features of IronCore allow enterprises and
Internet service providers to have dedicated access to the network at any time,
using any application at the maximum speed.
IronWare and Internet IronWare Software
Our IronWare and Internet IronWare software work with the IronCore hardware
architecture to provide high performance switching. IronWare, which is pre-
installed on our Layer 2 and Layer 3 products, provides network design
flexibility, multiple levels of redundancy for reliability and support for
current and future applications. We believe our Internet IronWare software
provides industry-leading intelligent switching capabilities, such as server
load-balancing and transparent cache switching, for our Layer 4-7 products.
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Customers
The following table is a representative list of companies that have purchased
over $100,000 of Foundry products since January 1, 1998.
<TABLE>
<CAPTION>
Enterprises Enterprises Internet Service Providers
- ----------- ----------- --------------------------
<S> <C> <C>
Arlington Public Schools Microsoft Corporation America Online
ATI Technologies Mitsui & Co. AT&T Cerfnet
AXA Colonia Netscape Communications AT&T WorldNet
Brann Software Network Appliance Cable & Wireless
Carnival Cruise Lines Ontario Ministry of Finance France Telecom
Cendant Corporation Paramount Pictures MindSpring Enterprises
Dubai Ministry of Labor and Social Parkedale Pharmaceuticals None Networks
Affairs
Ericsson Samsung Electronics Sprint
First Union San Francisco Newspaper Agency Telewest Communications
Fort James Paper Sun Microsystems ThruNet
Fox Liberty Network U.S. Army (Redstone Arsenal) Uunet Technologies
Goto.com United States Bureau of Land Verio
Management
Harris Corporation Universal Computer Systems Xoom.com
Hewlett-Packard University of Miami
ibeam Broadcasting University of Oklahoma
Incyte Pharmaceuticals University of Washington
LTV Steel Co. University of Washington Medical
Center
McKinsey & Company Veritas Software
Michigan State University Wright Patterson Air Force Base
</TABLE>
Customer Case Studies
Representative examples of the manner in which our products have been used by
our customers are set forth below. These customer case studies also demonstrate
the breadth of our product offerings, and their appeal across different
industry categories.
Internet Service Provider
America Online. America Online required a high performance switch
solution to support its growth and enhance members' online experience. AOL
selected us as its primary supplier of Ethernet, Fast Ethernet and Gigabit
Ethernet Layer 2 and Layer 4 switches based upon functionality, port
density, management, price and the responsiveness of our service and
technical organization. Our FastIron workgroup switches, as well as our
FastIron II switches, are deployed in fully redundant configurations to
efficiently and reliably manage the extremely large traffic volumes that
traverse AOL's network. Our ServerIron Layer 4-7 switches provide server
load balancing capabilities that enable AOL to improve server performance
and run higher capacity sites. In addition to front ending AOL.com, our
switches support AOL Internet services such as Digital City, a popular
local content network and community guide and ICQ, an instant
communications and chat technology on the Internet.
Entertainment
Lucasfilm, Ltd. Lucasfilm Ltd. is the world's largest independent film
production company. Lucasfilm provides all aspects of film production
including pre-production, post- production, sound and digital effects.
Before installing Foundry products, the Lucasfilm network was a traditional
10/100 Mbps LAN. Lucasfilm required multi-protocol support including, IP
and the Appletalk protocol, which is used primarily in Macintosh
environments. Lucasfilm moves extremely large amounts of data across the
network and required a higher performance edge and core solution that would
enable it to reduce time
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to market for its products. Additionally, Lucasfilm required a high
performance, highly reliable Layer 4 - 7 solution to support the enormous
number of hits expected on the Star Wars web site. Lucasfilm evaluated
numerous Gigabit Ethernet and Layer 4 - 7 switch vendors and selected
Foundry based on performance, reliability and stability. Foundry's FastIron
II switches and FastIron Workgroup switches reside at the network edge and
TurboIron Gigabit Ethernet routers reside in the network core. Foundry's
ServerIron Layer 4 - 7 switches are key components of the www.starwars.com
web site.
Higher Education
The University of Oklahoma. The University of Oklahoma enrolls more than
25,000 students and has approximately 1,830 full-time faculty members. The
university's goal was to build a cost-effective, switched local area
network that would support distance learning via web archived classes and,
in the future, real-time video on demand. All incoming engineering students
are required to purchase laptop computers for connectivity to the
university's local area network. Classes are videotaped and accessible via
a web archive. Video on demand will enable students to dial into a class in
progress. After evaluating numerous Gigabit Ethernet vendors, they chose us
based on price, features and support. The network includes our FastIron
workgroup switches at the edge and BigIron 4000 switches in the core. Each
FastIron workgroup switch is connected to video on demand servers and
linked together via Gigabit Ethernet to provide a high performance, cost-
effective solution.
Service Industry
Carnival Cruise Lines. Carnival Cruise Lines wanted to provide passengers
on its Sensation Superliner ships with in-room interactive video services.
Carnival selected us to provide the necessary network infrastructure based
on our ability to provide a high performance, attractively priced multicast
solution in a small physical space. Carnival installed a BigIron 4000 in
the broadcast center and FastIron II switches throughout the ship. Our
solution provides reliable high-speed connectivity to 1,024 passenger
cabins and supports 1,000 simultaneous interactive sessions and up to 300
concurrent video streams. Passengers use a web-like browser interface on
the television set to choose from a selection of movies, video on demand,
and music stations and make shore excursion reservations.
Government
The United States Army Aviation and Missile Command (Redstone
Arsenal). The United States Army Aviation and Missile Command (Redstone
Arsenal) develops, acquires, fields and sustains aviation and missile
systems for the Army. The Redstone Technical Test Center tests weapons
systems using computer simulation and modeling applications. The
organization required a cost-effective, high-speed network to support more
than 500 nodes. Redstone Arsenal evaluated ATM technology but selected our
Gigabit Ethernet solution based on cost, bandwidth capabilities and ease of
use. RedStone Arsenal installed a BigIron 4000 in the network core to
interconnect 10 of the facility's test centers via Gigabit Ethernet. A
TurboIron switch connects three additional test areas via Gigabit Ethernet
and aggregates traffic into the BigIron 4000.
Sales and Marketing
Our sales strategy includes a domestic and international field sales
organization, domestic and international resellers and a key OEM relationship.
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Domestic field sales. Our domestic field organization establishes and
maintains direct relationships with key accounts and strategic customers.
To a lesser extent, our field organization also works with resellers to
assist in communicating product benefits to end user customers and
proposing networking solutions. As of June 30, 1999, our field organization
included over 23 sales representatives and system engineers. In addition,
as of June 30, 1999, we maintained field offices in 20 major metropolitan
areas in the United States.
Domestic resellers. Our domestic resellers include regional networking
system resellers and vertical resellers who focus on specific markets such
as small Internet service providers. We provide sales and marketing
assistance and training to our resellers, who in turn provide first level
support to end-user customers. We intend to leverage our relationship with
key resellers to penetrate select vertical markets.
International sales. Product fulfillment and first level support are
provided by resellers and integrators. Our international resellers include
Mitsui in Japan, Samsung in Korea, Mitech in the United Kingdom, Boreal in
France and Pan Dacom in Germany. We also provide field support in key
Canadian, European and Asia Pacific locations including Toronto, London,
Paris, Frankfurt, Munich and Taipei. We intend to expand our international
presence through additional sales and engineering personnel and through the
addition of key resellers and integrators. For the six months ended June
30, 1999, sales to Japan accounted for 10% of our revenue. No other country
accounted for greater than or equal to 10% of our revenue.
OEM. We established an OEM relationship with Hewlett-Packard in January
1999. Pursuant to our agreement, Hewlett-Packard markets and sells our
products on a private label basis through its worldwide sales force.
Hewlett-Packard also purchases our products for use in its internal
networks. For the six months ended June 30, 1999, sales to Hewlett-Packard
accounted for 15% of our revenue. Our agreement with Hewlett-Packard
continues until May 18, 2000, unless terminated earlier for a material
breach by either party. The agreement automatically renews for two
additional one year periods, unless the agreement is terminated within 60
days prior to the end of any period. This agreement provides that Hewlett-
Packard may postpone, cancel, increase or decrease any order made under the
agreement without penalty.
Marketing programs. We have numerous marketing programs designed to
inform existing and potential customers, as well as resellers and OEMs,
about the capabilities and benefits of our company and products. Our
marketing efforts also support the sale and distribution of our products
through our field organizations and channels. Our marketing efforts include
advertising, public relations, participation in industry trade shows and
conferences, participation in independent third-party product tests,
presentations and our web site. We have begun an e-commerce initiative
directed at existing customers and resellers.
Customer Service and Support
Our service and support organization maintains and supports our products sold
by our field organization to end users. Customer service revenue was 1.0% of
our revenue for both the year ended December 31, 1998 and the six months ended
June 30, 1999. Our resellers and OEM are responsible for installation,
maintenance and support services to their customers. We may offer limited
assistance to our resellers and OEM in providing service and support to their
end user customers.
TechNet, our comprehensive suite of service and support options, provides
customers with a variety of programs to meet specific support needs. TechNet
Gold gives customer
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network operations the highest level of priority and our full range of
services. TechNet Silver provides customers with all the tools needed to
optimize network performance and uptime. TechNet Bronze extends warranty
support with software updates and telephone and online support.
Manufacturing
We operate under a modified "turn key" process utilizing strategic
manufacturing partners that are ISO 9000 certified and have global
manufacturing capabilities. We maintain control and procurement responsibility
for all proprietary components. All designs, documentation, selection of
approved suppliers, quality control and repairs are performed at our
facilities. In the first quarter of 1999, we began transitioning our assembly
and testing functions from our Sunnyvale facility to one of our manufacturing
partners in order to realize lower costs and higher volume efficiencies. Our
approach to manufacturing provides the flexibility of outsourcing while
maintaining quality control of delivered products to customers. We have
selected this approach to ensure our ability to respond to rapid growth and
sudden market shifts.
We currently have two primary manufacturing partners. One partner, Celestica-
Asia, located in San Jose, California, assembles and tests our printed circuit
boards. The other partner, Hadco, located in Santa Clara, California, assembles
and tests our backplane products. Both companies are ISO certified and have
global manufacturing facilities providing full back-up capability and local
content for foreign sales if required. We perform all prototype and pre-
production procurement and component qualification with support from our
manufacturing partners. Any interruptions in the operations of either of these
manufacturing partners or delays in their shipment of products would negatively
impact our ability to meet scheduled product deliveries to our customers. We
design all ASICs, printed circuit boards and sheet metal while working closely
with semiconductor partners on future component selection and design support.
All materials used in our products are processed through a full qualification
cycle and controlled by use of an "Approved Vendor Listing" that must be
followed by our sources. We perform extensive testing of all our products
including in-circuit testing of all printed circuit board assemblies, full
functional testing, 24 hour burn-in and power cycling at maximum and minimum
configuration levels. Please see "Risk Factors--Our reliance on third- party
manufacturing vendors to manufacture our products may cause a delay in our
ability to fill orders" on page 10 for a review of certain risks associated
with our manufacturing operations.
We currently purchase several components from a single source, including
certain integrated circuits, power supplies and long-range optics, which we
believe are readily available from other suppliers. Our proprietary ASICs,
which provide key functionality in our products, are fabricated in foundries
operated by Texas Instruments. An alternative supply for these ASICs could not
be readily obtained.
We acquire these components through purchase orders and have no long-term
commitments regarding supply or price from these suppliers. The material terms
of these orders typically involve the quantity of supply ordered by us, the
purchase price of the components, lead time and the shipping arrangements. In
the event one of these suppliers, in particular, Texas Instruments, materially
delays its supply to us or one of them terminates its relationship with us, we
may not be able to find an alternate supplier on a timely basis and, as a
result, our business could be harmed.
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<PAGE>
Research and Development
Our future success depends on our ability to enhance existing products and
develop new products that enable us to maintain a technology lead. We work with
customers and prospects, as well as partners and industry research
organizations, to identify and implement new solutions that meet the current
and future needs of enterprises and Internet service providers. Whenever
possible, our products are based on industry standards to ensure
interoperability. We intend to continue to support emerging industry standards
integral to our product strategy.
We use a uniform architecture across our product line, including programmable
ASICs, and system and network management software. This enables us to quickly
bring new products and features to market. For example, we shipped the
industry's first Gigabit Ethernet Layer 2 and Layer 3 switch in June 1997. We
are currently developing new switching solutions that provide new levels of
performance, scalability and functionality for the LAN, MAN and LAN/WAN. We
also have engineering efforts focused on cost reduction.
As of June 30, 1999, we had an engineering staff of 33 responsible for
hardware design and development, architecture and software development,
documentation and quality assurance. Our research and development expenses
totaled $8.8 million in 1998, $5.4 million in 1997 and $1.9 million in 1996.
Competition
We believe that we compete favorably in the key competitive factors that
impact our markets, including technical expertise, price points, new product
innovation, product features, service and support, brand awareness and
distribution. We intend to remain competitive through ongoing investment in
research and development efforts to enhance existing products and introduce new
products. We will seek to expand our market presence through aggressive
marketing and sales efforts and through the continued implementation of cost
reduction efforts. However, our market is still evolving and we may not be able
to compete successfully against current and future competitors.
The market in which we operate is highly competitive. Cisco maintains a
dominant position in this market and several of its products compete directly
with our products. Its substantial resources and market dominance have enabled
it to reduce prices on its products within a short period of time following the
introduction of these products, which reduces the margins and profitability of
its competitors. Purchasers of networking solutions may choose Cisco's products
because of its longer operating history, broad product line and strong
reputation in the networking market. In addition, Cisco may have developed or
could in the future develop new technologies that directly compete with our
products or render our products obsolete.
In addition to Cisco, we compete with other large public companies, such as
3Com and Nortel Networks, as well as other smaller public and private
companies. Many of our current and potential competitors have longer operating
histories and substantially greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and larger installed
customer bases than we do. Furthermore, companies that do not offer a directly
competitive product to our products could develop new products or enter into
agreements with other networking companies to provide a product that competes
with our products or provides a more complete solution than we can offer.
Additionally, we may face competition from unknown companies and emerging
technologies that may offer new LAN, MAN and LAN/WAN solutions to enterprises
and Internet service providers.
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<PAGE>
Intellectual Property
Our success and ability to compete are substantially dependent upon our
internally developed technology and know-how. Our proprietary technology
includes our ASICs, our IronCore hardware architecture, and our IronWare and
Internet IronWare software. Different versions and combinations of these
proprietary technologies are implemented across our product offerings. We rely
on a combination of copyright, trademark and trade secret laws and restrictions
on disclosure to protect our intellectual property rights in these proprietary
technologies. We do not own any patents nor do we have any patent applications
pending. We may not have taken actions that adequately protect our intellectual
property rights.
We provide software to customers under license agreements included in the
packaged software. These agreements are not negotiated with or signed by the
licensee, and thus may not be enforceable in some jurisdictions. Despite our
efforts to protect our proprietary rights through confidentiality and license
agreements, unauthorized parties may attempt to copy or otherwise obtain and
use our products or technology. These precautions may not prevent
misappropriation or infringement of our intellectual property. Monitoring
unauthorized use of our products is difficult and the steps we have taken may
not prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States.
Our industry is characterized by the existence of a large number of patents
and frequent claims and related litigation regarding patent and other
intellectual property rights. In particular, leading companies in the
networking markets have extensive patent portfolios with respect to networking
technology, while we do not currently own any patents or have any patent
applications pending. We recently received a letter from Resonate, Inc.,
alleging that our ServerIron products infringe one of its patents. Based on the
advice of our patent counsel, we do not believe that our current ServerIron
products infringe Resonate's patent. Accordingly, we intend to contest this
claim vigorously. However, these kinds of disputes are subject to inherent
uncertainties and, therefore, we cannot assure you that we will prevail in our
objection to this claim, nor can we assure you that this dispute will not
result in litigation or that an adverse result or judgment will not adversely
affect our financial condition.
From time to time, other third parties, including leading companies, have
asserted against others and may assert against us exclusive patent, copyright,
trademark and other intellectual property rights to technologies and related
standards that are important to us. Third parties may assert claims or initiate
litigation against us or our manufacturers, suppliers or customers alleging
infringement of their proprietary rights with respect to our existing or future
products. Any of these claims, with or without merit, could be time-consuming,
result in costly litigation and diversion of technical and management
personnel, or require us to develop non-infringing technology or enter into
royalty or license agreements. These royalty or license agreements, if
required, may not be available on acceptable terms, if at all. If there is a
successful claim of infringement or if we fail to develop non-infringing
technology or license the proprietary rights on a timely basis, our business
would be harmed.
Employees
As of June 30, 1999, we had 131 employees, including 64 in sales and
marketing, 33 in engineering, 23 in manufacturing and 11 in general and
administrative functions. We are not subject to any collective bargaining
agreements and believe our employee relations are good.
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<PAGE>
Facilities
In June 1999, we leased approximately 9,500 additional square feet in our
current facility primarily for the expansion of our manufacturing capabilities.
This lease expires at the end of February 2000. Prior to that date we leased
approximately 18,000 square feet for our corporate headquarters which includes
research and development, sales and marketing, general and administrative and
manufacturing. This lease expires in November 2001. We also lease space in
various other geographic locations for sales and service personnel.
45
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MANAGEMENT
Executive Officers and Directors
The names and ages of our executive officers and directors as of June 30,
1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Bobby R. Johnson, Jr......... 42 President, Chief Executive Officer, and
Chairman of the Board of Directors
H. Earl Ferguson............. 61 Vice President, Hardware Engineering
Drusilla W. Demopoulos....... 38 Vice President, Marketing
Timothy D. Heffner........... 50 Vice President, Finance and Administration,
Chief Financial Officer
Ken K. Cheng................. 44 Vice President, Product and Program
Management
Wilburn W. McGill............ 56 Vice President, Manufacturing
Robert W. Shackleton......... 48 Vice President, North American Sales
William S. Kallaos........... 51 Vice President, International Sales
Seth D. Neiman(a)............ 45 Director
Andrew K. Ludwick(a)......... 53 Director
</TABLE>
- --------
(a) Member of Audit Committee and Compensation Committee
Bobby R. Johnson, Jr. co-founded Foundry and has served as President, Chief
Executive Officer and Chairman of the board of directors of Foundry since its
inception in May 1996. From August 1993 to October 1995, Mr. Johnson co-founded
and served as President, Chief Executive Officer and Chairman of the board of
directors of Centillion Networks, Inc., a provider of local area network
switches. From September 1991 to February 1993, Mr. Johnson was Vice President
and General Manager of Internetworking Hardware for Network Equipment
Technologies, a wide area networking company. Mr. Johnson holds a B.S. with
honors from North Carolina State University.
H. Earl Ferguson co-founded Foundry and has served as Vice President,
Hardware Engineering, and chief technical officer of Foundry since July 1996.
From August 1993 to February 1996, Mr. Ferguson was co-founder and Vice
President of Engineering of Centillion Networks and the Vice President of
Engineering for the Centillion Business Unit of Bay Networks. From December
1991 to February 1993, Mr. Ferguson was Director of Internetworking Hardware
for Network Equipment Technologies. Mr. Ferguson holds six patents in
internetworking technologies. Mr. Ferguson holds a B.S. from the University of
Washington and M.S. from the University of Michigan.
Drusilla W. Demopoulos has served as Vice President of Marketing of Foundry
since November 1996. From April 1994 to October 1996, Ms. Demopoulos was
Director of Marketing for Centillion Networks, and for the Centillion Business
Unit of Bay Networks. From January 1991 to March 1994, she was Senior Manager
of Public Relations for Network Equipment Technologies. Ms. Demopoulos holds a
B.A. with honors from Georgia State University.
Timothy D. Heffner has served as Vice President, Finance and Administration
and Chief Financial Officer of Foundry since November 1996. From September 1994
to November 1996, Mr. Heffner was Director of Finance for Centillion Networks
and for the Centillion Business Unit of Bay Networks. From January 1994 to
September 1994, Mr. Heffner was Chief Financial Officer of Digital Generation
Systems, a network services company. Mr. Heffner holds a B.S. from San Jose
State University.
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<PAGE>
Ken K. Cheng has served as Vice President of Product and Program Management
of Foundry since July 1998. From December 1993 to July 1998, Mr. Cheng was
Senior Vice President and Chief Operating Officer of Digital Generation
Systems, a network services company. From December 1988 to December 1993, Mr.
Cheng was Director of LAN/WAN Internetworking Hardware for Network Equipment
Technologies. Mr. Cheng holds a B.S. from Queen's University and an M.B.A. from
Santa Clara University.
Wilburn W. McGill has served as Vice President of Manufacturing of Foundry
since February 1997. From March 1996 to February 1997, Mr. McGill was the Vice
President of Operations at Ancot Corporation, a networking analyzer company.
From May 1995 to March 1996, Mr. McGill was Vice President of Engineering and
Operations for DTC Data Technology Corporation, a network interface card
company. From January 1990 to February 1994, Mr. McGill was General Manager for
the Research and Development Division of Centera Ltd., a networking solutions
company.
Robert W. Shackleton has served as Vice President of North American Sales of
Foundry since April 1997. From March 1989 to March 1997, Mr. Shackleton was
Senior Director of United States Distribution and Sales for Network Equipment
Technologies. Mr. Shackleton holds a B.A. with honors from the University of
Colorado and attended Stanford University's Business School Executive
Management Program.
William S. Kallaos has served as Vice President of International Sales of
Foundry since April 1997. From September 1984 to February 1997, Mr. Kallaos
worked for UB Networks in a variety of positions, most recently as Vice
President of United States Sales. Mr. Kallaos holds a B.A. with honors from the
University of Missouri.
Seth D. Neiman has served as a member of the board of directors of Foundry
since its inception in May 1996. Since August 1994, Mr. Neiman has held various
positions at Crosspoint Venture Partners, a venture capital firm, and has been
a partner of Crosspoint since January 1996. From September 1991 to July 1994,
Mr. Neiman was Vice President of Engineering at Coactive Networks, a local area
networks company. Mr. Neiman serves on the board of Brocade Communications
Systems, Inc., where he is Chairman of the Board. Mr. Neiman holds a B.A. from
Ohio State University.
Andrew K. Ludwick has served as a member of the board of directors of Foundry
since May 1999. From September 1995 to October 1997, Mr. Ludwick was Chief
Executive Officer of Bay Networks, a networking company. From July 1985 to
September 1995, Mr. Ludwick was founder, President and Chief Executive Officer
of SynOptics, an internetworking company. Mr. Ludwick currently serves as a
member of the boards of directors of a number of private companies. Mr. Ludwick
holds a B.A. from Harvard College and an M.B.A. from Harvard Business School.
Board Composition
Upon completion of this offering, we will have an authorized board of three
to five directors. The number of our directors is currently set at three. Each
director is elected for a period of one year at our annual meeting of
stockholders and serves until the next annual meeting or until his successor is
duly elected and qualified. The executive officers serve at the discretion of
the board of directors. There are no family relationships among any of our
directors or executive officers.
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<PAGE>
Executive Compensation
The following table provides summary information concerning the compensation
received for services rendered to us during 1998 by our Chief Executive Officer
and each of the other four most highly compensated executive officers, each of
whose aggregate compensation during our last fiscal year exceeded $100,000
(collectively, the "Named Executive Officers"). The amounts in the column
entitled "Other Annual Compensation" represent commissions paid, based on total
sales, to Messrs. Shackleton and Kallaos and partial forgiveness by Foundry of
loans and interest outstanding under loans made to Mr. McGill in connection
with the exercise of options. The amounts in the column titled "All Other
Compensation" consist of life insurance premiums paid by Foundry.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------------- ------------
Other Annual Securities All Other
Name and Principal Salary Bonus Compensation Underlying Compensation
Position ($) ($) ($) Options (#) ($)
- ------------------ -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Bobby R. Johnson, Jr... $139,090 $ -- $ -- -- $470
President, Chief
Executive Officer,
Chairman of the Board
of Directors
Robert W. Shackleton... 111,590 2,500 74,112 11,250 504
Vice President,
Domestic Sales
William S. Kallaos..... 109,090 -- 35,821 -- 370
Vice President,
International Sales
Wilburn W. McGill...... 125,090 11,500 12,830 22,500 430
Vice President,
Manufacturing
Drusilla W.
Demopoulos............ 119,840 2,500 -- -- 407
Vice President,
Marketing
</TABLE>
Option Grants in Last Fiscal Year
The following table provides summary information regarding stock options
granted to each of the Named Executive Officers in 1998.
These stock options were granted under the 1996 Stock Plan and were
immediately exercisable. These options were exercised prior to December 31,
1998, but we have a right to repurchase at cost any shares that remain unvested
at the time of the officer's cessation of employment. The shares vest at a rate
of 1/48th per month subject to earlier termination in the event of termination
of employment and provide for partial acceleration upon a change of control.
The percentages below are based on the aggregate of 4,083,750 shares subject
to options granted by us in 1998. The exercise price per share of each option
was equal to the fair market value of our common stock on the date of grant as
determined by our board of directors.
The potential realizable value assumes that the fair market value of our
common stock on the date of grant appreciates at the indicated annual rate
compounded annually for the entire 10-year term of the option and that the
option is exercised and sold on the last day of its term for the appreciated
stock price. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by the rules of the SEC, and do not represent our
prediction of stock performance. Actual gains, if any, on stock option
exercises will depend on the future
48
<PAGE>
performance of our common stock. The gains shown are net of the option exercise
price, but do not include deductions for taxes and other expenses payable upon
the exercise of the option or for sale of underlying shares of common stock.
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------
Potential Realizable
% Of Total Value At Assumed
Number Of Options Annual Rates of Stock
Securities Granted To Exercise Price Appreciation
Underlying Employees In Or Base For Option Term ($)
Options Fiscal Year Price Expiration ----------------------
Name Granted(#) (%) ($/Share) Date 5% 10%
- ---- ---------- ------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bobby R. Johnson, Jr.... -- --% $ -- -- $ -- $ --
Robert W. Shackleton.... 11,250 0.3 0.33 6/10/08 2,358 5,977
William S. Kallaos...... -- -- -- -- -- --
Wilburn W. McGill....... 22,500 0.6 0.33 4/29/08 4,717 11,953
Drusilla W. Demopoulos.. -- -- -- -- -- --
</TABLE>
On January 26, 1999 the board of directors authorized the grant of options to
the following Named Executive Officers, at an exercise price of $1.67 per
share: Drusilla W. Demopoulos, 42,000 shares; Robert W. Shackleton, 75,000
shares; and Wilburn W. McGill, 112,500 shares. These options were granted
outside of the 1996 Stock Plan, but the exercise and repurchase rights of the
options are substantially similar to those granted officers in 1998 under the
1996 Stock Plan.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table provides summary information concerning stock option
exercises during our last fiscal year and options outstanding at the end of the
last fiscal year.
The value realized represents the difference between $15.00, which is the
mid-point of the assumed price range of the offering, and the exercise price of
the option.
<TABLE>
<CAPTION>
Number of Shares Value of
Underlying Unexercised
Unexercised In-the Money
Options at Options at
December 31, 1998 December 31, 1998
Shares ----------------- -----------------
Acquired Value Exercisable / Exercisable /
Name on Exercise Realized Unexercisable Unexercisable
- ---- ----------- -------- ------------- -----------------
<S> <C> <C> <C> <C>
Bobby R. Johnson, Jr.... -- $ -- -- $--
Robert W. Shackleton.... 11,250 165,000 -- --
William S. Kallaos...... -- -- -- --
Wilburn W. McGill....... 22,500 330,000 -- --
Drusilla W. Demopoulos.. 48,000 710,400 -- --
</TABLE>
Director Compensation
Except for the grant of stock options, directors are not compensated for
their services as directors. All directors are eligible to participate in our
1996 Stock Plan. Upon completion of this offering, directors who are not our
employees will be eligible to participate in our 1999 Directors' Stock Option
Plan. See "1996 Stock Plan" and "1999 Directors' Stock Option Plan" on pages 50
and 52 for more information regarding our stock plans.
On June 28, 1999, Andrew K. Ludwick exercised a fully vested option to
purchase 240,000 shares of our common stock at an exercise price of $5.33 per
share which was granted to him in connection with his appointment as a member
of our board of directors.
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<PAGE>
Committees of the Board of Directors
In July 1999, the board established the audit committee, compensation
committee and stock option subcommittee. The audit committee reviews our annual
audit and meets with our independent auditors to review our internal controls
and financial management practices. The audit committee currently consists of
Seth D. Neiman and Andrew K. Ludwick. The compensation committee recommends
compensation for some of our personnel to the board and generally administers
our stock plans. The compensation committee currently consists of Messrs.
Neiman and Ludwick. The stock option subcommittee administers our discretionary
stock plans with respect to grants to optionees who are not officers or non-
employee directors of Foundry under guidelines to be established by the board.
The stock option subcommittee currently consists of Bobby R. Johnson, Jr.
On June 9, 1999, we sold to a family trust of which Mr. Ludwick is a trustee
187,500 shares of our Series C preferred stock at a purchase price of $5.33 per
share.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of our board of directors are
currently Seth D. Neiman and Andrew K. Ludwick. Neither has at any time been an
officer or employee of Foundry.
See "Certain Transactions" on page 58 for a discussion of related party
transactions between Foundry and Messrs. Ludwick and Neiman, or their
affiliates.
1996 Stock Plan
Our 1996 Stock Plan was adopted by our board of directors and approved by our
stockholders in July 1996. A total of 15,405,000 shares of common stock for
stock option grants were originally reserved under this plan. Our board of
directors and our stockholders approved a 1,500,000 share increase in October
1998, and a 1,500,000 share increase in May 1999. In addition, in July 1999,
our board of directors approved a 3,000,000 share increase plus an automatic
annual increase on the first day of each of Foundry's fiscal years from 2000
through 2006 equal to the lesser of:
. 2,250,000 shares;
. 3% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
. the number of shares determined by our board of directors.
The July 1999 increase will be submitted to our stockholders for approval
prior to the completion of this offering, and, if approved, will bring the
total number of shares currently reserved under this plan to 21,405,000. As of
June 30, 1999, options to purchase 18,912,000 shares of common stock with a
weighted average exercise price equal to $0.71 per share have been granted
under the 1996 Stock Plan. Of these, 950,002 options have been canceled and
returned to the option pool so that, as of June 30, 1999, 443,002 shares
remained available for future grant.
The 1996 Stock Plan provides for the grant of incentive stock options, as
defined in Section 422 of the Internal Revenue Code, to employees and the grant
of nonstatutory stock options and stock purchase rights to employees, non-
employee directors and consultants. The plan may be administered by our board
or a committee appointed by the board. The administrator of the 1996 Stock Plan
will determine number, vesting schedule, and exercise
50
<PAGE>
price for options, or conditions for stock purchase rights, granted under the
1996 Stock Plan provided, however, an individual employee may not receive
option grants and stock purchase rights for more than 1,500,000 shares in any
fiscal year. To the extent an optionee would have the right in any calendar
year to exercise for the first time one or more incentive stock options for
shares having an aggregate fair market value in excess of $100,000 as of the
date the options were granted, the excess options will be treated as
nonstatutory stock options.
Incentive stock options granted under the 1996 Stock Plan must have an
exercise price equal to at least 100% of the fair market value of the common
stock on the date of the grant, and at least 110% of the fair market value in
the case of incentive stock options granted to an employee who holds more than
10% of the total voting power of all classes of our stock or the stock of any
parent or subsidiary. Nonstatutory stock options granted under the 1996 Stock
Plan will have an exercise price as determined by the administrator of the 1996
Stock Plan; provided, however, that the exercise price of a nonstatutory stock
option granted to a Named Executive Officer must equal at least 100% of the
fair market value of the common stock on the date of grant in order for that
grant to qualify as performance-based compensation under applicable tax law.
Payment of the exercise price may be made in cash or other forms of
consideration approved by the administrator.
The administrator determines the term of options, which may not exceed 10
years, or 5 years in the case of an incentive stock option granted to an
employee who holds more than 10% of the total voting power of all classes of
our stock or the stock of any parent or subsidiary. No option may be
transferred by the optionee other than by will or the laws of descent or
distribution. Each option may be exercised during the lifetime of the optionee
only by such optionee.
Options granted under the 1996 Stock Plan generally may be exercised
immediately after the grant date, but to the extent the shares subject to the
options are not vested as of the date of exercise, we retain a right to
repurchase any shares that remain unvested at the time of the optionee's
termination of employment by paying an amount equal to the exercise price times
the number of unvested shares. Options granted under the 1996 Stock Plan
generally vest at the rate of 1/4th of the total number of shares subject to
the options twelve months after the date of grant and 1/48th of the total
number of shares subject to the options each month thereafter.
In addition to stock options, the administrator may issue stock purchase
rights under the 1996 Stock Plan to employees, non-employee directors and
consultants. The administrator determines the number of shares, price, terms,
conditions and restrictions related to a grant of stock purchase rights. The
purchase price of a stock purchase right granted under the 1996 Stock Plan will
be as determined by the administrator. The period during which the stock
purchase right is held open is determined by the administrator, but in no case
shall this period exceed 30 days. Unless the administrator determines
otherwise, the recipient of a stock purchaser right must execute a restricted
stock purchase agreement granting Foundry an option to repurchase unvested
shares at cost upon termination of the recipient's relationship with us.
In the event we sell all or substantially all of our assets or merge with
another corporation, then each option may be assumed or an equivalent option
substituted by the successor corporation. However, if the successor corporation
does not agree to this assumption or substitution, the option or stock purchase
right will terminate. Upon the closing of the transaction, outstanding
repurchase rights will terminate unless acquired by the acquiror or purchaser.
The board of directors may amend, modify or terminate the 1996 Stock
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<PAGE>
Plan at any time as long as any amendment, modification or termination does not
impair vesting rights of plan participants and provided that stockholder
approval shall be required for an amendment to the extent required by
applicable law. The 1996 Stock Plan will terminate in July 2006 unless the
board of directors terminates it earlier.
1999 Directors' Stock Option Plan
The 1999 Directors' Stock Option Plan was adopted by the board of directors
in July 1999. We will be submitting it for approval by the stockholders prior
to completion of this offering. A total of 675,000 shares of common stock has
been reserved for issuance under the 1999 Directors' Stock Option Plan.
Under the 1999 Directors' Stock Option Plan, each non-employee director who
becomes a non-employee director after the effective date of the plan will
receive an automatic initial grant of an option to purchase 112,500 shares of
common stock upon appointment or election. Initial grants to non-employee
directors shall be vested and exercisable in full on the date of the grant. The
1999 Directors' Stock Option Plan also provides for annual grants, on the date
of each annual meeting of our stockholders, to each non-employee director who
has served on our board of directors for at least six months. The annual grant
to non-employee directors is an option to purchase 30,000 shares of common
stock, which will be vested and exercisable in full on the date of grant. The
exercise price of all stock options granted under the 1999 Directors' Stock
Option Plan shall be equal to the fair market value of a share of our common
stock on the date of grant of the option. Options granted under the 1999
Directors' Stock Option Plan have a term of ten years. However, options will
terminate if they are not exercised within 12 months after the director's death
or disability or within 90 days after the director ceases to serve as a
director for any other reason.
In the event of a sale of all or substantially all of our assets or our
merger or consolidation with or into another corporation in which the ownership
of more than 50% of the total combined voting power of our outstanding
securities changes hands, all outstanding options shall be assumed or an
equivalent option substituted by the successor corporation. However, if the
successor corporation does not agree to this assumption or substitution, the
option will terminate.
The 1999 Directors' Stock Option Plan is designed to work automatically
without administration. However, to the extent administration is necessary, it
will be performed by the board of directors other than the director or
directors that have a personal interest at stake. Although the board of
directors may amend or terminate the 1999 Directors' Stock Option Plan, it may
not take any action that may adversely affect any outstanding option without
the consent of the optionee. The 1999 Directors' Stock Option Plan will have a
term of ten years unless terminated earlier. We have not issued any options
under the 1999 Directors' Stock Option Plan to date.
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan was adopted by the board of directors
in July 1999. We will be submitting it for approval by the stockholders prior
to the completion of this offering. A total of 750,000 shares of common stock
has been reserved for issuance under the 1999 Employee Stock Purchase Plan,
none of which have been issued as of the date of this offering. The number of
shares reserved for issuance under the 1999 Employee Stock Purchase Plan will
be increased on the first day of each of our fiscal years from 2000 through
2009 by the lesser of:
. 750,000 shares;
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<PAGE>
. 2% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
. the number of shares determined by the board of directors.
The 1999 Employee Stock Purchase Plan becomes effective on the date of this
prospectus. Unless terminated earlier by the board of directors, the 1999
Employee Stock Purchase Plan shall terminate on the 10-year anniversary of the
date of this offering.
The 1999 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the IRS Code, will be implemented by a series of overlapping
offering periods of 24 months' duration, with new offering periods, other than
the first offering period, commencing on February 1 and August 1 of each year.
Each offering period will consist of four consecutive purchase periods of six
months' duration, and at the end of each six month period an automatic purchase
will be made for participants. The initial offering period is expected to
commence on the date of this offering and end on July 31, 2001; the initial
purchase period is expected to begin on the date of this offering and end on
January 31, 2000. The 1999 Employee Stock Purchase Plan will be administered by
the board of directors or by a committee appointed by the board. Employees
(including officers and employee directors) of ours, or of any majority-owned
subsidiary designated by the board, are eligible to participate in the 1999
Employee Stock Purchase Plan if we or any subsidiary employs them for at least
20 hours per week and more than five months per year. Under the 1999 Employee
Stock Purchase Plan, eligible employees may purchase common stock through
payroll deductions, which in any event may not exceed 20% of an employee's
compensation, at a price equal to the lower of 85% of the fair market value of
the common stock at the beginning of each offering period or at the end of each
purchase period. Employees may end their participation in the 1999 Employee
Stock Purchase Plan at any time during an offering period and participation
ends automatically on termination of employment.
Under the 1999 Employee Stock Purchase Plan no employee shall be granted an
option if immediately after the grant the employee would own stock and/or hold
outstanding options to purchase stock equaling 5% or more of the total voting
power or value of all classes of our stock. In addition, no employee shall be
granted an option under the 1999 Employee Stock Purchase Plan if the option
would permit the employee to purchase stock under all of our employee stock
purchase plans in an amount that exceeds $25,000 of fair market value for each
calendar year in which the option is outstanding at any time. In addition, no
employee may purchase more than 2,500 shares of common stock under the 1999
Employee Stock Purchase Plan in any one purchase period. If the fair market
value of the common stock on a purchase date other than the final purchase date
of an offering period is less than the fair market value at the beginning of
the offering period, each participant in the 1999 Employee Stock Purchase Plan
shall automatically be withdrawn from the offering period as of the purchase
date and re-enrolled in a new 24 month offering period beginning on the first
business day following the purchase date.
The 1999 Employee Stock Purchase Plan provides that, in the event of our
merger or consolidation with or into another corporation or a sale of all or
substantially all of our assets, each right to purchase stock under the 1999
Employee Stock Purchase Plan will be assumed or an equivalent right will be
substituted by the successor corporation. However, our board of directors will
shorten any ongoing offering period so that employees' rights to purchase stock
under the 1999 Employee Stock Purchase Plan are exercised prior to the
transaction in the event that the successor corporation refuses to assume each
purchase right or to substitute an equivalent right. The board of directors has
the power to amend or
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terminate the 1999 Employee Stock Purchase Plan and to change or terminate
offering periods as long as any action does not adversely affect any
outstanding rights to purchase stock under the 1999 Employee Stock Purchase
Plan. However the board may amend or terminate the 1999 Employee Stock Purchase
Plan or an offering period even if it would adversely affect outstanding
options in order to avoid Foundry's incurring adverse accounting charges. We
have not issued any shares under the 1999 Employee Stock Purchase Plan to date.
401(k) Retirement Plan
Effective January 1, 1997, we adopted the Foundry Networks 401(k) plan
covering our full-time employees. The 401(k) plan is intended to qualify under
Section 401(a) of the IRS Code, and its accompanying trust is intended to be a
tax-exempt trust under Section 501(c) of the IRS Code. Contributions to the
401(k) plan by employees or by us, and the investment earnings on them, are not
taxable to employees until withdrawn from the 401(k) plan, and contributions by
us, if any, will be deductible by us when made. Under the 401(k) plan,
employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit of $10,000 in 1999 and to have the amount
of such reduction contributed to the 401(k) plan. The trustees of the 401(k)
plan, at the direction of participants, invest the assets of the 401(k) plan in
any of certain designated investment options. The 401(k) plan permits, but does
not require, additional matching contributions to the 401(k) plan by us on
behalf of all participants to the 401(k) plan. To date, we have not made any
matching contributions to the 401(k) plan.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derives an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
relief such as injunctive relief or rescission.
Upon completion of this offering, our bylaws will provide that Foundry shall
indemnify its directors and officers and may indemnify its employees and other
agents to the full extent permitted by law. We believe that indemnification
under our bylaws will cover at least negligence and gross negligence on the
part of an indemnified party. Our bylaws will also permit us to advance
expenses incurred by an indemnified party in connection with the defense of any
action or proceeding arising out of the party's status or service as a
director, officer, employee or other agent of Foundry upon an undertaking by
the indemnified party to repay these advances if it is ultimately determined
that the party is not entitled to indemnification.
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We have also entered into indemnification agreements with our officers and
directors containing provisions that are in some respects broader than the
specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements require us to indemnify
officers and directors against liabilities that may arise by reason of their
status or service as officers and directors, but not for liabilities arising
from willful misconduct of a culpable nature, and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. We believe that our certificate of incorporation and bylaw
provisions and indemnification agreements are necessary to attract and retain
qualified persons as officers and directors. In addition, we will obtain
directors' and officers' liability insurance prior to completion of this
offering.
At present, we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees or agents in
which indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification. We believe that our charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership
of our common stock as of June 30, 1999 and as adjusted to reflect the sale of
the common stock offered by us under this prospectus by:
. each of our directors, Named Executive Officers, and founders who are ex-
ecutive officers;
. all directors and executive officers as a group; and
. each person who is known to us to own beneficially more than 5% of our
common stock.
<TABLE>
<CAPTION>
Percent Beneficially
Owned
------------------------
Number Before After
Name and Address of Shares Offering Offering
- ---------------- ---------- ---------- ----------
<S> <C> <C> <C>
Directors and Executive Officers:
Bobby R. Johnson, Jr................... 12,075,000 23.8% 21.7
H. Earl Ferguson....................... 2,392,500 4.7 4.3
Drusilla W. Demopoulos (a)............. 900,000 1.8 1.6
Wilburn W. McGill (b).................. 727,500 1.4 1.3
Robert W. Shackleton (c)............... 738,750 1.5 1.3
William S. Kallaos (d)................. 607,500 1.2 1.1
Seth D. Neiman (e)..................... 8,129,805 16.1 14.6
Andrew K. Ludwick (f).................. 423,750 * *
All directors and executive officers as
a group (10 persons) (g).............. 27,427,305 53.8 49.0
5% Stockholders:
Entities affiliated with Crosspoint
Venture Partners (h).................. 8,129,805 16.1 14.6
2925 Woodside Rd.
Woodside, CA 94062
Entities affiliated with Institutional
Venture Partners (i).................. 4,567,806 9.0 8.2
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
Entities affiliated with Accel Partners
(j)................................... 3,510,754 6.9 6.3
428 University Ave.
Palo Alto, CA 94301
Entities affiliated with VantagePoint
Venture Partners (k).................. 3,412,371 6.7 6.1
1001 Bayhill Drive, Ste. 140
San Bruno, CA 94066
</TABLE>
- --------
* Less than one percent of the outstanding shares of common stock.
(a) Includes 858,000 shares subject to stock pledge agreements in favor of
Foundry, 316,875 of which are subject to our right of repurchase at cost
upon cessation of employment, and 42,000 shares issuable upon the exercise
of an option which was exercisable as of June 30, 1999.
(b) Includes 615,000 shares subject to stock pledge agreements in favor of
Foundry, 269,064 of which are subject to our right of repurchase at cost
upon cessation of employment and 7,500 of which are held jointly with
Billie J. McGill, and 112,500 shares issuable upon the exercise of an
option which was exercisable as of June 30, 1999.
(c) Includes 663,750 shares subject to stock pledge agreements in favor of
Foundry, 307,500 of which are subject to our right of repurchase at cost
upon cessation of employment, and 75,000 shares issuable upon the exercise
of an option which was exercisable as of June 30, 1999.
(d) Includes 607,500 shares subject to a stock pledge agreement in favor of
Foundry, 278,437 of which are subject to our right of repurchase at cost
upon cessation of employment.
(e) Includes 5,810,217 shares held by Crosspoint Venture Partners (1996), and
2,319,588 shares held by Crosspoint Venture Partners LS 1997. Seth D.
Neiman is a general partner of the general partner of the Crosspoint
entities and is a director of Foundry. He disclaims beneficial ownership
of the shares held by the Crosspoint entities except to the extent of his
pecuniary interest in these shares.
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<PAGE>
(f) Includes 187,500 shares sold to a family trust of which Mr. Ludwick is a
trustee and 7,500 shares transferred to his minor children and held in
custodial accounts on their behalf.
(g) Includes 8,129,805 shares held by entities affiliated with Mr. Neiman as
described in Note (a), 5,309,533 shares subject to our right of repurchase
upon cessation of employment by officers and 327,000 shares issuable upon
the exercise of options which were exercisable as of June 30, 1999.
(h) Includes 5,810,217 shares held by Crosspoint Venture Partners (1996) and
2,319,588 shares held by Crosspoint Venture Partners LS 1997. The
following natural persons exercise voting and/or dispositive powers for
the shares held by these funds: Robert A. Hoff, Donald B. Milder, John B.
Mumford, Seth D. Neiman and Rich Shapero.
(i) Includes 76,220 shares held by Institutional Venture Management VII, L.P.,
159,875 shares held by IVP Founders Fund I, L.P. and 4,331,711 shares held
by Institutional Venture Partners VII, L.P. The following natural persons
exercise voting and/or dispositive powers for the shares held by these
funds: Samuel D. Colella, Reid W. Dennis, Mary Jane Elmore, Norman A.
Fogelsong, Ruthann Quindlen, L. James Strand, William P. Tai, T. Peter
Thomas and Geoffrey Y. Yang.
(j) Includes 365,118 shares held by Accel Internet/Strategic Technology Fund
L.P., 168,515 shares held by Accel Investors 97 L.P., 143,940 shares held
by Accel Keiretsu V L.P., 2,755,945 shares held by Accel V L.P. and
77,236 shares held by Elmore C. Patterson Partners. The following natural
persons exercise voting and/or dispositive powers for the shares held by
these funds: James W. Breyer, Luke B. Evnin, Eugene D. Hill, Arthur C.
Patterson, James R. Swartz, G. Carter Sednaoui and J. Peter Wagner.
(k) Includes 51,546 shares held by VantagePoint Advisors, LLC and 3,360,825
shares held by VantagePoint Venture Partners 1996. The following natural
persons exercise voting and/or dispositive powers for the shares held by
these funds: James Marver and Alan Salzman.
Except as otherwise noted, the address of each person listed in the table is
c/o Foundry Networks, Inc., 680 W. Maude Avenue, Suite 3, Sunnyvale, CA 94086.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to shares. To our knowledge, except under applicable community
property laws or as otherwise indicated, the persons named in the table have
sole voting and sole investment control with respect to all shares beneficially
owned.
The table includes all shares of common stock issuable within 60 days of June
30, 1999 upon the exercise of options and other rights beneficially owned by
the indicated stockholders on that date.
The applicable percentage of ownership for each stockholder is based on
50,635,929 shares of common stock outstanding as of June 30, 1999 and an
assumed 55,635,929 shares outstanding upon completion of this offering, in each
case together with applicable options for that stockholder. Shares of common
stock issuable upon exercise of options and other rights beneficially owned are
deemed outstanding for the purpose of computing the percentage ownership of the
person holding those options and other rights, but are not deemed outstanding
for computing the percentage ownership of any other person.
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<PAGE>
CERTAIN TRANSACTIONS
Since our inception, we have issued shares of preferred stock in private
placement transactions as follows: 8,625,000 shares of Series A preferred stock
at $0.67 per share in June 1996; 6,130,425 shares of Series B preferred stock
at $1.53 per share in June, August and December 1997; 7,731,960 shares of
Series C preferred stock at $1.94 per share in March 1998; and 187,500 shares
of Series C preferred stock at $5.33 per share in June 1999 to a family trust
of which Andrew K. Ludwick, a director of Foundry, is a trustee. Each share of
preferred stock converts automatically upon completion of the offering into one
share of common stock. In October 1996, we also issued in a private placement
transaction warrants for 45,000 shares of Series A preferred stock at a
purchase price of $0.67 per share, which will convert to warrants to purchase
common stock upon completion of this offering. See "Description of Capital
Stock--Warrants" on page 60 for more information regarding outstanding
warrants.
The following table summarizes the shares of preferred stock purchased by
directors, executive officers and 5% stockholders of Foundry and persons and
entities associated with them in private placement transactions.
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Preferred Preferred
Stock Stock Stock
--------- --------- ---------
<S> <C> <C> <C>
Entities affiliated with Crosspoint Venture
Partners(a).................................... 4,995,000 815,217 2,319,588
Andrew K. Ludwick(b)............................ -- -- 187,500
Bobby R. Johnson, Jr.(c)........................ 900,000 -- --
Entities affiliated with Institutional Venture
Partners(d).................................... 2,130,000 1,793,476 644,330
Entities affiliated with Accel Partners(e)...... -- 2,608,692 902,062
Entities affiliated with VantagePoint Venture
Partners(f).................................... -- -- 3,412,371
</TABLE>
- --------
(a) Includes shares held by Crosspoint Venture Partners (1996) and Crosspoint
Venture Partners LS 1997. Seth D. Neiman is a general partner of the
general partner of the Crosspoint entities and is a director of Foundry. He
disclaims beneficial ownership of the shares held by the entities except to
the extent of his pecuniary interest in these shares.
(b) Includes 187,500 shares sold to a family trust of which Mr. Ludwick is a
trustee and 3,750 shares transferred to one of his children.
(c) In June 1999, we repurchased 600,000 shares of our common stock from Mr.
Johnson at his original purchase price of $0.0067 per share.
(d) Includes shares held by Institutional Venture Management VII, L.P., IVP
Founders Fund I, L.P. Fund I, L.P. and Institutional Venture Partners VII,
L.P.
(e) Includes shares held by Accel Internet/Strategic Technology Fund L.P.,
Accel Investors '97 L.P., Accel Keiretsu V L.P., Accel V L.P. and Elmore C.
Patterson Partners.
(f) Includes shares held by VantagePoint Advisors, LLC and VantagePoint Venture
Partners 1996.
On June 6, 1996, we sold Bobby R. Johnson, Jr. 11,775,000 shares of our
common stock at a purchase price of $0.0067 per share, paid for by Mr. Johnson
through the assignment of proprietary information, discussed below. Under the
agreement, we held the right to repurchase any shares that remained unvested
upon either a voluntary termination of employment by Mr. Johnson or a
termination by us for cause. As of May 22, 1996, 25% of the stock vested and
the remaining shares vested monthly over each of the next 48 months. Also on
June 6, 1996, and in connection with the stock sale discussed above, Mr.
Johnson executed an assignment agreement, in which he assigned to us certain
business concepts and proprietary information relating to the development of
next generation high performance campus LAN infrastructure products. In June
1999, we repurchased 600,000 shares of our common stock from Mr. Johnson at his
original purchase price of $0.0067 per share.
On December 4, 1996, we granted Drusilla W. Demopoulos an option to purchase
810,000 shares of our common stock at an exercise price of $0.067 per share
under our 1996
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<PAGE>
Stock Plan. This option was immediately exercisable subject to our right to
repurchase at cost any shares that remain unvested upon cessation of
employment. In connection with the exercise of this option on June 25, 1997, we
provided a loan to Ms. Demopoulos, pursuant to a note secured by a stock pledge
agreement, in the principal amount of $54,000 with an interest rate of 6.68%,
due upon the earlier of June 25, 2002 or twelve months after the closing of
Foundry's initial public offering. On December 17, 1997, we granted Ms.
Demopoulos an option to purchase 48,000 shares of our common stock at an
exercise price of $0.20 per share under our 1996 Stock Plan. This option was
immediately exercisable subject to our right to repurchase at cost any shares
that remain unvested upon cessation of employment. In connection with the
exercise of this option on April 29, 1998, we provided a second loan to
Ms. Demopoulos, pursuant to a note secured by a stock pledge agreement, in the
principal amount of $9,600 with an interest rate of 5.58%, due upon the earlier
of April 28, 2003 or twelve months after the closing of Foundry's initial
public offering.
On August 11, 1998, we granted Ken K. Cheng an option to purchase 622,500
shares of our common stock at an exercise price of $0.33 per share under our
1996 Stock Plan. This option was immediately exercisable subject to our right
to repurchase at cost any shares that remain unvested upon cessation of
employment. In connection with the exercise of this option on October 6, 1998,
we provided a loan to Mr. Cheng, pursuant to a note secured by a stock pledge
agreement, in the principal amount of $207,458 with an interest rate of 5.03%,
due upon the earlier of October 5, 2003 or twelve months after the closing of
Foundry's initial public offering.
On March 19, 1998, an entity affiliated with Crosspoint Venture Partners
purchased 2,319,588 shares of our Series C Preferred Stock at $1.94 per share.
Seth D. Neiman is a general partner of the general partner of the Crosspoint
entities and is a director of Foundry. He disclaims beneficial ownership of the
shares held by the entities except to the extent of his pecuniary interest in
these shares.
On June 28, 1999, Andrew K. Ludwick exercised a fully vested option to
purchase 240,000 shares of our common stock at an exercise price of $5.33 per
share granted him in connection with his appointment as a member of our board
of directors. On June 9, 1999, we sold to a family trust of which Mr. Ludwick
is a trustee, 187,500 shares of our Series C preferred stock at a purchase
price of $5.33 per share.
We believe that the transactions identified in this section were on terms no
less favorable to us than could have been obtained from unaffiliated third
parties.
Indemnification Agreements
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. See "Management--Limitation of Liability
and Indemnification Matters" on page 54 for more information regarding
indemnification of our officers and directors.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General Matters
Upon the completion of this offering, we will be authorized to issue
200,000,000 shares of common stock, $0.0001 par value per share, and 5,000,000
shares of undesignated preferred stock, $0.0001 par value per share. All
currently outstanding shares of preferred stock will be converted into common
stock upon the closing of this offering.
Common Stock
As of June 30, 1999, and after giving effect to the conversion of our
preferred stock into common stock at a one-to-one ratio, there were 50,635,929
shares of common stock outstanding that were held of record by approximately
121 stockholders. Also outstanding as of that date were options to purchase
5,792,953 shares of common stock and warrants to purchase 45,000 shares of
Series A preferred stock, which will convert to warrants to purchase common
stock upon completion of this offering. Assuming no exercise of the
underwriters' overallotment option, exercise of outstanding options under our
1996 Stock Plan or exercise of the warrant, and after giving effect to the sale
of shares offered here, there will be shares of common stock outstanding
upon completion of this offering.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the board of directors out of funds legally available for that
purpose. In the event of liquidation, dissolution or winding up of Foundry, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to the prior distribution rights of any
outstanding preferred stock. The common stock has no preemptive or conversion
rights or other subscription rights. The outstanding shares of common stock
are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
Preferred Stock
Upon completion of this offering, all outstanding shares of preferred stock
will be converted into 22,674,885 shares of common stock. Thereafter, our board
of directors will have the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock, $0.0001 par
value, in one or more series. The board of directors will also have the
authority to designate the rights, preferences, privileges and restrictions of
each series, including dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of Foundry without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may also adversely affect the voting power of the holders of common stock. In
certain circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of the common stock. We currently have no plans to
issue any shares of preferred stock.
Warrants
As of June 30, 1999, there were warrants outstanding to purchase 45,000
shares of Series A preferred stock which will convert to warrants to purchase
common stock upon completion of this offering. The warrants contain provisions
for the adjustment of the exercise price and
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<PAGE>
the aggregate number of shares issuable upon the exercise of the warrant under
certain circumstances, including stock dividends, stock splits,
reorganizations, reclassifications, consolidations and certain dilutive
issuances of securities at prices below the then existing warrant exercise
price.
Registration Rights
Assuming the conversion of all outstanding preferred stock into common stock
upon completion of this offering, the holders of 22,678,635 shares of common
stock or securities convertible into common stock or their transferees are
entitled to registration rights with respect to these shares under the
Securities Act. These rights are provided under the terms of an agreement
between Foundry and the holders of these securities. Subject to limitations in
the agreement, these registration rights include the following:
. The holders of at least 30% of these securities then outstanding may
require, on one occasion beginning one year after the date of this
prospectus, that we use our best efforts to register these securities
for public resale, provided that the anticipated aggregate offering
price, net of underwriting discounts and commissions, of such public
resale would exceed $10,000,000.
. If we register any of our common stock either for our own account or for
the account of other security holders, the holders of these securities
are entitled to include their shares of common stock in that
registration, subject to the ability of the underwriters to limit the
number of shares included in the offering.
. The holders of these securities may also require us, not more than once
in any 12 month period and no more than three times total, to register
all or a portion of these securities on Form S-3 when use of that form
becomes available to us, provided, among other limitations, that the
proposed aggregate selling price, net of any underwriters' discounts or
commissions, is at least $1,000,000.
We will be responsible for paying all registration expenses other than
underwriting discounts and commissions, and the holders selling their shares
will be responsible for paying all selling expenses.
Delaware Anti-Takeover Law and Charter and Bylaw Provisions
Provisions of Delaware law and our certificate of incorporation and bylaws
could make the acquisition of Foundry and the removal of incumbent officers and
directors more difficult. These provisions are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of Foundry to negotiate with it
first. We believe that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure Foundry outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.
We are subject to the provisions of Section 203 of the Delaware law. In
general, the statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless, subject to exceptions, the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
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asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior, did
own, 15% or more of the corporation's voting stock. These provisions may have
the effect of delaying, deferring or preventing a change in control of Foundry
without further action by the stockholders.
Upon completion of this offering, our bylaws will provide that stockholder
action can only be taken at an annual or special meeting. The bylaws provide
that special meetings of stockholders can be called only by the board of
directors, the Chairman of the Board, if any, and the President. The bylaws set
forth an advance notice procedure with regard to the nomination, other than by
or at the direction of the board of directors, of candidates for election as
directors and with regard to business to be brought before a meeting of
stockholders.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is U.S. Stock Transfer
Corporation. The Transfer Agent's address and telephone number is 1745 Gardena
Avenue, 2nd Floor, Glendale, CA 91204, (818) 502-1404.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future
sales of substantial amounts of common stock in the public market after this
offering could cause the market price of our common stock to decline.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of contractual and legal restrictions on
resale, sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market price
and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 55,635,929 shares
of common stock. Of these shares, the 5,000,000 shares sold in the offering
(and any shares issued upon exercise of the underwriters' overallotment option)
will be freely tradable without restriction under the Securities Act, unless
purchased by "affiliates" of ours as that term is defined in Rule 144 under the
Securities Act. Affiliates generally include officers, directors or 10%
stockholders. Shares eligible to be sold by affiliates pursuant to Rule 144 are
subject to volume restrictions as described below.
The remaining 50,635,929 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. These shares may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 under the Securities
Act, which are summarized below. Sales of these shares in the public market, or
the availability of such shares for sale, could cause the market price of our
common stock to decline.
Our stockholders have entered into lock-up agreements generally providing
that they will not offer, sell, contract to sell or grant any option to
purchase or otherwise dispose of our common stock or any securities exercisable
for or convertible into our common stock owned by them for a period of 180 days
after the effective date of the registration statement filed pursuant to this
offering. As a result of these contractual restrictions, notwithstanding
possible earlier eligibility for sale under the provisions of Rules 144, 144(k)
and 701, shares subject to lock-up agreements will not be salable until such
agreements expire or are waived. Taking into account the lock-up agreements,
the following shares will be eligible for sale in the public market at the
following times:
. Beginning on the effective date of this prospectus, only the shares sold
in the offering will be immediately available for sale in the public
market;
. Beginning 180 days after the effective date, approximately 46,711,010
shares will be eligible for sale pursuant to Rules 701, 144 and 144(k),
of which all but 21,735,383 shares are held by affiliates;
. An additional 3,737,419 shares will be eligible for sale pursuant to
Rule 701 at various times beginning 180 days after the effective date
when these shares are released from our repurchase option with respect
to these shares, of which all but 1,980,244 shares are held by
affiliates; and
. An additional 187,500 shares will be eligible for sale pursuant to Rule
144 on June 10, 2000.
Rule 144
Under Rule 144, beginning 90 days after the effective date of the
registration statement of which this prospectus is a part, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for
at least one year, which includes the holding period of
63
<PAGE>
any prior owner other than an affiliate, would generally be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
. 1% of the outstanding shares of our common stock then outstanding, which
will equal approximately 556,350 shares immediately after this offering;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about
Foundry.
Rule 144(k)
Under Rule 144(k), a person who was not an affiliate of Foundry at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, which includes the holding period
of any prior owner except an affiliate, is entitled to sell these shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701
In general, under Rule 701, any of our employees, consultants or advisors,
other than affiliates, who purchases or receives shares from us in connection
with a compensatory stock purchase plan or option plan or other written
agreement will be eligible to resell these shares beginning 90 days after the
effective date of the registration statement of which this prospectus is a
part, subject only to the manner of sale provisions of Rule 144, and by
affiliates under Rule 144 without compliance with its holding period
requirements.
Registration Rights
Upon completion of this offering, the holders of 22,678,635 shares of common
stock or securities convertible into common stock will be entitled to
registration rights with respect to these shares under the Securities Act. When
these shares are registered under the Securities Act, they will be freely
tradable unless held by affiliates.
Stock Options
In addition, we intend to file registration statements under the Securities
Act as promptly as possible upon the completion of this offering to register
10,435,956 shares of common stock to be issued pursuant to our employee benefit
plans or upon exercise of non-plan options. As a result, any options or rights
exercised under the 1996 Stock Plan, the 1999 Employee Stock Purchase Plan or
the 1999 Directors' Stock Option Plan after the effectiveness of the
registration statements will be available for sale in the public market 180
days after the effective date of this offering upon the expiration of lock-up
agreements. However, such shares held by affiliates will still be subject to
the volume limitation, manner of sale, notice and public information
requirements of Rule 144 unless otherwise resalable under Rule 701.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank
Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P.
Morgan Securities Inc. have severally agreed to purchase from Foundry the
number of shares of common stock set forth beside their names below at a public
offering price less the underwriting discounts and commissions set forth on the
cover page of this prospectus:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
- ----------- ---------
<S> <C>
Deutsche Bank Securities Inc. ........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ................................................
J.P. Morgan Securities Inc. ..........................................
---------
Total............................................................... 5,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
to purchase the common stock is subject to the terms and conditions set forth
in the underwriting agreement. The underwriting agreement requires the
underwriters to purchase all of the shares of the common stock offered by this
prospectus, if any are purchased. The shares of common stock offered by the
underwriters pursuant to this prospectus are subject to prior sale, when, as
and if delivered to and accepted by the underwriters, and subject to the
underwriters' right to reject any order in whole or in part.
We have been advised by the representatives that the underwriters propose to
offer the shares of common stock to the public at the initial public offering
price of $ per share and to certain dealers at a price that represents a
concession not in excess of $ per share. Any shares sold by the underwriters
to securities dealers may be sold at a discount of up to $ per share from
the initial public offering price. Any such securities dealers may resell any
shares purchased from the underwriters to certain other brokers or dealers at a
discount of up to $ per share from the public offering price. The
underwriters may change the public offering price after the common stock is
released for sale to the public.
The underwriters may sell more shares than the total number set forth in the
table above. To cover these sales, we have granted the underwriters an option
to purchase up to an aggregate of 750,000 additional shares of common stock at
the initial public offering price, less the underwriting discounts and
commissions. The underwriters may exercise this option at any time within 30
days after the date of this prospectus only to cover these sales. To the extent
the underwriters exercise this option, each of the underwriters will purchase
shares in approximately the same proportion as the number of shares of common
stock to be purchased by it shown in the above table bears to 5,000,000, and we
will be obligated, pursuant to the option, to sell those shares to the
underwriters. If purchased, the underwriters will offer the additional shares
on the same terms as those on which the 5,000,000 shares are being offered. If
the underwriters exercise their over-allotment option in full, the total public
offering price will be $ , the total underwriting discount will be $ , and
the total proceeds to Foundry will be $ .
We have agreed to indemnify the underwriters with respect to certain
liabilities, including liabilities under the Securities Act.
65
<PAGE>
To facilitate the offering of the common stock, the underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price
of the common stock. Specifically, the underwriters may over-allot shares of
our common stock in connection with this offering, thereby creating a short
position in the underwriters' account. A short position results when an
underwriter sells more shares of common stock than such underwriter is
committed to purchase. Additionally, to cover over-allotments or to stabilize
the market price of the common stock, the underwriters may bid for, and
purchase, shares of our common stock at a level above that which might
otherwise prevail in the open market. The underwriters are not required to
engage in these activities, and, if they do, they may discontinue doing so at
any time. The underwriters also may reclaim selling concessions allowed to an
underwriter or dealer, if the underwriters repurchase shares distributed by
such underwriter or dealer.
Foundry and its officers and directors and substantially all of our
stockholders have agreed not to offer, sell or make any other disposition of
any shares of our common stock or other securities convertible into or
exchangeable or exercisable for shares of our common stock or derivatives of
our common stock for a period of 180 days after the date of this prospectus,
directly or indirectly, without the prior written consent of Deutsche Bank
Securities Inc.
The representatives of the underwriters have advised us that the underwriters
do not intend to confirm sales to any account over which they exercise
discretionary authority.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $965,000.
At Foundry's request, the underwriters have reserved for sale, at the initial
public offering price, up to 450,000 shares for Foundry's vendors, customers
and other third parties. The number of shares of common stock available for
sale to the general public will be reduced to the extent these reserved shares
are purchased. Any reserved shares that are not purchased will be offered by
the underwriters to the general public on the same basis as the other shares
offered by this prospectus.
Pricing of this Offering
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock will be
determined by negotiation among Foundry and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be:
. prevailing market conditions;
. Foundry's results of operations in recent periods;
. the present stage of our development;
. the market capitalizations and stages of development of other companies
which Foundry and the representatives of the underwriters believe to be
comparable to us; and
. estimates of Foundry's business potential.
The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
66
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Foundry by Venture Law Group, A Professional Corporation, Menlo Park,
California. Joshua L. Green, a director of Venture Law Group, is the Secretary
of Foundry. Pillsbury Madison & Sutro LLP, Palo Alto and San Francisco,
California, is acting as counsel for the underwriters in connection with
selected legal matters relating to the shares of common stock offered by this
prospectus. As of the date of this prospectus, a family trust of which a
director of Venture Law Group is trustee and two investment partnerships
affiliated with Venture Law Group own a total of 37,500 shares of Foundry's
Series A preferred stock and 16,301 shares of Series B preferred stock, which
shares will convert into 53,801 shares of our common stock upon the completion
of this offering.
EXPERTS
The audited financial statements and schedule included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION AVAILABLE TO YOU
We have filed with the SEC a registration statement on Form S-1 with respect
to the common stock in this offering. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are
part of the registration statement. For further information with respect to
Foundry and the common stock, reference is made to the registration statement
and the exhibits and schedules thereto. You may read and copy any document we
file at the SEC's public reference room in Washington, DC. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available to the public from the SEC's web site at
www.sec.gov.
Upon completion of this offering, Foundry will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
and, in accordance therewith, will file periodic reports, proxy statements and
other information with the SEC. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the SEC's
public reference rooms and the web site of the SEC referred to above.
67
<PAGE>
FOUNDRY NETWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants ................................ F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity (Deficit)........................................................ F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
After the stock split discussed in Note 6 to the financial statements of
Foundry Networks, Inc., we expect to be in a position to render the following
audit report:
ARTHUR ANDERSEN LLP
San Jose, California
July 28, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Foundry Networks, Inc.:
We have audited the accompanying balance sheets of Foundry Networks, Inc. (a
Delaware corporation) as of December 31, 1997 and 1998, and the related
statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit) and cash flows for the period from inception,
May 22, 1996, to December 31, 1996 and for the years ended December 31, 1997
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Foundry Networks, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from inception, May 22, 1996, to December 31, 1996 and for
the years ended December 31, 1997 and 1998 in conformity with generally
accepted accounting principles.
San Jose, California
July 28, 1999
ARTHUR ANDERSEN LLP
F-2
<PAGE>
FOUNDRY NETWORKS, INC.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1999
December 31, Pro Forma
------------------ June 30, Stockholders'
1997 1998 1999 Equity (Note 5)
-------- -------- -------- ---------------
<S> <C> <C> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents....... $ 3,182 $ 4,567 $ 12,340
Accounts receivable, net of
allowance for doubtful
accounts of $10, $399, and
$1,074, respectively........... 1,234 6,607 13,381
Inventories..................... 1,497 7,201 9,735
Prepaid expenses and other
current assets................. 363 367 582
-------- -------- --------
Total current assets........ 6,276 18,742 36,038
-------- -------- --------
Property and equipment:
Computers and related
equipment...................... 1,207 1,603 1,748
Furniture and fixtures.......... 62 80 80
-------- -------- --------
1,269 1,683 1,828
Less: Accumulated
depreciation................... (557) (1,187) (1,413)
-------- -------- --------
Net property and equipment.. 712 496 415
-------- -------- --------
$ 6,988 $ 19,238 $ 36,453
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Bank line of credit............. $ -- $ -- $ 2,000
Current portion of capital
lease obligations.............. 166 178 90
Accounts payable................ 1,405 6,059 7,170
Accrued payroll and related
expenses....................... 493 937 1,297
Warranty accrual................ 24 355 1,067
Other accrued expenses.......... 89 179 1,215
Income taxes payable............ -- -- 1,004
Deferred revenue................ 23 371 898
-------- -------- --------
Total current liabilities... 2,200 8,079 14,741
-------- -------- --------
Capital lease obligations, net of
current portion................. 178 -- --
-------- -------- --------
Commitments and contingencies
(Note 3)
Redeemable convertible preferred
stock, $0.0001 par value,
aggregate liquidation preference
of $30,150 at December 31, 1998
and $30,514 at June 30, 1999:
Authorized--22,750,431 shares
at June 30, 1999 and
5,000,000 shares pro forma
Issued and outstanding--
14,755,431 shares at December
31, 1997, 22,487,394 shares
at December 31, 1998,
22,674,885 shares at June 30,
1999 and none pro forma....... 15,119 30,085 31,085
-------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.0001 par
value:
Authorized--75,000,000 shares
at June 30, 1999 and
200,000,000 shares pro forma
Issued and outstanding--
26,271,563 shares at
December 31, 1997, 27,915,984
shares at December 31, 1998,
27,961,044 shares at June 30,
1999 and 50,635,929 shares
pro forma.................... 3 3 3 $ 5
Treasury stock.................. -- -- (6,480) (6,480)
Additional paid-in capital...... 768 6,120 28,728 59,811
Notes receivable from
stockholders................... (260) (713) (859) (859)
Deferred stock compensation..... -- (3,964) (13,404) (13,404)
Accumulated deficit............. (11,020) (20,372) (17,361) (17,361)
-------- -------- -------- --------
Total stockholders' equity
(deficit).................. (10,509) (18,926) (9,373) $ 21,712
-------- -------- -------- ========
$ 6,988 $ 19,238 $ 36,453
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FOUNDRY NETWORKS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
Inception
(May 22, Year Ended Six Months Ended
1996) to December 31, June 30,
December 31 ---------------- ------------------
1996 1997 1998 1998 1999
----------- ------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue, net.................. $ -- $ 3,381 $17,039 $ 4,203 $ 39,487
Cost of revenue............... -- 1,835 8,433 2,082 18,341
------- ------- ------- -------- --------
Gross profit................ -- 1,546 8,606 2,121 21,146
------- ------- ------- -------- --------
Operating expenses:
Research and development.... 1,914 5,403 8,797 3,250 3,625
Sales and marketing......... -- 3,419 7,258 2,745 6,973
General and administrative.. 226 1,853 1,589 569 1,655
Amortization of deferred
stock compensation......... -- -- 727 -- 4,902
------- ------- ------- -------- --------
Total operating expenses.. 2,140 10,675 18,371 6,564 17,155
------- ------- ------- -------- --------
Income (loss) from
operations................... (2,140) (9,129) (9,765) (4,443) 3,991
Interest income, net.......... 127 122 413 213 24
------- ------- ------- -------- --------
Income (loss) before provision
for income taxes............. (2,013) (9,007) (9,352) (4,230) 4,015
Provision for income taxes.... -- -- -- -- 1,004
------- ------- ------- -------- --------
Net income (loss)............. $(2,013) $(9,007) $(9,352) $ (4,230) $ 3,011
======= ======= ======= ======== ========
Basic net income (loss) per
share........................ $ (0.99) $ (1.33) $ (0.69) $ (0.35) $ 0.17
======= ======= ======= ======== ========
Weighted average shares used
in computing basic net income
(loss) per share............. 2,024 6,785 13,488 12,044 18,246
======= ======= ======= ======== ========
Diluted net income (loss) per
share........................ $ (0.99) $ (1.33) $ (0.69) $ (0.35) $ 0.06
======= ======= ======= ======== ========
Weighted average shares used
in computing diluted net
income (loss) per share...... 2,024 6,785 13,488 12,044 52,320
======= ======= ======= ======== ========
Pro forma basic net income
(loss) per share
(unaudited).................. $ (0.27) $ 0.07
======= ========
Weighted average shares used
in computing pro forma basic
net income (loss) per share
(unaudited).................. 34,323 40,755
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FOUNDRY NETWORKS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Redeemable
Convertible Notes Total
Preferred Stock Common Stock Treasury Stock Additional Receivable Deferred Stockholders'
---------------- -------------- -------------- Paid-in From Stock Accumulated Equity
Shares Amount Shares Amount Shares Amount Capital Stockholders Compensation Deficit (Deficit)
------- -------- ------ ------ ------ ------- ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT
INCEPTION........ -- $ -- -- $-- -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock to
founders for
cash and
technology
rights.......... -- -- 16,470 2 -- -- 108 -- -- -- 110
Exercise of
stock options
for notes
receivable...... -- -- 713 -- -- -- 47 (47) -- -- --
Issuance of
Series A
redeemable
convertible
preferred stock,
net of issuance
costs of $31.... 8,625 5,719 -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (2,013) (2,013)
------- -------- ------ ---- --- ------- ------- ----- -------- -------- -------
BALANCES AT
DECEMBER 31,
1996............. 8,625 5,719 17,183 2 -- -- 155 (47) -- (2,013) (1,903)
Exercise of
stock options
for cash........ -- 6,239 1 -- -- 415 -- -- -- 416
Exercise of
stock options
for notes
receivable...... -- 3,075 -- -- -- 213 (213) -- -- --
Issuance of
Series B
redeemable
convertible
preferred
stock........... 6,130 9,400 -- -- -- -- -- -- -- -- --
Repurchase of
common stock.... -- -- (225) -- -- -- (15) -- -- -- (15)
Net loss........ -- -- -- -- -- -- -- -- -- (9,007) (9,007)
------- -------- ------ ---- --- ------- ------- ----- -------- -------- -------
BALANCES AT
DECEMBER 31,
1997............. 14,755 15,119 26,272 3 -- -- 768 (260) -- (11,020) (10,509)
Exercise of
stock options
for cash........ -- -- 550 -- -- -- 212 -- -- -- 212
Exercise of
stock options
for notes
receivable...... -- -- 1,477 -- -- -- 474 (474) -- -- --
Issuance of
Series C
redeemable
convertible
preferred stock,
net of issuance
costs of $34.... 7,732 14,966 -- -- -- -- -- -- -- -- --
Deferred stock
compensation.... -- -- -- -- -- -- 4,691 -- (4,691) -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- -- 727 -- 727
Repurchase of
common stock.... -- -- (383) -- -- -- (25) -- -- -- (25)
Cancellation of
notes receivable
from
stockholders.... -- -- -- -- -- -- -- 21 -- -- 21
Net loss........ -- -- -- -- -- -- -- -- -- (9,352) (9,352)
------- -------- ------ ---- --- ------- ------- ----- -------- -------- -------
BALANCES AT
DECEMBER 31,
1998............. 22,487 30,085 27,916 3 -- -- 6,120 (713) (3,964) (20,372) (18,926)
Exercise of
stock options
for cash
(unaudited)..... -- -- 522 -- -- -- 1,644 -- -- -- 1,644
Exercise of
stock options
for notes
receivable
(unaudited)..... -- -- 123 -- -- -- 146 (146) -- -- --
Issuance of
Series C
redeemable
convertible
preferred stock
(unaudited)..... 188 1,000 -- -- -- -- -- -- -- -- --
Deferred stock
compensation
(unaudited)..... -- -- -- -- -- -- 14,342 -- (14,342) -- --
Amortization of
deferred stock
compensation
(unaudited)..... -- -- -- -- -- -- -- -- 4,902 -- 4,902
Repurchase of
common stock
from a founder
(unaudited)..... -- -- (600) -- 600 (6,480) 6,476 -- -- -- (4)
Net income
(unaudited)..... -- -- -- -- -- -- -- -- -- 3,011 3,011
------- -------- ------ ---- --- ------- ------- ----- -------- -------- -------
BALANCES AT JUNE
30, 1999
(unaudited)...... 22,675 $ 31,085 27,961 $ 3 600 $(6,480) $28,728 $(859) $(13,404) $(17,361) $(9,373)
======= ======== ====== ==== === ======= ======= ===== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FOUNDRY NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period
from
Inception
(May 22, Year Ended Six Months Ended
1996) to December 31, June 30,
December 31, ----------------- ------------------
1996 1997 1998 1998 1999
------------ ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)........ $(2,013) $(9,007) $ (9,352) $ (4,230) $ 3,011
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating
activities:
Depreciation........... 88 469 630 326 226
Amortization of
deferred stock
compensation.......... -- -- 727 -- 4,902
Cancellation of notes
receivable from
stockholders.......... -- -- 21 -- --
Provision for allowance
for doubtful
accounts.............. -- 10 389 89 675
Provision for excess
and obsolete
inventories........... -- 106 1,012 34 1,113
Issuance of common
stock for certain
technology rights..... 94 -- -- -- --
Change in operating
assets and
liabilities:
Accounts receivable.. -- (1,244) (5,762) 18 (7,449)
Inventories.......... -- (1,603) (6,716) (862) (3,647)
Prepaid expenses and
other current
assets.............. (78) (285) (4) 41 (215)
Accounts payable..... 117 1,288 4,654 (122) 1,111
Accrued liabilities.. 123 483 865 25 2,108
Income taxes
payable............. -- -- -- -- 1,004
Deferred revenue..... -- 23 348 67 527
------- ------- -------- -------- --------
Net cash provided by
(used in) operating
activities......... (1,669) (9,760) (13,188) (4,614) 3,366
------- ------- -------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment............... (243) (526) (414) (218) (145)
------- ------- -------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from bank line
of credit.............. -- -- -- -- 2,000
Principal payments on
capital lease
obligations............ -- (156) (166) (82) (88)
Proceeds from issuance
of common stock........ 16 416 212 32 1,644
Repurchase of common
stock.................. -- (15) (25) -- (4)
Net proceeds from
issuance of redeemable
convertible preferred
stock.................. 5,719 9,400 14,966 14,966 1,000
------- ------- -------- -------- --------
Net cash provided by
financing
activities......... 5,735 9,645 14,987 14,916 4,552
------- ------- -------- -------- --------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS.............. 3,823 (641) 1,385 10,084 7,773
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD...... -- 3,823 3,182 3,182 4,567
------- ------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD............ $ 3,823 $ 3,182 $ 4,567 $ 13,266 $ 12,340
======= ======= ======== ======== ========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of property and
equipment through
capital lease
obligations............. $ 500 $ -- $ -- $ -- $ --
Issuance of common stock
for notes receivable.... 47 213 474 85 146
Increase in treasury
stock on repurchase of
common stock............ -- -- -- -- 6,480
Cash paid for interest... -- 28 18 9 48
Cash paid for income
taxes................... -- 2 1 1 3
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(All information as of and for the six months ended June 30, 1998 and 1999 is
unaudited)
1. ORGANIZATION OF THE COMPANY:
Foundry Networks, Inc. (the Company or Foundry) was incorporated in Delaware
on May 22, 1996 under the name Perennium Networks, Inc., and changed its name
to StarRidge Networks, Inc. on June 5, 1996 and to Foundry Networks, Inc. on
January 22, 1997. Foundry designs, develops, manufactures and markets a
comprehensive suite of high performance networking products for enterprises and
Internet service providers.
During 1997, Foundry commenced commercial shipment of its products and
emerged from the development stage. Although no longer in the development
stage, Foundry continues to be subject to the risks and challenges similar to
other companies in a comparable stage of development. These risks include, but
are not limited to, dependence on key individuals, dependence on key suppliers
of integral components, successful development and marketing of products, the
ability to obtain adequate financing to support growth and competition from
substitute products and larger companies with greater financial, technical,
management and marketing resources.
2. SIGNIFICANT ACCOUNTING POLICIES:
Unaudited Interim Financial Data
The unaudited interim financial statements for the six months ended June 30,
1998 and 1999 have been prepared on the same basis as the audited financial
statements and, in the opinion of management, reflect all normal recurring
adjustments necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles. Results
for the six months ended June 30, 1999 are not necessarily indicative of
results in future periods.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Split
In July 1999, Foundry's board of directors approved a three for two stock
split of Foundry's outstanding common and preferred stock subject to
stockholder approval. All share and per share information included in these
financial statements have been retroactively adjusted to reflect this stock
split.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash deposited in checking and money
market accounts with original maturities of less than three months.
Inventories
Inventories are stated on a first-in, first-out basis at the lower of cost or
market, and include purchased parts, labor and manufacturing overhead.
Inventories consist of the following (in thousands):
F-7
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998 June 30, 1999
------ ------ -------------
(unaudited)
<S> <C> <C> <C>
Purchased parts.................................. $ 577 $5,302 $6,643
Work-in-process.................................. 667 1,281 1,393
Finished goods................................... 253 618 1,699
------ ------ ------
$1,497 $7,201 $9,735
====== ====== ======
</TABLE>
Provision for excess and obsolete inventory in the amounts of $106,000,
$1,012,000 and $1,113,000 were recorded for the years ended December 31, 1997
and 1998 and the six months ended June 30, 1999, respectively. Approximately
$779,000 of work-in-process inventory was consigned at contract manufacturers'
sites as of December 31, 1998.
Concentrations
Financial instruments that potentially subject Foundry to a concentration of
credit risk principally consist of accounts receivable. Foundry performs
ongoing credit evaluations of its customers and generally does not require
collateral. To date, credit losses have been immaterial and within management's
expectations. During the year ended December 31, 1998, Foundry provided
approximately $389,000 to its allowance for doubtful accounts. Total write-offs
of uncollectible amounts were immaterial during fiscal 1997 and 1998. Ten
customers accounted for 78% and 58% of trade receivables as of December 31,
1997 and 1998, respectively.
Foundry purchases several key components used in the manufacture of products
from single or limited sources and depends on supply from these sources to meet
its needs. In addition, Foundry depends on contract manufacturers for major
portions of the manufacturing requirements. The inability of the suppliers or
manufacturers to fulfill the production requirements of Foundry could
negatively impact future results.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives as follows:
<TABLE>
<S> <C>
Computers and related equipment...................................... 2 years
Furniture and fixtures............................................... 3 years
</TABLE>
Revenue Recognition
Foundry generally recognizes product revenue upon shipment to customers.
Revenue from customer support services is deferred and recognized on a
straight-line basis over the contractual period. At shipment date, Foundry
establishes an accrual for estimated warranty expenses associated with sales.
From inception to December 31, 1998, Foundry did not record a reserve for sales
returns because product returns were immaterial. For the six months ended June
30, 1999, Foundry recorded a reserve for sales returns equal to $250,000 for
direct product sales to end users, consistent with increasing revenue, which
has been netted with revenue in the statements of operations. The contracts
with distributors do not provide for rights of return and the contract with the
original equipment manufacturer also does not provide for rights of return
except in the event products do not meet specifications or there has been an
epidemic failure, as defined in the agreement.
F-8
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
During 1997 and 1998 and the six months ended June 30, 1999, approximately
100%, 99% and 99%, respectively, of Foundry's total revenue was derived from
product sales. The percentages of revenue to significant customers were as
follows:
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended
--------------- June 30,
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Customer A..................................... 49% 21% 10%
Customer B..................................... 14% -- --
Customer C..................................... -- -- 17%
Customer D..................................... -- -- 15%
</TABLE>
Sales in significant markets are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended
-------------- June 30,
1997 1998 1999
------ ------- -----------
(unaudited)
<S> <C> <C> <C>
United States..................................... $1,649 $11,816 $30,972
Japan............................................. 1,647 3,657 4,055
</TABLE>
Foundry sells to various countries in North America, Europe, Asia, South
America and Australia. Sales to individual countries other than disclosed above
within these continents represent less than 10% of total revenue.
Software Development Costs
Foundry accounts for internally generated software development costs in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." Capitalization of eligible product development costs begins upon the
establishment of technological feasibility, which Foundry has defined as
completion of a working model. Internally generated costs which were eligible
for capitalization, after consideration of factors such as realizable value,
were not material for the period from inception to December 31, 1996, the years
ended December 31, 1997 and 1998 and the six months ended June 30, 1999 and,
accordingly, all software development costs have been charged to research and
development expense in the accompanying statements of operations.
Computation of Per Share Amounts
Basic net income (loss) per common share and diluted net income (loss) per
common share are presented in conformity with Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share" for all periods presented.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
98, common stock and convertible preferred stock issued or granted for nominal
consideration prior to the anticipated effective date of the initial public
offering must be included in the calculation of basic and diluted net income
(loss) per common share as if such stock had been outstanding for all periods
presented. To date, Foundry has not had any issuances or grants for nominal
consideration.
In accordance with SFAS No. 128, basic net income (loss) per common share has
been calculated using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. For the
period from inception to December 31, 1996, the
F-9
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
years ended December 31, 1997 and 1998 and the six months ended June 30, 1998
Foundry has excluded all convertible preferred stock, outstanding stock options
and shares subject to repurchase from the calculation of diluted net loss per
common share because all such securities are anti-dilutive for those periods.
The total number of shares excluded from the calculations of diluted net loss
per common share were 13,873,500, 16,613,744, 26,001,285, and 24,927,645 for
the period from inception to December 31, 1996, the years ended December 31,
1997 and 1998 and the six months ended June 30, 1998, respectively. For the six
months ended June 30, 1999, diluted net income per common share has been
calculated assuming the conversion of all dilutive potential common stock. Pro
forma basic net income (loss) per common share has been calculated assuming the
conversion of the redeemable convertible preferred stock using the if-converted
method into an equivalent number of common shares as if the shares had been
converted on the dates of issuance.
<TABLE>
<CAPTION>
Period from
Inception (May Year Ended Six Months
22, 1996) to December 31, Ended June 30,
December 31, ----------------- ----------------
1996 1997 1998 1998 1999
-------------- -------- ------- ------- -------
(in thousands, except per share data)
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss).......... $(2,013) $ (9,007) $(9,352) $(4,230) $ 3,011
------- -------- ------- ------- -------
Basic:
Weighted average shares
of common stock
outstanding............. 10,079 22,490 26,699 26,351 28,043
Less: Weighted average
shares subject to
repurchase.............. (8,055) (15,705) (13,211) (14,307) (9,797)
------- -------- ------- ------- -------
Weighted average shares
used in computing basic
net income (loss) per
common share............ 2,024 6,785 13,488 12,044 18,246
======= ======== ======= ======= =======
Basic net income (loss) per
common share.............. $ (0.99) $ (1.33) $ (0.69) $ (0.35) $ 0.17
======= ======== ======= ======= =======
Diluted:
Weighted average shares
of common stock
outstanding............. 28,043
Add: Weighted average
dilutive potential
common stock............ 24,277
-------
Weighted average shares
used in computing
diluted net income
(loss) per common
share................... 2,024 6,785 13,488 12,044 52,320
======= ======== ======= ======= =======
Diluted net income (loss)
per common share.......... $ (0.99) $ (1.33) $ (0.69) $ (0.35) $ 0.06
======= ======== ======= ======= =======
Pro forma basic:
Shares used above........ 13,488 18,246
Pro forma adjustment to
reflect weighted effect
of assumed conversion of
redeemable convertible
preferred stock
(unaudited)............. 20,835 22,509
------- -------
Weighted average shares
used in computing pro
forma basic net income
(loss) per common share
(unaudited)............. 34,323 40,755
======= =======
Pro forma basic net income
(loss) per common share
(unaudited)............... $ (0.27) $ 0.07
======= =======
</TABLE>
F-10
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation (SFAS No. 123), in October 1995.
This accounting standard permits the use of either a fair value based method or
the method defined in Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees" (APB Opinion 25) to account for stock-based
compensation arrangements. Companies that elect to employ the valuation method
provided in APB Opinion 25 are required to disclose the pro forma net income
(loss) that would have resulted from the use of the fair value based method.
Foundry has elected to determine the value of stock-based compensation
arrangements under the provisions of APB Opinion 25, and accordingly, the pro
forma disclosures required under SFAS No. 123 have been included in Note 5.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," (SFAS No. 130) which establishes standards
for reporting and presentation of comprehensive income. SFAS No. 130 was
adopted by Foundry in 1998. This standard defines comprehensive income as the
changes in equity of an enterprise except those resulting from stockholder
transactions. Comprehensive income (loss) for the period from inception to
December 31, 1996, the years ended December 31, 1997 and 1998 and the six
months ended June 30, 1999 equaled net income (loss).
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (SFAS No.
131). SFAS No. 131 was adopted by Foundry in 1997. SFAS No. 131 establishes
standards for disclosures about operating segments, products and services,
geographic areas and major customers. Foundry is organized and operates as one
operating segment, the design, development, manufacturing and marketing of high
performance Gigabit Ethernet switches, switching routers, server load balancing
and transparent caching switches.
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," (SOP No. 98-1). SOP
No. 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria have been met. SOP No. 98-1 was adopted by
Foundry in 1998. The adoption of SOP No. 98-1 did not have a material impact on
Foundry's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133, as recently amended, is effective for fiscal years beginning
after June 15, 2000. Management believes the adoption of SFAS No. 133 will not
have a material effect on Foundry's financial position or results of
operations.
In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP No. 97-
2, Software Revenue Recognition, With Respect to Certain Transactions," (SOP
No. 98-9). SOP No. 98-9 amends SOP No. 97-2 and SOP No. 98-4 by extending the
deferral of the application of certain provisions of SOP No. 97-2 amended by
SOP No. 98-4 through fiscal years beginning on or before March 15, 1999. All
other provisions of SOP No. 98-9 are effective for
F-11
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
transactions entered into in fiscal years beginning after March 15, 1999.
Foundry has not had significant software sales to date and management does not
expect the adoption of SOP No. 98-9 to have a significant effect on the
financial position or results of operations.
3. COMMITMENTS AND CONTINGENCIES:
Foundry leases its office facilities under a noncancellable operating lease
expiring in October 2001. Rent expense was approximately $66,000, $245,000 and
$263,000, respectively, for the period from inception to December 31, 1996 and
the years ended December 31, 1997 and 1998.
Foundry leases equipment under a long-term lease agreement that is classified
as a capital lease. The lease expires in December 1999. Future payments on the
lease together with the present value of the payments, as of December 31, 1998
were as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Lease Lease
------- ---------
<S> <C> <C>
1999....................................................... $ 184 $248
2000....................................................... -- 258
2001....................................................... -- 235
----- ----
Total minimum lease payments............................. 184 $741
====
Less: Amount representing interest (6.6%).................. (6)
-----
Present value of minimum lease payments.................... 178
Less: Current portion of capital lease obligations......... (178)
-----
Long-term portion of capital lease obligations............. $ --
=====
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with a cost and related accumulated depreciation of approximately
$500,000 and $312,000, respectively, at December 31, 1997 and $500,000 and
$500,000, respectively, at December 31, 1998.
Foundry is subject to various claims which arise in the normal course of
business. Although the amount of any liability with respect to such litigation
cannot be determined, in the opinion of management, the ultimate disposition of
these claims will not have a material adverse effect on Foundry's financial
position or results of operations. During 1997, Foundry incurred costs and
expenses in the amount of $750,000 related to the settlement of a lawsuit,
which is reflected in the 1997 statements of operations under general and
administrative expenses.
F-12
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. INCOME TAXES:
Foundry accounts for income taxes pursuant to Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". A valuation
allowance has been recorded for the total net deferred tax assets as a result
of uncertainties regarding realization of the assets based upon the limited
operating history of Foundry, the lack of profitability to date and the
uncertainty of future profitability. As of December 31, 1997 and 1998,
components of the net deferred income tax assets were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
Net operating loss carryforwards.......................... $3,348 $6,126
Capitalized start-up costs................................ 699 552
Capitalized organization costs............................ 12 9
Tax credits............................................... 514 1,348
Reserve and other cumulative temporary differences........ 345 1,150
------ ------
4,918 9,185
Less: Valuation allowance................................. (4,918) (9,185)
------ ------
Net deferred tax assets................................. $ -- $ --
====== ======
</TABLE>
As of December 31, 1998, Foundry had cumulative net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $15.3 million, which expire in various periods from 2003 to 2015.
Under current tax law, net operating loss carryforwards available in any given
year may be limited upon the occurrence of certain events, including
significant changes in ownership interests. As of December 31, 1997 and 1998,
Foundry had no significant deferred tax liabilities.
The income tax provision for the six months ended June 30, 1999 is based upon
the estimated annualized tax rate and differs from the statutory rate of 34%
primarily due to application of the benefit from the net operating loss offset
by the amortization of deferred compensation expense recorded for financial
reporting purposes but not for tax purposes.
5. STOCKHOLDERS' EQUITY (DEFICIT):
Redeemable Convertible Preferred Stock
In June 1996, Foundry issued 8,625,000 shares of Series A redeemable
convertible preferred stock (Series A) at $0.67 per share. In June to December
1997, Foundry issued 6,130,425 shares of Series B redeemable convertible
preferred stock (Series B) at $1.53 per share. In March 1998 Foundry issued
7,731,960 shares of Series C redeemable convertible preferred stock (Series C)
at $1.94 per share. The rights with respect to Series A, B and C are as
follows:
Dividends
Holders of Series A, B and C are entitled to receive non-cumulative dividends
at an annual rate of $0.05, $0.11 and $0.15 per share, respectively, when and
if declared by the board of directors. No distributions may be made to holders
of common stock until all dividends declared on Series A, B and C have been
paid. No dividends have been declared or paid through December 31, 1998.
F-13
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Liquidation
In the event of liquidation, Series A, B and C stockholders have a preference
of $0.67, $1.53 and $1.94 per share (with the Series C having a preference over
Series A and B, and Series B having a preference over Series A), respectively,
plus all declared and unpaid dividends over holders of the common stock.
Thereafter, all remaining assets will be distributed among holders of common
stock as if the Series A, B and C shares were converted into common stock.
Conversion
Each share of outstanding preferred stock is convertible, at the option of
the holder, into one share of common stock. The conversion rate is subject to
adjustment based on a formula to prevent dilution. Each share of convertible
preferred stock will automatically convert into common stock upon the closing
of a public offering resulting in proceeds of not less than $20,000,000.
Redemption
Each share of outstanding preferred stock must be redeemed in four annual
installments beginning on March 19, 2004, and continuing thereafter on each
March 19 until and including March 19, 2007. The preferred stock is redeemable
for cash equal to $0.67, $1.53 and $1.94 per share of Series A, B and C,
respectively (as adjusted for any stock dividends, combinations or splits).
Voting Rights
The holders of Series A, B and C are entitled to the number of votes equal to
the number of shares of common stock into which such preferred stock is
convertible.
Common Stock
Foundry had 26,271,563 and 27,915,984 shares of common stock issued and
outstanding at December 31, 1997 and 1998, respectively. Included in such
outstanding shares are 16,470,000 shares issued to Foundry's founders in 1996
(the Founders Shares). The Founders Shares were issued subject to a repurchase
option by Foundry. The Founders Shares vest out of the repurchase option 25
percent upon issuance, with the balance vesting ratably each month for the 48
months after issuance. At December 31, 1998, approximately 4,375,500 of the
Founders Shares are unvested and no Founders Shares had been repurchased. As
further defined in the respective stock purchase agreements, (i) any unvested
Founders Shares immediately vest prior to the sale or merger of Foundry to
certain non-controlled parties and (ii) Foundry has certain rights of first
refusal to repurchase the Founders Shares until such time that Foundry's common
shares trade on a public market.
F-14
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following shares of common stock have been reserved for future issuance
as of December 31, 1998:
<TABLE>
<S> <C>
Conversion of Series A convertible redeemable preferred
stock outstanding.......................................... 8,625,000
Conversion of Series B convertible redeemable preferred
stock outstanding.......................................... 6,130,425
Conversion of Series C convertible redeemable preferred
stock outstanding.......................................... 7,731,960
1996 Stock Plan............................................. 4,851,516
Conversion of preferred stock warrants outstanding.......... 45,000
----------
27,383,901
==========
</TABLE>
Notes Receivable from Stockholders
Foundry's stock option plan allows for the exercise of stock options in
exchange for stockholders' notes receivable. The following table summarizes the
non-recourse notes receivable outstanding as of December 31, 1998 (in
thousands, except interest rate):
<TABLE>
<CAPTION>
Maturity
Date Principal Number of Shares Interest Rate
-------- --------- ---------------- -------------
<S> <C> <C> <C>
2001................................ $ 36 713 6.16%
2002................................ $203 2,745 5.97%--6.68%
2003................................ $474 1,477 5.03%--5.58%
</TABLE>
Preferred Stock Warrants
During October 1996, in connection with a sales and leaseback arrangement,
Foundry issued warrants, to the lessor to purchase 45,000 shares of Series A at
$0.67 per share, which will convert to warrants to purchase common stock upon
completion of an initial public offering. At the date of issuance, the value of
the warrants were deemed immaterial and, accordingly, no expense was recorded.
These warrants expire in September 2003.
Pro Forma Stockholders' Equity
The board of directors has authorized the filing of a registration statement
with the Securities and Exchange Commission to register shares of its common
stock in connection with a proposed initial public offering (IPO). If the IPO
is consummated under the terms presently anticipated, (i) all of the
outstanding redeemable convertible preferred stock at June 30, 1999 will be
converted into 22,674,885 shares of common stock upon the closing of the IPO.
The effect of the conversion has been reflected as unaudited pro forma
stockholders' equity in the accompanying balance sheet as of June 30, 1999.
Upon completion of the IPO, the Company will be authorized to issue 200,000,000
shares of common stock, $0.0001 par value, and 5,000,000 shares of undesignated
preferred stock, $0.0001 par value.
Stock Options
Under Foundry's 1996 Stock Plan (the Plan), the board of directors authorized
the issuance of 16,905,000 shares to employees and consultants as of December
31, 1998. Nonstatutory options granted under the Plan must be issued at a price
equal to at least 85% of the fair
F-15
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
market value of Foundry's common stock at the date of grant if granted to
others. Incentive stock options granted under the Plan must be issued at a
price at least equal to the fair market value of Foundry's common stock at the
date of grant. All options may be exercised at any time within ten years of the
date of grant or within one month of termination of employment, or such shorter
time as may be provided in the stock option agreement, and vest over a vesting
schedule determined by the board of directors, generally four years.
The following option activity in the Plan occurred during the period from
inception (May 22, 1996) to June 30, 1999:
<TABLE>
<CAPTION>
Weighted
Options Average
Outstanding Exercise Price
----------- --------------
<S> <C> <C>
Granted..................................... 5,916,000 $0.07
Exercised................................... (712,500) 0.07
----------
Balances, December 31, 1996................... 5,203,500 0.07
Granted..................................... 6,375,750 0.09
Exercised................................... (9,314,063) 0.07
Cancelled................................... (451,875) 0.07
----------
Balances, December 31, 1997................... 1,813,312 0.13
Granted..................................... 4,083,750 0.41
Exercised................................... (2,026,921) 0.34
Cancelled................................... (401,250) 0.17
----------
Balances, December 31, 1998................... 3,468,891 0.34
Granted (unaudited)......................... 2,536,500 4.29
Exercised (unaudited)....................... (645,061) 2.77
Cancelled (unaudited)....................... (96,877) 0.20
----------
Balances, June 30, 1999 (unaudited)........... 5,263,453 1.95
==========
</TABLE>
As of December 31, 1998, Foundry had issued an aggregate of 12,053,484 shares
of common stock to employees of Foundry of which 6,474,402 shares are subject
to repurchase rights at the option of Foundry at $0.07-$0.67 per share. In 1997
and 1998, Foundry repurchased 225,000 and 382,500 shares, respectively, of
unvested common stock from employees at $0.07 per share. As of June 30, 1999,
an aggregate of 443,002 shares were available for future option grants under
the Plan.
F-16
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
and vested at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Vested
--------------------------------- -----------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Vested Price
-------- ----------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.07.................... 787,266 8.06 $0.07 286,119 $0.07
$0.20.................... 489,000 8.63 $0.20 122,250 $0.20
$0.33.................... 1,316,625 9.54 $0.33 39,718 $0.33
$0.67.................... 876,000 9.84 $0.67 2,516 $0.67
--------- -------
$0.07-$0.67.............. 3,468,891 $0.34 450,603
========= =======
</TABLE>
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Vested at December 31, 1997..................... 300,156 $0.07
Vested at December 31, 1998..................... 450,603 $0.13
Vested at June 30, 1999 (unaudited)............. 568,293 $0.23
</TABLE>
Foundry accounts for stock options issued to employees under APB Opinion No.
25 whereby the difference between the exercise price and the fair value at the
date of grant is recognized as compensation expense. Had compensation expense
been determined consistent with SFAS No. 123, net income would have decreased
and losses would have increased to the following pro forma amounts (in
thousands except per share data):
<TABLE>
<CAPTION>
Period
from Inception Year Ended
(May 22, 1996) to December 31, Six Months
December 31, ---------------- Ended June 30,
1996 1997 1998 1999
----------------- ------- ------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Net income (loss) as
reported.................. $(2,013) $(9,007) $(9,352) $3,011
Pro forma net income
(loss).................... (2,035) (9,060) (9,483) 2,669
Basic net income (loss) per
share as reported......... (0.99) (1.33) (0.69) 0.17
Pro forma net income (loss)
per share................. (1.01) (1.33) (0.70) 0.15
Diluted net income (loss)
per share as reported..... (0.99) (1.33) (0.69) 0.06
Pro forma diluted net
income (loss) per share... (1.01) (1.33) (0.70) 0.05
</TABLE>
The weighted average fair value of options granted during 1996, 1997 and 1998
was $0.01, $0.02 and $0.08, respectively. Pursuant to the provisions of SFAS
No. 123, the compensation cost associated with options granted in 1996, 1997
and 1998 was estimated on the grant date using the Black-Scholes model and the
following assumptions:
<TABLE>
<S> <C>
Risk free interest rate..................................... 5.13 to 6.83%
Average expected life of option............................. 4 years
Dividend yield.............................................. 0%
Volatility of common stock.................................. 0.01%
</TABLE>
F-17
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In connection with the issuance of certain stock options to employees in 1998
and for the six months ended June 30, 1999, Foundry has recorded deferred stock
compensation in the aggregate amount of approximately $4.7 million and $14.3
million, respectively, representing the difference between the deemed fair
value of Foundry's common stock for accounting purposes and the exercise price
of stock options at the date of grant. Foundry is amortizing the deferred stock
compensation expense over the vesting period, generally four years. For the
year ended December 31,1998 and the six months ended June 30, 1999,
amortization expense was approximately $727,000 and $4.9 million, respectively.
At June 30, 1999, the remaining deferred stock compensation of approximately
$13.4 million will be amortized as follows: $4.0 million in the last two
quarters of fiscal 1999, $5.2 million during fiscal 2000, $2.8 million during
fiscal 2001, $1.2 million during fiscal 2002 and $189,000 during fiscal 2003.
The amortization expense relates to options granted to employees in all
operating expense categories. The amortization of deferred stock compensation
has not been separately allocated to these categories. The amount of deferred
stock compensation expense to be recorded in future periods could decrease if
options for which accrued but unvested compensation has been recorded are
forfeited.
6. SUBSEQUENT EVENTS:
In January 1999, Foundry granted 529,500 nonstatutory stock options to
certain key employees outside of the 1996 Stock Plan at an exercise price of
$1.67 per share. The options vest over a four-year period and expire in January
2009. The weighted average remaining contractual life of the options was 9.6
years as of June 30, 1999.
In January 1999, the Company entered into a lease agreement for additional
office facilities. The following summarizes future payments (in thousands):
<TABLE>
<S> <C>
1999................................ $126
2000................................ 18
----
$144
====
</TABLE>
In February 1999, Foundry entered into a revolving line of credit agreement
(the Agreement) with a bank which expires on February 18, 2000. The Agreement
provides for borrowings up to $10,000,000 of eligible accounts receivable at
the bank's prime rate. Borrowings are collaterized by substantially all of
Foundry's assets. The Agreement contains restrictive covenants which, among
other things, require Foundry to maintain certain financial ratios and limits
the payment of dividends. Borrowings outstanding under the line of credit as of
June 30, 1999 were $2,000,000.
In March 1999, Foundry issued a letter of credit in the amount of $1,000,000
to a supplier which expires on December 31, 1999.
In May 1999, the board of directors approved an amendment to Foundry's 1996
Stock Plan to increase the number of shares of common stock reserved under the
Plan from 16,905,000 to 18,405,000 shares. In July 1999, an additional
3,000,000 shares of common stock were reserved under the Plan to increase the
total to 21,405,000.
In June 1999, Foundry issued 187,500 shares of Series C redeemable
convertible preferred stock at $5.33 per share to a family trust, of which a
recently appointed director of Foundry is a trustee, for gross proceeds of
$1,000,000.
F-18
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1999, the Company repurchased 600,000 unvested shares from a founder
at $0.0067 per share. The repurchase was recorded as treasury stock on the
accompanying balance sheet as of June 30, 1999. Foundry recorded the repurchase
at the deemed fair value of the common stock on the transaction date.
In July 1999, the 1999 Directors' Stock Option Plan was adopted by the board
of directors. A total of 675,000 shares of common stock have been reserved for
issuance under this plan.
In July 1999, the 1999 Employee Stock Purchase Plan was adopted by the board
of directors. A total of 750,000 shares of common stock have been reserved for
issuance under this plan.
F-19
<PAGE>
[INSIDE BACK COVER]
[FOUNDRY TURBOMAN LOGO AND WEB ADDRESS]
<PAGE>
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in the
prospectus is current only as of its date.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 2
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 17
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 32
Management............................................................... 46
Principal Stockholders................................................... 56
Certain Transactions..................................................... 58
Description of Capital Stock............................................. 60
Shares Eligible for Future Sale.......................................... 63
Underwriting............................................................. 65
Legal Matters............................................................ 67
Experts.................................................................. 67
Additional Information Available
to You.................................................................. 67
Index to Financial Statements............................................ F-1
</TABLE>
Until , 1999 (25 days after the date of this prospectus), all dealers that
buy, sell or trade in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. Dealers are also obligated
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
[CORPORATION LOGO]
Foundry Networks, Inc.
5,000,000 Shares
Common Stock
Deutsche Banc Alex. Brown
Merrill Lynch & Co.
J.P. Morgan & Co.
Prospectus
,
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
SEC registration fee............................................... $ 25,576
NASD filing fee.................................................... 9,700
Nasdaq National Market listing fee................................. 100,000
Printing and engraving expenses.................................... 100,000
Legal fees and expenses............................................ 450,000
Accounting fees and expenses....................................... 250,000
Blue Sky qualification fees and expenses........................... 5,000
Transfer Agent and Registrar fees.................................. 10,000
Miscellaneous fees and expenses.................................... 14,724
--------
Total............................................................ $965,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Upon
completion of this offering, Article XIII of our certificate of incorporation
(Exhibit 3.2) and Article VI of our bylaws (Exhibit 3.4) will provide for
indemnification of our directors, officers, employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. In addition,
we have entered into indemnification agreements with our officers and
directors. The Underwriting Agreement (Exhibit 1.1) also provides for cross-
indemnification among Foundry and the Underwriters with respect to certain
matters, including matters arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
Since inception in May 1996, we have sold and issued the following
unregistered securities:
1. In June 1996, we issued and sold 16,470,000 shares of common stock for an
aggregate purchase price of $109,800. These shares were issued to the
following: Lee Chen, H. Earl Ferguson, Bobby R. Johnson, Jr. and Jeffrey
Prince.
2. In June 1996, we issued 8,625,000 shares of Series A preferred stock for an
aggregate cash consideration of $5,750,000. These shares were issued to the
following: Crosspoint Venture Partners (1996), Dixon & Carol Doll Family
Trust, DMW Investors '96, Doll Family Partnership, H. Earl Ferguson, Robert
Earl Ferguson, Institutional Venture Management VII L.P., Institutional
Venture Partners Founders Fund I, LP, Institutional Venture Partners VII
L.P., James E. Hulburd and Laura L. Hulburd, Trustees for the Hulburd
Family Trust REV TR U/A DTD 7/30/92, Bobby R. Johnson, Jr., Joshua L. Green
As Trustee of the Community Trust under the Green Family Trust U/A/D
11/6/95, Russell Randolph Scott, University of Michigan Business School
Growth Fund, VLG Investments '96 and James P. Wade.
II-1
<PAGE>
3. In October 1996, we issued warrants to purchase 45,000 shares of Series A
preferred stock, which will convert to warrants to purchase common stock
upon completion of this offering, to Lighthouse Capital Partners II L.P. in
connection with an equipment lease agreement.
4. In June, August and December 1997, we issued a total of 6,130,425 shares of
Series B preferred stock for an aggregate cash consideration of
$9,399,994.20. These shares were issued to the following: Accel
Internet/Strategic Technology Fund L.P., Accel Investors '97 L.P., Accel
Keiretsu V L.P., Accel V L.P., Crosspoint Venture Partners (1996), Doll
Technology Investment Fund L.P., Ellmore C. Patterson Partners,
Institutional Venture Management VII L.P., Institutional Venture Partners
Founders Fund I, LP, Institutional Venture Partners VII L.P., Joshua L.
Green As Trustee of the Community Trust under the Green Family Trust U/A/D
11/6/95, Mitsui & Co. (U.S.A.), Inc., Mitsui & Co., Ltd. and VLG
Investments '97.
5. In March 1998, we issued 7,731,960 shares of Series C preferred stock for
an aggregate cash consideration of $15,000,008. These shares were issued to
the following: Accel Internet/Strategic Technology Fund L.P., Accel
Investors '97 L.P., Accel Keiretsu V L.P., Accel V L.P., Crosspoint Venture
Partners LS 1997, Doll Technology Affiliates Fund, L.P., Doll Technology
Investment Fund L.P., Doll Technology Side Fund, L.P., Ellmore C. Patterson
Partners, Institutional Venture Management VII L.P., IVP Founders Fund I,
LP, Institutional Venture Partners VII L.P., Mitsui & Co., Ltd.,
VantagePoint Advisors, LLC and VantagePoint Venture Partners 1996.
6. In June 1999, we issued 187,500 shares of Series C preferred stock to one
investor, a family trust of which Andrew K. Ludwick, a director of Foundry,
is a trustee, for an aggregate cash consideration of $1,000,000.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain issuances described in Item 2 were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Foundry Networks,
Inc.*
3.2 Amended and Restated Certificate of Incorporation of Foundry Networks,
Inc. (proposed).
3.3 Amended and Restated Bylaws of Foundry Networks, Inc.*
3.4 Amended and Restated Bylaws of Foundry Networks, Inc. (proposed).*
4.1 Specimen Stock Certificate.*
4.2 Preferred Stock Purchase Warrant dated October 9, 1996.*
5.1 Opinion of Venture Law Group regarding the legality of the common stock
being registered.
10.1 1996 Stock Plan (amended July 8, 1999).
10.2 1999 Employee Stock Purchase Plan dated July 8, 1999.
10.3 1999 Directors' Stock Option Plan dated July 8, 1999.
10.4 Form of Indemnification Agreement between Foundry Networks, Inc. and
each of its Officers and Directors.*
</TABLE>
II- 2
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.5 OEM Purchase Agreement dated January 6, 1999 between Foundry Networks,
Inc. and Hewlett-Packard Company, Workgroup Networks Division.**
10.6 Reseller Agreement dated July 1, 1997 between Foundry Networks, Inc.
and Mitsui & Co., Ltd.**
10.7 Common Stock Purchase Agreement and Assignment Agreement between
StarRidge Networks, Inc. and Bobby R. Johnson, Jr. dated June 6, 1996.*
10.8 Promissory Note, Pledge and Security Agreement and Assignment Separate
from Certificate dated June 25, 1997, executed by Drusilla Demopoulos
in connection with a loan from Foundry Networks, Inc. in connection
with the exercise of options to purchase common stock.*
10.9 Promissory Note, Pledge and Security Agreement and Assignment Separate
from Certificate dated April 29, 1998, executed by Drusilla Demopoulos
in connection with a loan from Foundry Networks, Inc. in connection
with the exercise of options to purchase common stock.*
10.10 Promissory Note, Pledge and Security Agreement and Assignment Separate
from Certificate dated October 6, 1998, executed by Ken Cheng in
connection with a loan from Foundry Networks, Inc. in connection with
the exercise of options to purchase common stock.*
10.11 Lease agreement dated October 16, 1996, between StarRidge Networks,
Inc. and PaineWebber Qualified Plan Property Fund Four, L.P. for
offices at 680 W. Maude Ave., Sunnyvale, CA 94086.*
10.12 Sublease agreement dated March 15, 1999 between Foundry Networks, Inc.
and Prolifix Medical, Inc. for offices at 680 W. Maude Ave., Sunnyvale,
CA 94086.*
23.1 Consent of Arthur Andersen, LLP, Independent Public Accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney.*
27.1 Financial Data Schedule (EDGAR-filed version only).*
99.1 Consent of Collaborative Research.
99.2 Consent of Dell'Oro Group.
99.3 Consent of Tolly Group.
99.4 Consent of Network World.
</TABLE>
- --------
* Previously filed.
** Previously filed; confidential treatment requested as to certain portions
of this exhibit.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Other schedules are omitted because they are not applicable, or because the
information is included in the Financial Statements or the Notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a
II-3
<PAGE>
director, officer, or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement on Form S-1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
city of Sunnyvale, State of California on August 17, 1999.
FOUNDRY NETWORKS, INC.
/s/ Timothy D. Heffner
By: _________________________________
Timothy D. Heffner
Vice President, Finance &
Administration,Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
*Bobby R. Johnson, Jr. President, Chief Executive August 17, 1999
______________________________________ Officer and Chairman of
(Bobby R. Johnson, Jr.) the Board of Directors
(Principal Executive
Officer)
/s/ Timothy D. Heffner Vice President, Finance & August 17, 1999
______________________________________ Administration, Chief
(Timothy D. Heffner) Financial Officer
(Principal Financial and
Accounting Officer)
*Seth D. Neiman Director August 17, 1999
______________________________________
(Seth D. Neiman)
*Andrew K. Ludwick Director August 17, 1999
______________________________________
(Andrew K. Ludwick)
</TABLE>
/s/ Timothy D. Heffner
*By: _________________________________
(Timothy D. Heffner)
Attorney-In-Fact
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders
of Foundry Networks, Inc.
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Foundry Networks, Inc. included in this
Registration Statement and have issued our report thereon dated July 28, 1999.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
July 28, 1999
<PAGE>
FOUNDRY NETWORKS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------------------------------------- --------- ---------- ---------- --------
Balance Balance
at Charged to at End
Beginning Costs and of
Description of Period Expenses Deductions Period
- -------------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Period ended December 31, 1996:
Allowance for doubtful accounts....... $ -- $ -- $-- $ --
Allowance for sales returns........... $ -- $ -- $-- $ --
Year ended December 31, 1997:
Allowance for doubtful accounts....... $ -- $ 10,000 $-- $ 10,000
Allowance for sales returns........... $ -- $ -- $-- $ --
Year ended December 31, 1998:
Allowance for doubtful accounts....... $10,000 $389,000 $-- $399,000
Allowance for sales returns........... $ -- $ -- $-- $ --
</TABLE>
<PAGE>
Foundry Networks, Inc. Exhibits Index
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Foundry Networks,
Inc.*
3.2 Amended and Restated Certificate of Incorporation of Foundry Networks,
Inc. (proposed).
3.3 Amended and Restated Bylaws of Foundry Networks, Inc.*
3.4 Amended and Restated Bylaws of Foundry Networks, Inc. (proposed).*
4.1 Specimen Stock Certificate.*
4.2 Preferred Stock Purchase Warrant dated October 9, 1996.*
5.1 Opinion of Venture Law Group regarding the legality of the common stock
being registered.
10.1 1996 Stock Plan (amended July 8, 1999).
10.2 1999 Employee Stock Purchase Plan dated July 8, 1999.
10.3 1999 Directors' Stock Option Plan dated July 8, 1999.
10.4 Form of Indemnification Agreement between Foundry Networks, Inc. and
each of its Officers and Directors.*
10.5 OEM Purchase Agreement dated January 6, 1999 between Foundry Networks,
Inc. and Hewlett-Packard Company, Workgroup Networks Division.**
10.6 Reseller Agreement dated July 1, 1997 between Foundry Networks, Inc.
and Mitsui & Co., Ltd.**
10.7 Common Stock Purchase Agreement and Assignment Agreement between
StarRidge Networks, Inc. and Bobby R. Johnson, Jr. dated June 6, 1996.*
10.8 Promissory Note, Pledge and Security Agreement and Assignment Separate
from Certificate dated June 25, 1997, executed by Drusilla Demopoulos
in connection with a loan from Foundry Networks, Inc. in connection
with the exercise of options to purchase common stock.*
10.9 Promissory Note, Pledge and Security Agreement and Assignment Separate
from Certificate dated April 29, 1998, executed by Drusilla Demopoulos
in connection with a loan from Foundry Networks, Inc. in connection
with the exercise of options to purchase common stock.*
10.10 Promissory Note, Pledge and Security Agreement and Assignment Separate
from Certificate dated October 6, 1998, executed by Ken Cheng in
connection with a loan from Foundry Networks, Inc. in connection with
the exercise of options to purchase common stock.*
10.11 Lease agreement dated October 16, 1996, between StarRidge Networks,
Inc. and PaineWebber Qualified Plan Property Fund Four, L.P. for
offices at 680 W. Maude Ave., Sunnyvale, CA 94086.*
10.12 Sublease agreement dated March 15, 1999 between Foundry Networks, Inc.
and Prolifix Medical, Inc. for offices at 680 W. Maude Ave., Sunnyvale,
CA 94086.*
23.1 Consent of Arthur Andersen, LLP, Independent Public Accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney.*
27.1 Financial Data Schedule (EDGAR-filed version only).*
99.1 Consent of Collaborative Research.
99.2 Consent of Dell'Oro Group.
99.3 Consent of Tolly Group.
99.4 Consent of Network World.
</TABLE>
- --------
* Previously filed.
** Previously filed; confidential treatment requested as to certain portions of
this exhibit.
<PAGE>
Exhibit 1.1
_______________ Shares
FOUNDRY NETWORKS, INC.
Common Stock
($0.0001 Par Value)
EQUITY UNDERWRITING AGREEMENT
-----------------------------
_______________, 1999
Deutsche Bank Securities Inc.
J. P. Morgan Securities Inc.
Merrill Lynch, Pierce, Fenner & Smith Inc.
As Representatives of the
Several Underwriters
c/o Deutsche Bank Securities Inc.
One South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Foundry Networks, Inc., a Delaware corporation (the "Company"), proposes to
sell to the several underwriters (the "Underwriters") named in Schedule I hereto
for whom you are acting as Representatives (the "Representatives") an aggregate
of __________ shares of the Company's Common Stock, $0.0001 par value (the "Firm
Shares"). The Company also proposes to sell at the Underwriters' option an
aggregate of up to __________ additional shares of the Company's Common Stock
(the "Option Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if you elect to exercise the over-allotment option in whole or in part for the
accounts of the several Underwriters. The Firm Shares and the Option Shares (to
the extent the aforementioned option is exercised) are herein collectively
called the "Shares."
Deutsche Bank Securities Inc. ("DBSI") has agreed to reserve a portion of
the Shares to be purchased by it under this Agreement for sale to the Company's
directors, officers, employees and business associates and other parties related
to the Company (collectively, "Participants"), as set forth in the Prospectus
under the heading "Underwriters" (the "Directed Share Program"). The Shares to
be sold by DBSI pursuant to the Directed Share Program are hereinafter referred
to as the "Directed Shares." Any Directed Shares not orally confirmed for
purchase by any
<PAGE>
Participants by the end of the business day on which this Agreement is
executed will be offered to the public by the Underwriters as set forth in the
Prospectus.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to each of the Underwriters as follows:
(a) A registration statement on Form S-1 (File No. 333-______) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules
and Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by
the Company to you. Such registration statement, together with any
registration statement filed by the Company pursuant to Rule 462(b) of the
Act, herein referred to as the "Registration Statement," which shall be deemed
to include all information omitted therefrom in reliance upon Rule 430A and
contained in the Prospectus referred to below, has become effective under the
Act and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. "Prospectus" means the form of
prospectus first filed with the Commission pursuant to Rule 424(b). Each
preliminary prospectus included in the Registration Statement prior to the
time it becomes effective is herein referred to as a "Preliminary Prospectus."
Any reference herein to any Prospectus shall be deemed to include any
supplements or amendments thereto, filed with the Commission after the date of
filing of the Prospectus under Rules 424(b) or 430A, and prior to the
termination of the offering of the Shares by the Underwriters.
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. The Company is duly
qualified to transact business in all jurisdictions in which the conduct of
its business requires such qualification. The Company has no subsidiaries and
does not currently own or control, directly or indirectly, any equity interest
in any other corporation, association, or other business entity.
(c) The outstanding shares of Common Stock of the Company (including the
shares issued pursuant to the 3-for-2 stock split of its Common Stock effected
________) have been duly authorized and validly issued and are fully paid and
non-assessable; the Shares to be issued and sold by the Company have been duly
authorized and when issued and paid for as contemplated herein will be validly
issued, fully paid and non-assessable; and no preemptive rights of
stockholders exist with respect to any of the Shares or the issue and sale
thereof. Neither the filing of the Registration Statement nor the offering or
sale of the Shares as contemplated by this Agreement gives rise to any rights,
other than those which have been waived or satisfied, for or relating to the
registration of any shares of Common Stock. The shares
-2-
<PAGE>
of Common Stock to be issued upon the conversion of the Company's Preferred
Stock and upon the exercise of outstanding warrants to purchase shares of
Common Stock have been duly authorized and, when issued in accordance with
applicable agreements with the Company and the Company's Certificate of
Incorporation, as amended, will be validly issued, fully paid and non-
assessable, and the issuance of such shares will not be subject to any
preemptive or similar rights created by the Company.
(d) The information set forth under the caption "Capitalization" in the
Prospectus is true and correct. All of the Shares conform to the description
thereof contained in the Registration Statement. The form of certificates for
the Shares conforms to the corporate law of the State of Delaware.
(e) The Commission has not issued an order preventing or suspending the
use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform to the
requirements of, the Act and the Rules and Regulations. The Registration
Statement and any amendment thereto do not contain, and will not contain, any
untrue statement of a material fact and do not omit, and will not omit, to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue statement
of material fact and do not omit, and will not omit, to state any material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the Company makes no representations or
warranties as to information contained in or omitted from the Registration
Statement or the Prospectus, or any such amendment or supplement, in reliance
upon, and in conformity with, written information furnished to the Company by
or on behalf of any Underwriter through the Representatives, specifically for
use in the preparation thereof.
(f) The financial statements of the Company, together with related notes
and schedules as set forth in the Registration Statement, present fairly the
financial position and the results of operations and cash flows of the
Company, at the indicated dates and for the indicated periods. Such financial
statements and related schedules have been prepared in accordance with
generally accepted principles of accounting, consistently applied throughout
the periods involved, except as disclosed therein, and all adjustments
necessary for a fair presentation of results for such periods have been made.
The summary financial and statistical data included in the Registration
Statement presents fairly the information shown therein and such data has been
compiled on a basis consistent with the financial statements presented therein
and the books and records of the Company.
(g) Arthur Andersen LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement,
are independent public accountants as required by the Act and the Rules and
Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company before any court or
administrative agency or otherwise which, if determined adversely to the
Company, (i) might result in any material
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adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company or might materially
and adversely affect its properties (including intellectual property), assets
or rights or (ii) might prevent consummation of the transactions contemplated
hereby, except as set forth in the Registration.
(i) The Company has good and marketable title to all of the properties and
assets reflected in the financial statements (or as described in the
Registration Statement) hereinabove described, subject to no lien, mortgage,
pledge, charge or encumbrance of any kind which would materially affect the
value thereof or materially interfere with the use made or to be made thereof
by it, except those reflected in such financial statements (or as described in
the Registration Statement) or which are not material in amount. The Company
occupies its leased properties under valid and binding leases conforming in
all material respects to the description thereof set forth in the Registration
Statement.
(j) The Company has filed all Federal, State, local and foreign tax
returns or extensions thereto that have been required to be filed and has paid
all taxes indicated by said returns and all assessments received by the
Company to the extent that such taxes have become due and are not being
contested in good faith and for which an adequate reserve for accrual has been
established in accordance with generally accepted accounting principles. All
tax liabilities have been adequately provided for in the financial statements
of the Company, and the Company does not know of any actual or proposed
additional material tax assessments.
(k) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, (A) there has
not been any material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company, whether or not occurring in the
ordinary course of business, (B) there has not been any material adverse
change in the capital stock or in the long-term debt of the Company, (C) the
Company has not purchased, except repurchases of stock at cost from terminated
employees, any of its outstanding capital stock nor declared, paid or made any
dividend or other distribution on its capital stock of any class or series,
and (D) there has not been any material transaction entered into by the
Company, other than transactions in the ordinary course of business and
changes and transactions described in the Registration Statement, as it may be
amended or supplemented. The Company has no material contingent obligations
that are not disclosed in the Company's financial statements that are included
in the Registration Statement.
(l) The Company is not and with the giving of notice or lapse of time or
both, will not be, in violation of or in default under its Certificate of
Incorporation or Bylaws or under any agreement, lease, contract, indenture or
other instrument or obligation to which it is a party or by which it, or any
of its properties, is bound and which default is of material significance in
respect of the business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company. The execution,
delivery and performance of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms hereof will
not conflict with or result in a breach of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company is a party or of the Certificate
of Incorporation or Bylaws of the Company or any order, rule or regulation
applicable to the Company of any court or of any
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regulatory body or administrative agency or other governmental body having
jurisdiction over the Company.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by
the Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the "NASD")
or such additional steps as may be necessary to qualify the Shares for public
offering by the Underwriters under state securities or Blue Sky laws) has been
obtained or made and is in full force and effect.
(n) Neither the Company, nor to the Company's knowledge, any of its
affiliates, has taken or may take, directly or indirectly, any action designed
to cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of the
shares of Common Stock to facilitate the sale or resale of the Shares.
(o) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended (the "1940 Act"); and the rules
and regulations thereunder.
(p) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(q) The Company carries, or is covered by, insurance in such amounts and
covering such risks as is adequate for the conduct of its businesses and the
value of its properties and as is customary for companies engaged in similar
industries.
(r) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "Code"); and each "pension plan" for
which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would
cause the loss of such qualification.
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<PAGE>
(s) To the Company's knowledge, there are no affiliations or associations
between any member of the NASD and any of the Company's officers, directors
or 5% or greater securityholders, except as set forth in the Registration
Statement.
(t) To the Company's knowledge, the Company has not violated any foreign,
federal, state or local law or regulation relating to the protection of human
health and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), or any provisions of the
Foreign Corrupt Practices Act, or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate,
would not have a material adverse effect on the business, prospects, financial
condition or results of operation of the Company.
(u) The Company holds all material licenses, certificates and permits from
governmental authorities that are necessary to the conduct of its business.
(v) This Agreement has been duly authorized, executed and delivered by the
Company.
(w) Other than as set forth in the Prospectus, the Company owns or
possesses adequate rights in all patents, trademarks, service marks, trade
names, copyrights, trade secrets, information, proprietary rights or processes
("Intellectual Property") necessary for its business, without any conflict
with or infringement of the interests of others, and has taken all reasonable
steps necessary to secure interests in such Intellectual Property from its
contractors. Except as set forth in the Prospectus, the Company is not aware
of outstanding options, licenses or agreements of any kind relating to the
Intellectual Property of the Company that are required to be described in the
Prospectus, and, except as set forth in the Prospectus, the Company is not a
party to or bound by any options, licenses or agreements with respect to the
Intellectual Property of any other person or entity that are required to be
set forth in the Prospectus. None of the technology employed by the Company
has been obtained or is being used by the Company in violation of any
contractual obligation binding on the Company or any of its officers,
directors, employees or otherwise in violation of the rights of any persons.
Except as disclosed in the Prospectus, the Company has not received any
written or oral communications alleging that the Company has violated,
infringed or conflicted with, or, by conducting its business as set forth in
the Prospectus, would violate, infringe or conflict with any of the
Intellectual Property of any other person or entity. The Company knows of no
material infringement by others of Intellectual Property owned by or licensed
to the Company.
(x) There are no contracts, agreements or understandings between the
Company and any person granting such person (i) the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company, except as disclosed in the Prospectus or (ii) to
require the Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(y) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders, customers
or suppliers of the Company on the other hand, which is required by the Act to
be described in the Registration Statement or the Prospectus which is not so
described.
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<PAGE>
(z) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or, to the Company's knowledge,
threatened against the Company before the National Labor Relations Board or
any state or local labor relations board, (ii) strike, labor dispute, slowdown
or stoppage pending or, to the Company's knowledge, threatened against the
Company, or (iii) union representation question existing with respect to the
employees of the Company, except for such actions specified in clause (i),
(ii) or (iii) above which, singly or in the aggregate, would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company. To the best of the Company's knowledge,
no collective bargaining organizing activities are taking place with respect
to the Company.
(aa) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(bb) The Company's preparedness for the Year 2000 has been accurately
described in the Registration Statement and Prospectus. The Company has
inquired of material vendors as to their preparedness for the Year 2000 and
has disclosed in the Registration Statement or Prospectus any issues that the
Company knows of that would result in any material adverse change.
(cc) The Common Stock has been approved for quotation on The Nasdaq
National Market, subject to official notice of issuance.
(dd) The Company has not distributed and will not distribute prior to the
later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any preliminary prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(ee) Each officer and director of the Company and each beneficial owner
of 1% or more of the outstanding capital stock of the Company has signed a
letter or letters provided by DBSI ("Lock-up Agreement") stating that such
person will not, for a period commencing as of the date of the Lock-up
Agreement and ending one hundred eighty (180) days after the date (the
"Commencement Date") of the final prospectus relating to the Public Offering
(the "Lock-Up Period"), (A) make any offering, sale, short sale or other
disposition of any shares of Common Stock of the Company or other capital
stock of the Company or other securities convertible, exchangeable or
exercisable for Common Stock or derivative of Common Stock of the Company or
(B) request the registration for the offer or sale of any such shares of
Common Stock, capital stock or securities (or as to which such person has the
right to direct the disposition of), directly or indirectly, without the prior
written consent of DBSI, provided that the foregoing shall not apply to (X)
transfers of shares of Common Stock acquired in the open market after the
Commencement Date, provided that such shares are not acquired through the
Directed Share Program, or (Y) a distribution of shares of Common Stock to the
respective partners of such person or by transfer to any affiliate of such
person, including any trust, or to any other transferee in a private
transaction not requiring registration under the Securities Act of 1933, as
amended, or by any bona fide gift or pledge of such shares of Common Stock,
provided that such
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<PAGE>
partner, affiliate, trustee, donee or other transferee and/or lender or
creditor acknowledges in writing that it is bound by the provisions of such
Lock-up Agreement. Furthermore, pursuant to the Lock-up Agreement, such person
has also authorized the Company to cause the Company's transfer agent to note
stop transfer restrictions on the transfer books and records of the Company
with respect to any shares of Common Stock and any securities convertible into
or exercisable or exchangeable for Common Stock for which such person is the
record holder and, in the case of any such shares or securities for which such
person is the beneficial but not the record holder, agrees to cause the record
holder to cause the transfer agent to note stop transfer restrictions on such
books and records with respect to such shares or securities. The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each security holder.
(ff) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the
matters covered thereby.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
----------------------------------------------
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Company agrees
to sell to the Underwriters and each Underwriter agrees, severally and not
jointly, to purchase, at a price of $_____ per share, the number of Firm
Shares set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made in
New York Clearing House by Federal (same day) funds against delivery of
certificates therefor to the Representatives for the several accounts of the
Underwriters. Such payment and delivery are to be made through the facilities
of the Depository Trust Company, New York, New York at 10:00 a.m., New York
time, on the third business day after the date of this Agreement or at such
other time and date not later than five business days thereafter as you and
the Company shall agree upon, such time and date being herein referred to as
the "Closing Date." (As used herein, "business day" means a day on which the
New York Stock Exchange is open for trading and on which banks in New York are
open for business and are not permitted by law or executive order to be
closed.)
(c) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase the
Option Shares at the price per share as set forth in the first paragraph of
this Section 2. The option granted hereby may be exercised in whole or in part
by giving written notice (i) at any time before the Closing Date and (ii) only
once thereafter within thirty (30) days after the date of this Agreement, by
you, as Representatives of the several Underwriters, to the Company setting
forth the number of Option Shares as to which the several Underwriters are
exercising the option, the names and denominations in which the Option Shares
are to be registered and the time and date at which such certificates are to
be delivered. The time and date at which certificates for Option Shares are to
be delivered shall be determined by the Representatives but shall not be
earlier than three (3) nor later than ten (10) full business days after the
exercise of such option, nor in any event prior to the Closing Date (such time
and date
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<PAGE>
being herein referred to as the "Option Closing Date"). If the date of
exercise of the option is three or more days before the Closing Date, the
notice of exercise shall set the Closing Date as the Option Closing Date. The
number of Option Shares to be purchased by each Underwriter shall be in the
same proportion to the total number of Option Shares being purchased as the
number of Firm Shares being purchased by such Underwriter bears to the total
number of Firm Shares, adjusted by you in such manner as to avoid fractional
shares. The option with respect to the Option Shares granted hereunder may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters. You, as Representatives of the several Underwriters, may cancel
such option at any time prior to its expiration by giving written notice of
such cancellation to the Company. To the extent, if any, that the option is
exercised, payment for the Option Shares shall be made on the Option Closing
Date in Federal (same day) funds through the facilities of the Depository
Trust Company in New York, New York drawn to the order of the Company.
3. OFFERING BY THE UNDERWRITERS.
----------------------------
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY.
------------------------
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the Rules
and Regulations is followed, to prepare and timely file with the Commission
under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved
by the Representatives containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A of the
Rules and Regulations and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives shall
not previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations.
(b) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C) of
any request of the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, and (D) of
the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or the use of the Prospectus or of the
institution of any proceedings for that purpose. The Company will use its best
efforts to prevent the issuance of any such stop
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order preventing or suspending the use of the Prospectus and to obtain as soon
as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in endeavoring to
qualify the Shares for sale under the securities laws of such jurisdictions as
the Representatives may reasonably have designated in writing and will make
such applications, file such documents, and furnish such information as may be
reasonably required for that purpose, provided the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction where it is not now so qualified or
required to file such a consent. The Company will, from time to time, prepare
and file such statements, reports, and other documents, as are or may be
required to continue such qualifications in effect for so long a period as the
Representatives may reasonably request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period when
delivery of a Prospectus is required under the Act, as many copies of the
Prospectus in final form, or as thereafter amended or supplemented, as the
Representatives may reasonably request. The Company will deliver to the
Representatives at or before the Closing Date, four signed copies of the
Registration Statement and all amendments thereto including all exhibits filed
therewith, and will deliver to the Representatives such number of copies of
the Registration Statement (including such number of copies of the exhibits
filed therewith that may reasonably be requested), and of all amendments
thereto, as the Representatives may reasonably request.
(e) The Company will comply with the Act and the Rules and Regulations,
and the Exchange Act, and the rules and regulations of the Commission
thereunder, so as to permit the completion of the distribution of the Shares
as contemplated in this Agreement and the Prospectus. If during the period in
which a prospectus is required by law to be delivered by an Underwriter or
dealer, any event shall occur as a result of which, in the judgment of the
Company or in the reasonable opinion of the Underwriters, it becomes necessary
to amend or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances existing at the time the Prospectus is
delivered to a purchaser, not misleading, or, if it is necessary at any time
to amend or supplement the Prospectus to comply with any law, the Company
promptly will prepare and file with the Commission an appropriate amendment to
the Registration Statement or supplement to the Prospectus so that the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
(f) The Company will make generally available to its security holders,
as soon as it is practicable to do so, but in any event not later than fifteen
(15) months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period
of at least twelve (12) consecutive months beginning after the effective date
of the Registration Statement, which earning statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so
made available.
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<PAGE>
(g) Prior to the Closing Date, the Company will furnish to the
Underwriters, as soon as they have been prepared by or are available to the
Company, a copy of any unaudited interim financial statements of the Company
for any period subsequent to the period covered by the most recent financial
statements appearing in the Registration Statement and the Prospectus.
(h) No offering, sale, short sale or other disposition of any shares of
Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of Common
Stock (or agreement for such) will be made for a period of 180 days after the
date of this Agreement, directly or indirectly, by the Company otherwise than
hereunder or with the prior written consent of DBSI except (i) the Company's
issuance of Common Stock upon the exercise of warrants and stock options that
are presently outstanding and described as such in the Prospectus, or any
other issuance of options or Common Stock hereafter under the option or equity
incentive plans described in the Prospectus, provided that no such issuance of
Common Stock results from any acceleration of vesting of any such security and
(ii) the Company's issuance of Common Stock under the employee stock purchase
plan described in the Prospectus.
(i) The Company will use its best efforts to list, subject to notice of
issuance, the Shares on the NASDAQ Stock Market.
(j) Prior to the Closing Date, the Company will provide to counsel for the
Underwriters true, accurate and complete copies of all Lock-up Agreements
presently in effect or effected hereby. The Company will not release any of
its officers, directors or other stockholders from any Lock-up Agreements
currently existing or hereafter effected without the prior written consent of
DBSI.
(k) The Company shall apply the net proceeds of its sale of the Shares
as set forth in the Prospectus and shall file such reports with the Commission
with respect to the sale of the Shares and the application of the proceeds
therefrom as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the proceeds received
by the Company from its sale of the Shares in such a manner as would require
the Company to register as an investment company under the 1940 Act.
(m) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar for the Common
Stock.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute the stabilization or manipulation of the price of any
securities of the Company.
5. COSTS AND EXPENSES.
------------------
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of counsel for the Company; the cost
of printing and delivering to, or as requested by, the
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Underwriters copies of the Registration Statement, Preliminary Prospectuses,
the Prospectus, this Agreement, the Underwriters' Invitation Letter, the
Listing Application, the Blue Sky Survey and any supplements or amendments
thereto; the filing fees of the Commission; the filing fees and expenses
(including legal fees and disbursements) incident to securing any required
review by the NASD of the terms of the sale of the Shares; the Listing Fee of
the NASDAQ Stock Market; and the expenses, including the fees and
disbursements of counsel for the Underwriters, incurred in connection with the
qualification of the Shares under State securities or Blue Sky laws. The
Company agrees to pay all costs and expenses of the Underwriters, including
the fees and disbursements of counsel for the Underwriters, incident to the
offer and sale of Directed Shares of the Common Stock by the Underwriters to
employees and persons having business relationships with the Company.
Notwithstanding the foregoing, the Company shall not, however, be required to
pay for the expenses of any of the Underwriters (other than those related to
qualification under NASD regulation and State securities or Blue Sky laws)
except that, if this Agreement shall not be consummated because the conditions
in Section 6 hereof are not satisfied, or because this Agreement is terminated
by the Representatives pursuant to Section 11 hereof, or by reason of any
failure, refusal or inability on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement or to comply with any
of the terms hereof on its part to be performed, unless such failure to
satisfy said condition or to comply with said terms be due to the default or
omission of any Underwriter, then the Company shall reimburse the several
Underwriters for reasonable out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with
investigating, marketing and proposing to market the Shares or in
contemplation of performing their obligations hereunder; but the Company shall
not in any event be liable to any of the several Underwriters for damages on
account of loss of anticipated profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
---------------------------------------------
The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company contained
herein, and to the performance by the Company of its covenants and obligations
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the
Registration Statement or otherwise) shall have been disclosed to the
Representatives and complied with to their reasonable satisfaction. No stop
order suspending the effectiveness of the Registration Statement, as amended
from time to time, shall have been issued and no proceedings for that purpose
shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission and no injunction, restraining order, or order
of any nature by a Federal or state court of competent jurisdiction shall have
been issued as of the Closing Date which would prevent the issuance of the
Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Venture Law Group, a
Professional Corporation ("VLG"), counsel for the Company dated the Closing
Date or the Option Closing Date, as the
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case may be, addressed to the Underwriters (and stating that it may be relied
upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement; and the
Company has no subsidiaries and does not currently own or control, directly or
indirectly, any interest in any other corporation, association, or other
business entity.
(ii) The Company has authorized and outstanding capital
stock as set forth under the caption "Capitalization" in the Prospectus as of
the date and based on the assumptions stated therein; the authorized shares of
the Company's Common Stock have been duly authorized; the outstanding shares
of the Company's Common Stock have been duly authorized and validly issued and
are non-assessable and, to such counsel's knowledge, fully-paid; all of the
authorized capital stock of the Company and all of the Shares conform in all
material respects to the description thereof contained in the Prospectus; the
certificates for the Shares, assuming they are in the form filed with the
Commission, are in due and proper form in all material respects; the shares of
Common Stock, including the Option Shares, if any, to be sold by the Company
pursuant to this Agreement have been duly authorized and will be validly
issued, fully paid and non-assessable when issued and paid for as contemplated
by this Agreement; and, to such counsel's knowledge, no preemptive rights of
stockholders exist with respect to any of the Shares or the issue or sale
thereof.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no outstanding
securities of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the Company
and, except as described in or contemplated by the Prospectus, to such
counsel's knowledge, there are no outstanding or authorized options, warrants
or rights of any character obligating the Company to issue any shares of its
capital stock or any securities convertible or exchangeable into or evidencing
the right to purchase or subscribe for any shares of such stock; and except as
described in the Prospectus, to the knowledge of such counsel, no holder of
any securities of the Company or any other person has the right, contractual
or otherwise, which has not been satisfied or effectively waived, to cause the
Company to sell or otherwise issue to them, or to permit them to underwrite
the sale of, any of the Shares or the right to have any Common Shares or other
securities of the Company included in the Registration Statement or the right,
as a result of the filing of the Registration Statement, to require
registration under the Act of any shares of Common Stock or other securities
of the Company.
(iv) Based solely upon oral advice of the Staff of the
Commission, the Registration Statement has become effective under the Act and,
to the knowledge of such counsel, no stop order proceedings with respect
thereto have been instituted or are pending or threatened under the Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material respects
with the requirements of the Act and the applicable rules and regulations
thereunder (except that such counsel need express no opinion as to the
financial statements and related schedules therein).
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(vi) The statements under the captions "Description of
Capital Stock," "Shares Eligible for Future Sale," "Certain Transactions," and
"Management" in the Prospectus and Items 14 and 15 of Part II of the
Registration Statement, insofar as such statements constitute a summary of
documents referred to therein or matters of law, fairly summarize in all
material respects the information called for with respect to such documents
and matters.
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are not so
filed or described as required, and such contracts and documents as are
summarized in the Registration Statement or the Prospectus are fairly
summarized in all material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company except as set forth in
the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and, as of the
Closing Date, will not conflict with or result in a breach of any of the terms
or provisions of, or constitute a default under, any indenture, mortgage, deed
of trust or other agreement or instrument filed as an exhibit to the
Registration Statement pursuant to Item 601 of Regulation S-K, to which the
Company is a party or by which the Company may be bound, or under the
Certificate of Incorporation or Bylaws of the Company or, to the knowledge of
such counsel, any order, rule or regulation applicable to the Company of any
court or of any regulatory body or administrative agency or other governmental
body having jurisdiction over the Company.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative
or other governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by the NASD or as required by
State securities and Blue Sky laws as to which such counsel need express no
opinion) except such as have been obtained or made.
(xii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement, required
to register as an investment company under the 1940 Act.
In rendering such opinion VLG may rely as to matters governed by the laws
of states other than Delaware, California or Federal laws on local counsel in
such jurisdictions, provided that in each case VLG shall state that they believe
that they and the Underwriters are justified in relying on such other counsel.
In addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such counsel
which leads them to believe that (i) the Registration Statement, at the time it
became effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the Closing
Date or the Option Closing Date, as the case may be,
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contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading (except that such counsel may exclude from
the scope of its statement the financial statements, the notes and schedules
thereto and the other financial or statistical information in the Prospectus),
and (ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules or statistical information therein). With respect to
such statement, VLG may state that their belief is based upon the procedures
set forth therein, but is without independent check and verification.
(c) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Townsend & Townsend
("Townsend"), patent counsel for the Company dated the Closing Date or the
Option Closing Date, as the case may be, addressed to the Underwriters (and
stating that it may be relied upon by counsel to the Underwriters) to the
effect that:
(i) Such counsel represents the Company in certain matters
relating to intellectual property, including patents and trade secrets.
(ii) Such counsel is familiar with the technology used by
the Company in its business and the manner of its use and has read the
portions of the Registration Statement and the Prospectus entitled "Risk
Factors - We may be subject to intellectual property infringement claims that
are costly to defend and could limit out ability to use certain technologies
in the future" and "Business -Intellectual Property" (collectively, the
"Intellectual Property Portion").
(iii) Other than as disclosed in the Prospectus, such counsel
knows of no notification, pending or threatened action, suit, proceeding or
claim by others or governmental authorities that the Company is infringing or
otherwise violating any patents, copyrights, trademarks, trade secrets or
intellectual property not owned or licensed by the Company.
(iv) Nothing has come to the attention of such counsel which
causes such counsel to believe that the information contained in the
statements of the Intellectual Property Portion in (a) the Registration
Statement, or any amendments thereof, contained or contains an untrue
statement of a material fact, or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (b) the Prospectus, or any amendments thereof, contained or
contains an untrue statement of a material fact or omitted or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Representatives shall have received from Pillsbury Madison &
Sutro LLP ("PM&S"), counsel for the Underwriters, an opinion dated the Closing
Date or the Option Closing Date, as the case may be, with respect to the
incorporation of the Company, the validity of the Shares, the Registration
Statement and the Prospectus and such other related matters as it may
reasonably request, and the Company shall have furnished to such counsel such
documents
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<PAGE>
as they may reasonably request for the purposes of enabling them to pass upon
such matters. In rendering such opinion PM&S may rely as to all matters
governed other than by the laws of the State of Delaware or Federal laws on
the opinion of counsel referred to in Paragraph (b) of this Section 6. In
addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such counsel
which leads them to believe that (i) the Registration Statement, or any
amendment thereto, as of the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the Closing Date or the Option Closing Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a material fact,
necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need
express no view as to financial statements, schedules and statistical
information therein). With respect to such statement, PM&S may state that
their belief is based upon the procedures set forth therein, but is without
independent check and verification.
(e) The Representatives shall have received at or prior to the Closing
Date from PM&S a memorandum or summary, in form and substance satisfactory to
the Representatives, with respect to the qualification for offering and sale
by the Underwriters of the Shares under the State securities or Blue Sky laws
of such jurisdictions as the Representatives may reasonably have designated to
the Company.
(f) You shall have received, on each of the dates hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the date
hereof, the Closing Date or the Option Closing Date, as the case may be, in
form and substance satisfactory to you, of Arthur Andersen LLP confirming that
they are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in
their opinion the financial statements and schedules examined by them and
included in the Registration Statement comply in form in all material respects
with the applicable accounting requirements of the Act and the related
published Rules and Regulations; and containing such other statements and
information as is ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain financial
and statistical information contained in the Registration Statement and
Prospectus.
(g) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case
may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under
the Act and no stop order suspending the effectiveness of the Registrations
Statement has been issued, and no proceedings for such purpose have been taken
or are, to his knowledge, contemplated by the Commission;
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(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing Date or
the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to
Rules 424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration
Statement and the Prospectus and, in his or her opinion, as of the effective
date of the Registration Statement, the statements contained in the
Registration Statement were true and correct, and such Registration Statement
and Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading,
and since the effective date of the Registration Statement, no event has
occurred which should have been set forth in a supplement to or an amendment
of the Prospectus which has not been so set forth in such supplement or
amendment; and
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company,
whether or not arising in the ordinary course of business.
(h) The Company shall have furnished to the Representatives such further
certificates and documents confirming the representations and warranties,
covenants and conditions contained herein and related matters as the
Representatives may reasonably have requested.
(i) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the NASDAQ Stock Market.
(j) The Lock-up Agreements described in Section 4(j) are in full force and
effect.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to PM&S, counsel for the
Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
--------------------------------------------
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the
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Closing Date or the Option Closing Date, as the case may be, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and in effect or proceedings therefor initiated or threatened.
8. INDEMNIFICATION.
---------------
(a) The Company agrees:
(1) To indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, against any losses,
claims, damages or liabilities to which such Underwriter or any such
controlling person may become subject under the Act or the Exchange Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, (ii) the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of the circumstances under which they were made, or (iii) any alleged act
or failure to act by any Underwriter in connection with, or relating in any
manner to, the Shares or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage, liability or
action arising out of or based upon matters covered by clause (i) or (ii)
above (provided, that the Company shall not be liable under this clause
(iii) to the extent that it is determined in a final judgment by a court of
competent jurisdiction that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross negligence or
willful misconduct); provided, however, that the Company will not be liable
in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement, or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically for
use in the preparation thereof; and provided further that the foregoing
indemnity agreement with respect to any Preliminary Prospectus shall not
inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person at or prior to the written confirmation of the
sale of the Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses,
claims, damages or liabilities, unless such failure is the result of non-
compliance by the Company with Section 4(d) hereof.
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(2) to reimburse each Underwriter and each such controlling
person upon demand for any legal or other out-of-pocket expenses reasonably
incurred by such Underwriter or such controlling person in connection with
investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding. In the event
that it is finally judicially determined that the Underwriters were not
entitled to receive payments for legal and other expenses pursuant to this
subparagraph, the Underwriters will promptly return all sums that had been
advanced pursuant hereto together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate
for borrowers of the highest credit standing) announced from time to time
by Bank of America NT&SA, San Francisco, California (the "Prime Rate").
(3) to indemnify and hold harmless DBSI and each person, if
any, who controls, or is controlled by, DBSI within the meaning of Section
15 of the Act and Section 20 of the Exchange Act (the "DBSI Entities"),
against any losses, claims, damages or liabilities to which such DBSI
Entity or any such controlling person may become subject under the Act or
the Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto,
distributed to Participants in connection with the Directed Share Program,
(ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading any act or failure to act, (iii) caused by the failure of an
Participant to pay for and accept delivery of Directed Shares that the
Participant agreed to purchase or (iv) any alleged act or failure to act by
any DBSI Entity in connection with, or relating in any manner to, the
Directed Share Program, other than any loss, claim, damage, liability or
action that are finally judicially determined to have resulted from the bad
faith, gross negligence or willful misconduct of the DBSI Entities;
provided, however that the Company will not be liable in any such case to
the extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement, or omission
or alleged omission made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or such amendment or supplement, in reliance
upon and in conformity with written information furnished to the Company by
or through the Representatives specifically for use in the preparation
thereof; and provided further that the foregoing indemnity agreement with
respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages
or liabilities purchased Shares, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or supplemented
if the Company shall have furnished any amendments or supplements thereto)
was not sent or given by or on behalf of such Underwriter to such person at
or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended or supplemented) would have
cured
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the defect giving rise to such losses, claims, damages or liabilities,
unless such failure is the result of non-compliance by the Company with
Section 4(d) hereof.
(4) to reimburse each DBSI Entity upon demand for any legal or
other out-of-pocket expenses reasonably incurred by such DBSI Entity in
connection with investigating or defending any such loss, claim, damage or
liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Directed Shares,
whether or not such DBSI Entity is a party to any action or proceeding. In
the event that it is finally judicially determined that the DBSI Entities
were not entitled to receive payments for legal and other expenses pursuant
to this subparagraph, the DBSI Entities will promptly return all sums that
had been advanced pursuant hereto together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate
for borrowers of the highest credit standing) announced from time to time
by Bank of America NT&SA, San Francisco, California (the "Prime Rate").
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, against any losses, claims, damages or liabilities to which the
Company or any such director, officer, or controlling person may become subject
under the Act or the Exchange Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made; and will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, or controlling person in connection with investigating or defending any
such loss, claim, damage, liability, action or proceeding; provided, however,
that each Underwriter will be liable in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability that such Underwriter
may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise
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<PAGE>
than on account of the provisions of Section 8(a) or (b). In case any such
proceeding shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party and shall
pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel at its own expense. Notwithstanding the foregoing, the
indemnifying party shall pay as incurred (or within 30 days of presentation) the
fees and expenses of the counsel retained by the indemnified party in the event
(i) the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party shall have failed to assume the defense and employ
counsel acceptable to the indemnified party within a reasonable period of time
after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) and by the Company in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under Section 8(a)(1),
(a)(2) or (b) above in respect of any losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) in such proportion as is appropriate
to reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law then each indemnifying party shall contribute to such amount paid
or payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total
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underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand or the Underwriters on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter, and (ii) no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in this
Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless a DBSI Entity under Section 8(a)(3) or
(a)(4) above in respect of any losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) referred to therein, then the Company
shall contribute to the amount paid or payable by such DBSI Entity as a result
of such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the DBSI Entity on the
other from the offering of the Directed Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law then the Company shall contribute to such amount in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the DBSI Entity on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the DBSI Entities on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering of the Directed Shares (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by the
DBSI Entity in connection therewith. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the DBSI
Entity on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
-22-
<PAGE>
The Company and the DBSI Entities agree that it would not be just and
equitable if contributions pursuant to this Section 8(e) were determined by pro
rata allocation (even if the DBSI Entities were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(e). The amount
paid or payable by a DBSI Entity as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 8(e) shall be deemed to include any legal or other expenses
reasonably incurred by such DBSI Entity in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
subsection (e), (i) no DBSI Entity shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Directed
Shares purchased by such DBSI Entity, and (ii) no DBSI Entity guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company, you, as Representatives of
the Underwriters, shall use your reasonable efforts to procure within thirty-six
(36) hours thereafter one or more of the other Underwriters, or any others, to
purchase from the Company such amounts as may be agreed upon and upon the terms
set forth herein, the Firm Shares or Option Shares, as the case may be, which
the defaulting Underwriter or Underwriters failed to purchase. If during such
thirty-six (36) hours you, as such Representatives, shall not have procured such
other Underwriters, or any others, to purchase the Firm Shares or Option Shares,
as the case may be, agreed to be purchased by the defaulting
-23-
<PAGE>
Underwriter or Underwriters, then (a) if the aggregate number of shares with
respect to which such default shall occur does not exceed 10% of the Firm Shares
or Option Shares, as the case may be, covered hereby, the other Underwriters
shall be obligated, severally, in proportion to the respective numbers of Firm
Shares or Option Shares, as the case may be, which they are obligated to
purchase hereunder, to purchase the Firm Shares or Option Shares, as the case
may be, which such defaulting Underwriter or Underwriters failed to purchase, or
(b) if the aggregate number of shares of Firm Shares or Option Shares, as the
case may be, with respect to which such default shall occur exceeds 10% of the
Firm Shares or Option Shares, as the case may be, covered hereby, the Company or
you as the Representatives of the Underwriters will have the right, by written
notice given within the next thirty-six (36)-hour period to the parties to this
Agreement, to terminate this Agreement without liability on the part of the non-
defaulting Underwriters or of the Company except to the extent provided in
Section 8 hereof. In the event of a default by any Underwriter or Underwriters,
as set forth in this Section 9, the Closing Date or Option Closing Date, as the
case may be, may be postponed for such period, not exceeding seven (7) days, as
you, as Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. NOTICES.
-------
All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: (a) if to the Underwriters, to Deutsche Bank Securities
Inc., One South Street, Baltimore, Maryland 21202, Attention:_________________;
with a copy to Deutsche Bank Securities Inc., One Bankers Trust Plaza, 130
Liberty Street, New York, New York 10006, Attention: General Counsel and (b) if
to the Company, to Foundry Networks, Inc. 680 W. Maude Avenue, Suite 3,
Sunnyvale, CA 94086, Attention: Bobby Johnson, President and Chief Executive
Officer.
11. TERMINATION.
-----------
(a) This Agreement may be terminated by you by notice to the Company at
any time prior to the Closing Date if any of the following has occurred: (i)
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change or any development
involving a prospective material adverse change in or affecting the condition,
financial or otherwise, of the Company or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company, whether or not arising in the ordinary course of
business, (ii) any outbreak or escalation of hostilities or declaration of war
or national emergency or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the financial
markets of the United States would, in your reasonable judgment, make it
impracticable or inadvisable to market the Shares or to enforce contracts for
the sale of the Shares, or (iii) suspension of trading in securities generally
on the New York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such Exchange, (iv) the enactment, publication, decree or
other promulgation of any
-24-
<PAGE>
statute, regulation, rule or order of any court or other governmental authority
which in your opinion materially and adversely affects or may materially and
adversely affect the business or operations of the Company, (v) declaration of a
banking moratorium by United States or New York State authorities, (vi) any
downgrading, or placement on any watch list for possible downgrading, in the
rating of the Company's debt securities by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g) under
the Exchange Act); (vii) the suspension of trading of the Company's common stock
by the NASDAQ Stock Market, the Commission, or any other governmental authority
or (viii) the taking of any action by any governmental body or agency in respect
of its monetary or fiscal affairs which in your reasonable opinion has a
material adverse effect on the securities markets in the United States; or
(b) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
-----------
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
------------------------------------
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. MISCELLANEOUS.
-------------
The reimbursement, indemnification and contribution agreements contained in
this Agreement and the representations, warranties and covenants in this
Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
-25-
<PAGE>
Very truly yours,
FOUNDRY NETWORKS, INC.
By __________________
Name __________________
Title __________________
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
DEUTSCHE BANK SECURITIES INC.
J. P. MORGAN SECURITIES INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INC.
As Representatives of the several
Underwriters listed on Schedule I
By: Deutsche Bank Securities Inc.
By:____________________________________
Authorized Officer
-26-
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------
Deutsche Bank Securities Inc.
J. P. Morgan Securities Inc.
Merrill Lynch, Pierce, Fenner & Smith Inc.
__________
Total __________
-27-
<PAGE>
SCHEDULE II
SCHEDULE OF OPTION SHARES
<TABLE>
<CAPTION>
Maximum Number Percentage of
of Option Shares to Total Number
Name of Seller be Sold of Option Shares
- ------------------------------ ---------------------- ----------------------
<S> <C> <C>
Foundry Networks, Inc. 100%
---------------------- ----------------------
Total 100%
====================== ======================
</TABLE>
-28-
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
FOUNDRY NETWORKS, INC.
The undersigned, Bobby R. Johnson, Jr. and Joshua L. Green, hereby certify
that:
1. They are the duly elected and acting Chief Executive Officer and
Secretary, respectively, of said corporation, which was incorporated on May 22,
1996, under the name Perennium Networks, Inc., and changed its name to StarRidge
Networks, Inc., on June 5, 1996, and to Foundry Networks, Inc., on January 22,
1997.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on May 22, 1996.
3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:
ARTICLE I
"The name of this corporation is Foundry Networks, Inc. (the
"Corporation").
-----------
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, City of Wilmington, County of New Castle, 19805. The name
of its registered agent at such address is Corporation Service Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
(A) Classes of Stock. The Corporation is authorized to issue two classes
----------------
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
------------ ---------------
The total number of shares which the Corporation is authorized to issue is One
Hundred Five Million (205,000,000) shares, each with a par value of $0.0001 per
share. One Hundred Million (200,000,000) shares shall be Common Stock and Five
Million (5,000,000) shares shall be Preferred Stock.
(B) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Certificate of Incorporation, to determine or alter
the rights, preferences, privileges and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock and the number of shares
constituting any such series and the designation thereof, or any of them; and to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of
<PAGE>
that series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
ARTICLE V
The number of directors of the Corporation shall be fixed from time to time
by a bylaw or amendment thereof duly adopted by the Board of Directors.
ARTICLE VI
In the election of directors, each holder of shares of any class or series
of capital stock of the Corporation shall be entitled to one vote for each share
held. No stockholder will be permitted to cumulate votes at any election of
directors.
This Article VI shall become effective only when the Corporation qualifies
for an exemption from Section 2115 of the California Corporations Code (the
"Effective Time").
ARTICLE VII
No action shall be taken by the stockholders of the Corporation other than
at an annual or special meeting of the stockholders, upon due notice and in
accordance with the provisions of the Corporation's bylaws.
ARTICLE VIII
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
ARTICLE IX
The Board of Directors of the Corporation is expressly authorized to make,
alter or repeal bylaws of the Corporation.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the bylaws of the Corporation.
-2-
<PAGE>
ARTICLE XI
The Corporation shall have perpetual existence.
ARTICLE XII
(A) To the fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
If the General Corporation Law of Delaware is hereafter amended to authorize,
with the approval of a corporation's stockholders, further reductions in the
liability of a corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
(B) Any repeal or modification of the foregoing provisions of this Article
XII shall not adversely affect any right or protection of a director of the
Corporation with respect to any acts or omissions of such director occurring
prior to such repeal or modification.
ARTICLE XIII
(A) To the fullest extent permitted by applicable law, the Corporation is
also authorized to provide indemnification of (and advancement of expenses to)
such agents (and any other persons to which Delaware law permits the Corporation
to provide indemnification) through bylaw provisions, agreements with such
agents or other persons, vote of stockholders or disinterested directors or
otherwise, in excess of the indemnification and advancement otherwise permitted
by Section 145 of the General Corporation Law of Delaware, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to actions for breach of duty to a corporation, its stockholders, and
others.
(B) Any repeal or modification of any of the foregoing provisions of this
Article XIV shall not adversely affect any right or protection of a director,
officer, agent or other person existing at the time of, or increase the
liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification."
* * *
-3-
<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Sunnyvale, California, on ____________________.
__________________________________
Bobby R. Johnson, Jr.
Chief Executive Officer
__________________________________
Joshua L. Green
Secretary
-4-
<PAGE>
Exhibit 5.1
August 17, 1999
Foundry Networks, Inc.
680 W. Maude Ave., Suite 3
Sunnyvale, CA 95086
Registration Statement on Form S-1 (File No. 333-82577)
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-
82577) filed by you, Foundry Networks, Inc., with the Securities and Exchange
Commission (the "Registration Statement") on July 9, 1999 in connection with the
registration under the Securities Act of 1933, as amended, of shares of your
Common Stock (the "Shares"). As your counsel in connection with this
transaction, we have examined the proceedings taken and are familiar with the
proceedings proposed to be taken by you in connection with the sale and issuance
of the Shares.
It is our opinion that, assuming effectiveness of the Registration
Statement, the Shares when issued and sold in the manner described in the
Registration Statement will be legally and validly issued, fully paid and
nonassessable.
We are admitted to practice law only in the State of California and
accordingly, we express no opinion as to any matter relating to the laws of any
jurisdiction other than the laws of the State of California, the General
Corporation Law of the State of Delaware, and the federal securities laws of the
United States. We consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name wherever
appearing in the Registration Statement, including the Prospectus constituting a
part thereof, and in any amendment thereto.
Sincerely,
VENTURE LAW GROUP
A Professional Corporation
/s/ VENTURE LAW GROUP
<PAGE>
Exhibit 10.1
Foundry Networks, Inc.
1996 STOCK PLAN
(As amended through July 8, 1999)
1. Purposes of the Plan. The purposes of this 1996 Stock Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonstatutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees
-------------
appointed pursuant to Section 4 of the Plan.
(b) "Affiliate" means an entity other than a Subsidiary in which the
---------
Company owns an equity interest or which, together with the Company, is under
common control of a third person or entity.
(c) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock option, restricted stock purchase and stock bonus plans
under applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any stock exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations and
requirements shall be in place from time to time.
(d) "Board" means the Board of Directors of the Company.
-----
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) of the Plan.
(g) "Common Stock" means the Common Stock of the Company.
------------
(h) "Company" means Foundry Networks, Inc., a Delaware corporation,
-------
formerly known as StarRidge Networks, Inc.
<PAGE>
(i) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any Director of the Company whether
compensated for such services or not.
(j) "Continuous Status as an Employee or Consultant" means the
----------------------------------------------
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company, its Subsidiaries or their respective successors. For
purposes of this Plan, a change in status from an Employee to a Consultant or
from a Consultant to an Employee will not constitute an interruption of
Continuous Status as an Employee or Consultant.
(k) "Director" means a member of the Board.
--------
(l) "Employee" means any person (including if appropriate, any Named
--------
Executive, Officer or Director) employed by the Company or any Parent,
Subsidiary or Affiliate of the Company, with the status of employment determined
based upon such minimum number of hours or periods worked as shall be determined
by the Administrator in its discretion, subject to any requirements of the Code.
The payment by the Company of a director's fee to a Director shall not be
sufficient to constitute "employment" of such Director by the Company.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(n) "Fair Market Value" means, as of any date, the fair market value
-----------------
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
------
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock for the last
market trading day prior
-2-
<PAGE>
to the time of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(o) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.
(p) "Listed Security" means any security of the Company that is
---------------
listed or approved for listing on a national securities exchange or designated
or approved for designation as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
(q) "Named Executive" means any individual who, on the last day of
---------------
the Company's fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four most highly compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(r) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(s) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16(a) of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "Option" means a stock option granted pursuant to the Plan.
------
(u) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(v) "Optionee" means an Employee or Consultant who receives an Option
--------
or a Stock Purchase Right.
(w) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(x) "Plan" means this 1996 Stock Plan.
----
(y) "Reporting Person" means an officer, director, or greater than
----------------
ten percent stockholder of the Company within the meaning of Rule 16a-2 under
the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under
the Exchange Act.
-3-
<PAGE>
(z) "Restricted Stock" means shares of Common Stock acquired
----------------
pursuant to a grant of a Stock Purchase Right under Section 11 below.
(aa) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange
----------
Act, as the same may be amended from time to time, or any successor provision.
(bb) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(cc) "Stock Exchange" means any stock exchange or consolidated stock
--------------
price reporting system on which prices for the Common Stock are quoted at any
given time.
(dd) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(ee) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
(ff) "Ten Percent Holder" means a person who owns stock representing
------------------
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 21,405,000 shares of Common Stock, plus an automatic annual
increase on the first day of each of the Company's fiscal years beginning in
2000 and ending in 2006 equal to the lesser of: (i) 2,250,000 Shares; (ii) three
percent (3%) of the Shares outstanding on the last day of the immediately
preceding fiscal year; or (iii) such lesser number of shares as is determined by
the Board of Directors. The Shares may be authorized, but unissued, or
reacquired Common Stock. If an Option should expire or become unexercisable for
any reason without having been exercised in full, the unpurchased Shares that
were subject thereto shall, unless the Plan shall have been terminated, become
available for future grant under the Plan. In addition, any Shares of Common
Stock which are retained by the Company upon exercise of an Option or Stock
Purchase Right in order to satisfy the exercise or purchase price for such
Option or Stock Purchase Right or any withholding taxes due with respect to such
exercise shall be treated as not issued and shall continue to be available under
the Plan. Shares repurchased by the Company pursuant to any repurchase right
which the Company may have shall not be available for future grant under the
Plan.
4. Administration of the Plan.
--------------------------
(a) General. The Plan shall be administered by the Board or a
-------
Committee, or a combination thereof, as determined by the Board. The Plan may
be administered by different administrative bodies with respect to different
classes of
-4-
<PAGE>
Optionees and, if permitted by the Applicable Laws, the Board may authorize one
or more officers (who may (but need not) be Officers) to grant Options or Stock
Purchase Rights to Employees and Consultants.
(b) Administration With Respect to Reporting Persons. With respect to
------------------------------------------------
Options and Stock Purchase Rights granted to Reporting Persons and Named
Executives, the Plan may (but need not) be administered so as to permit such
Options and Stock Purchase Rights to qualify for the exemption set forth in Rule
16b-3 and to qualify as performance-based compensation under Section 162(m) of
the Code.
(c) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(n) of the Plan;
(ii) to select the Consultants and Employees to whom Options
and Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions (including, without
limitation, vesting schedules), not inconsistent with the terms of the Plan, of
any award granted hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 10(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights; and
(x) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan; and
-5-
<PAGE>
(xi) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs.
(d) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
holders of Options or Stock Purchase Rights.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options and Stock
--------------------
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees, provided however that Employees of
Affiliates shall not be eligible to receive Incentive Stock Options. An
Employee or Consultant who has been granted an Option or Stock Purchase Right
may, if he or she is otherwise eligible, be granted additional Options or Stock
Purchase Rights.
(b) Type of Option. Each Option shall be designated in the written
--------------
option agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of Shares with respect to which Options designated
as Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with such Optionee's right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 20 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 16 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement and provided further that, in the case of an
Option granted to an Optionee who, at the time the Option is granted, is a Ten
Percent Holder, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the written option
agreement. After the date, if any, on which the Common
-6-
<PAGE>
Stock becomes a Listed Security, the five (5) year limitation on option grants
to Ten Percent Holders described above shall only apply to the grant of
Incentive Stock Options.
8. Limitation on Grants to Employees. Subject to adjustment as provided
---------------------------------
in Section 14 below, the maximum number of Shares which may be subject to
Options and Stock Purchase Rights granted to any one Employee under this Plan
for any fiscal year of the Company shall be 1,500,000 Shares.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board and
set forth in the applicable agreement, but shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, is a Ten Percent Holder, the per Share exercise
price shall be no less than 110% of the Fair Market Value per Share on the date
of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted, prior to the date, if any, on which the
Common Stock becomes a Listed Security, to a person who, at the time of the
grant of such Option, is a Ten Percent Holder, the per Share exercise price
shall be no less than 110% of the Fair Market Value per Share on the date of the
grant; or
(B) granted to a person who, at the time of the grant of
such Option, is a Named Executive, the per share Exercise Price shall be no less
than 100% of the Fair Market Value on the date of grant if such Option is
intended to qualify as performance-based compensation under Section 162(m) of
the Code;
(C) granted, prior to the date, if any, on which the
Common Stock becomes a Listed Security, to a person other than a Named Executive
or a Ten Percent Holder, the per Share exercise price shall be no less than 85%
of the Fair Market Value per Share on the date of grant if required by the
Applicable Laws and, if not so required, shall be such price as is determined by
the Administrator.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
-7-
<PAGE>
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender or such other period as may be required
to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) authorization for the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (6) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price and any applicable
income or employment taxes, (7) any combination of the foregoing methods of
payment, or (8) such other consideration and method of payment for the issuance
of Shares to the extent permitted under Applicable Laws. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, and reflected in the written option
agreement, which may include vesting requirements and/or performance criteria
with respect to the Company and/or the Optionee; provided that if required by
the Applicable Laws, any option granted prior to the date, if any, upon which
the Common Stock becomes a Listed Security, shall become exercisable at the rate
of at least twenty percent (20%) per year over five (5) years from the date the
Option is granted. In the event that any of the Shares issued upon exercise of
an Option (which exercise occurs prior to the date, if any, upon which the
Common Stock becomes a Listed Security) should be subject to a right of
repurchase in the Company's favor, such repurchase right shall, if required by
the Applicable Laws, lapse at the rate of at least twenty percent (20%) per year
over five (5) years from the date the Option is granted. Notwithstanding the
above, in the case of an Option granted to an officer, Director or Consultant of
the Company or any Parent, Subsidiary or Affiliate of the Company, the Option
may become fully exercisable, or a repurchase right, if any, in favor of the
Company shall lapse, at any time or during any period established by the
Administrator. The Administrator shall have the discretion to determine whether
and to what extent the vesting of Options shall be tolled during any unpaid
leave of absence ; provided however that in the absence of such determination,
vesting of Options shall be tolled during any such leave.
-8-
<PAGE>
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares that thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Subject to
----------------------------------------------------
Section 10(c), in the event of termination of an Optionee's Continuous Status as
an Employee or Consultant with the Company, such Optionee may, but only within
three (3) months (or such other period of time not less than thirty (30) days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option and not
exceeding three (3) months) after the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent that the Optionee
was entitled to exercise it at the date of such termination. To the extent that
Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall occur and this Section 10(b) shall not apply if (i) the
Optionee is a Consultant who becomes an Employee; or (ii) the Optionee is an
Employee who becomes a Consultant.
(c) Disability of Optionee.
----------------------
(i) Notwithstanding Section 10(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise the Option
at the date of termination, or if Optionee does not exercise such
-9-
<PAGE>
Option to the extent so entitled within the time specified herein, the Option
shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from
the date of such termination (but in no event later than the expiration date of
the term of such Option as set forth in the Option Agreement), exercise the
Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option which is an Incentive Stock Option ("ISO") (within the meaning of Section
422 of the Code) within three (3) months of the date of such termination, the
Option will not qualify for ISO treatment under the Code. To the extent that
Optionee was not entitled to exercise the Option at the date of termination, or
if Optionee does not exercise such Option to the extent so entitled within six
months (6) from the date of termination, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee
-----------------
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within thirty (30) days following termination of
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six (6) months following the date of death (but in
no event later than the expiration date of the term of such Option as set forth
in the Option Agreement), by Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of death or, if earlier,
the date of termination of Optionee's Continuous Status as an Employee or
Consultant. To the extent that Optionee was not entitled to exercise the Option
at the date of death or termination, as the case may be, or if Optionee's estate
or the person who acquired the right to exercise the option by bequest or
inheritance does not exercise such Option to the extent so entitled within the
time specified herein, the Option shall terminate.
(e) Rule 16b-3. Options granted to Reporting Persons shall comply
----------
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
(f) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer
-10-
<PAGE>
Stock Purchase Rights under the Plan, it shall advise the offeree in writing of
the terms, conditions and restrictions related to the offer, including the
number of Shares that such person shall be entitled to purchase, the price to be
paid, and the time within which such person must accept such offer, which shall
in no event exceed thirty (30) days from the date upon which the Administrator
made the determination to grant the Stock Purchase Right. In the case of a Stock
Purchase Right granted prior to the date, if any, on which the Common Stock
becomes a Listed Security and if required by the Applicable Laws at such time,
the purchase price of Shares subject to such Stock Purchase Rights shall not be
less than 85% of the Fair Market Value of the Shares as of the date of the
offer, or, in the case of a Ten Percent Holder, the price shall not be less than
100% of the Fair Market Value of the Shares as of the date of the offer. If the
Applicable Laws do not impose the requirements set forth in the preceding
sentence and with respect to any Stock Purchase Rights granted after the date,
if any, on which the Common Stock becomes a Listed Security, the purchase price
of Shares subject to Stock Purchase Rights shall be as determined by the
Administrator. The offer shall be accepted by execution of a Restricted Stock
purchase agreement in the form determined by the Administrator. Shares purchased
pursuant to the grant of a Stock Purchase Right shall be referred to herein as
"Restricted Stock."
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine, provided, however, that with respect to a Stock
Purchase Right granted prior to the date, if any, on which the Common Stock
becomes a Listed Security to a purchaser who is not an officer (including an
Officer), Director or Consultant of the Company or any Parent or Subsidiary of
the Company, it shall lapse at a minimum rate of 20% per year.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
-11-
<PAGE>
12. Taxes.
-----
(a) As a condition of the exercise of an Option or Stock Purchase
Right granted under the Plan, the Participant (or in the case of the
Participant's death, the person exercising or receiving the Option or Stock
Purchase Right) shall make such arrangements as the Administrator may require
for the satisfaction of any applicable federal, state, local or foreign
withholding tax obligations that may arise in connection with the exercise of
Option or Stock Purchase Right and the issuance of Shares. The Company shall
not be required to issue any Shares under the Plan until such obligations are
satisfied.
(b) In the case of an Employee and in the absence of any other
arrangement, the Employee shall be deemed to have directed the Company to
withhold or collect from his or her compensation an amount sufficient to satisfy
such tax obligations from the next payroll payment otherwise payable after the
date of an exercise of the Option or Stock Purchase Right.
(c) This Section 12(c) shall apply only after the date, if any, upon
which the Common Stock becomes a Listed Security. In the case of Participant
other than an Employee (or in the case of an Employee where the next payroll
payment is not sufficient to satisfy such tax obligations, with respect to any
remaining tax obligations), in the absence of any other arrangement and to the
extent permitted under the Applicable Laws, the Participant shall be deemed to
have elected to have the Company withhold from the Shares to be issued upon
exercise of the Option or Stock Purchase Right that number of Shares having a
Fair Market Value determined as of the applicable Tax Date (as defined below)
equal to the amount required to be withheld. For purposes of this Section 12,
the Fair Market Value of the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be determined under the
Applicable Laws (the "Tax Date").
--------
(d) If permitted by the Administrator, in its discretion, a
Participant may satisfy his or her tax withholding obligations upon exercise of
an Option or Stock Purchase Right by surrendering to the Company Shares that (i)
in the case of Shares previously acquired from the Company, have been owned by
the Participant for more than six (6) months on the date of surrender, and (ii)
have a Fair Market Value determined as of the applicable Tax Date equal to the
amount required to be withheld.
(e) Any election or deemed election by a Participant to have Shares
withheld to satisfy tax withholding obligations under Section 12(c) or (d) above
shall be irrevocable as to the particular Shares as to which the election is
made and shall be subject to the consent or disapproval of the Administrator.
Any election by a Participant under Section 12(d) above must be made on or prior
to the applicable Tax Date.
(f) In the event an election to have Shares withheld is made by a
Participant and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Participant shall receive
the full number of
-12-
<PAGE>
Shares with respect to which the Option or Stock Purchase Right is exercised but
such Participant shall be unconditionally obligated to tender back to the
Company the proper number of Shares on the applicable Tax Date.
13. Adjustments Upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, the number of shares of Common
Stock that have been authorized for issuance under the Plan but as to which no
Options or Stock Purchase Rights have yet been granted or that have been
returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, the number of Shares described in Section 3(a)(i) and 8 above,
as well as the price per share of Common Stock covered by each such outstanding
Option or Stock Purchase Right, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of the Common Stock, or any other increase
or decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option
or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Sale of Assets. Except as may be otherwise set forth in
------------------------
the Notice of Stock Option Grant, in the event of a proposed sale of all or
substantially all of the Company's assets or a merger of the Company with or
into another corporation in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company are transferred to a
person or persons different form the persons holding those securities
immediately prior to such transaction, each outstanding Option or Stock Purchase
Right shall be assumed or an equivalent option or right shall be substituted by
such successor corporation or a parent or subsidiary of such successor
corporation, unless the successor corporation does not agree to assume the
Option or Stock Purchase Right or to substitute an equivalent option or right,
in which case such
-13-
<PAGE>
Option or Stock Purchase Right shall terminate upon the consummation of the
merger or sale of assets.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
14. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution, provided that, after the date, if any, upon which the
Common Stock becomes a Listed Security, the Administrator may in its discretion
grant transferable Nonstatutory Stock Options pursuant to Option Agreements
specifying (i) the manner in which such Nonstatutory Stock Options are
transferable and (ii) that any such transfer shall be subject to the Applicable
Laws. The designation of a beneficiary by an Optionee will not constitute a
transfer. An Option or Stock Purchase Right may be exercised, during the
lifetime of the holder of Option or Stock Purchase Right, only by such holder or
a transferee permitted by this Section 16.
15. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
16. Amendment and Termination of the Plan.
-------------------------------------
(a) Authority to Amend or Terminate. The Board may at any time amend,
-------------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made that would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with the Applicable Laws, the
Company shall obtain stockholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
17. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant
-14-
<PAGE>
thereto shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules
and regulations promulgated thereunder, and the requirements of any Stock
Exchange. As a condition to the exercise of an Option or Stock Purchase Right,
the Company may require the person exercising such Option or Stock Purchase
Right to represent and warrant at the time of any such exercise that the Shares
are being purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required by law.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
19. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
written agreements in such form as the Administrator shall approve from time to
time.
20. Stockholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under the Applicable Laws. All Options and
Stock Purchase Rights issued under the Plan shall become void in the event such
approval is not obtained.
21. Information to Optionees and Purchasers. Prior to the date, if any,
---------------------------------------
upon which the Common Stock becomes a Listed Security and if required by the
Applicable Laws, the Company shall provide financial statements at least
annually to each Optionee and to each individual who acquired Shares Pursuant to
the Plan, during the period such Optionee or purchaser has one or more Options
or Stock Purchase Rights outstanding, and in the case of an individual who
acquired Shares pursuant to the Plan, during the period such individual owns
such Shares. The Company shall not be required to provide such information if
the issuance of Options or Stock Purchase Rights under the Plan is limited to
key employees whose duties in connection with the Company assure their access to
equivalent information. In addition, at the time of issuance of any securities
under the Plan, the Company shall provide to the Optionee or the Purchaser a
copy of the agreement(s) pursuant to which securities under the Plan are issued.
-15-
<PAGE>
Exhibit 10.2
FOUNDRY NETWORKS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
The following constitute the provisions of the 1999 Employee Stock Purchase
Plan of Foundry Networks, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the Common Stock of the Company.
------------
(d) "Company" means Foundry Networks, Inc., a Delaware corporation.
-------
(e) "Compensation" means total cash compensation received by an
------------
Employee from the Company or a Designated Subsidiary. By way of illustration,
but not limitation, Compensation includes regular compensation such as salary,
wages, overtime, shift differentials, bonuses, commissions and incentive
compensation, but excludes relocation, expense reimbursements, tuition or other
reimbursements and income realized as a result of participation in any stock
option, stock purchase, or similar plan of the Company or any Designated
Subsidiary.
(f) "Continuous Status as an Employee" means the absence of any
--------------------------------
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of (i) sick leave; (ii)
military leave; (iii) any other leave of absence approved by the Administrator,
provided that such leave is for a period of not more than 90 days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company and its Designated Subsidiaries.
(g) "Contributions" means all amounts credited to the account of a
-------------
participant pursuant to the Plan.
(h) "Corporate Transaction" means a sale of all or substantially all
---------------------
of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
<PAGE>
(i) "Designated Subsidiaries" means the Subsidiaries which have been
-----------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan; provided however that the Board shall only have the
discretion to designate Subsidiaries if the issuance of options to such
Subsidiary's Employees pursuant to the Plan would not cause the Company to incur
adverse accounting charges.
(j) "Employee" means any person, including an Officer, who is
--------
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(l) "Offering Date" means the first business day of each Offering
-------------
Period of the Plan.
(m) "Offering Period" means a period of twenty-four (24) months
---------------
commencing on February 1 and August 1 of each year, except for the first
Offering Period as set forth in Section 4(a).
(n) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(o) "Plan" means this Employee Stock Purchase Plan.
----
(p) "Purchase Date" means the last day of each Purchase Period of the
-------------
Plan.
(q) "Purchase Period" means a period of six (6) months within an
---------------
Offering Period, except for the first Purchase Period as set forth in Section
4(b).
(r) "Purchase Price" means with respect to a Purchase Period an amount
--------------
equal to 85% of the Fair Market Value (as defined in Section 7(b) below) of a
Share of Common Stock on the Offering Date or on the Purchase Date, whichever is
lower; provided, however, that in the event (i) of any increase in the number of
Shares available for issuance under the Plan as a result of a stockholder-
approved amendment to the Plan, and (ii) all or a portion of such additional
Shares are to be issued with respect to one or more Offering Periods that are
underway at the time of such increase ("Additional Shares"), and (iii) the Fair
-----------------
Market Value of a Share of Common Stock on the date of such increase (the
"Approval Date Fair Market Value") is higher than the Fair Market Value on the
- --------------------------------
Offering Date for any such Offering Period, then in such instance the Purchase
Price with respect to Additional Shares shall be 85% of the Approval Date Fair
Market Value or the Fair Market Value of a Share of Common Stock on the Purchase
Date, whichever is lower.
(s) "Share" means a share of Common Stock, as adjusted in accordance
-----
with Section 19 of the Plan.
-2-
<PAGE>
(t) "Subsidiary" means a corporation, domestic or foreign, of which
----------
not less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or a Subsidiary.
3. Eligibility.
-----------
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code; provided however that eligible Employees
may not participate in more than one Offering Period at a time.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own capital stock of
the Company and/or hold outstanding options to purchase stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or of any subsidiary of the Company, or (ii) if such
option would permit his or her rights to purchase stock under all employee stock
purchase plans (described in Section 423 of the Code) of the Company and its
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such
stock (determined at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
4. Offering Periods and Purchase Periods.
-------------------------------------
(a) Offering Periods. The Plan shall be implemented by a series of
----------------
Offering Periods of twenty-four (24) months' duration, with new Offering
Periods commencing on or about February 1 and August 1 of each year (or at such
other time or times as may be determined by the Board of Directors). The first
Offering Period shall commence on the beginning of the effective date of the
Registration Statement on Form S-1 for the initial public offering of the
Company's Common Stock (the "IPO Date") and continue until July 31, 2001. The
--------
Plan shall continue until terminated in accordance with Section 19 hereof. The
Board of Directors of the Company shall have the power to change the duration
and/or the frequency of Offering Periods with respect to future offerings
without stockholder approval if such change is announced at least five (5) days
prior to the scheduled beginning of the first Offering Period to be affected.
(b) Purchase Periods. Each Offering Period shall consist of four (4)
----------------
consecutive purchase periods of six (6) months' duration. The last day of each
Purchase Period shall be the "Purchase Date" for such Purchase Period. A
-------------
Purchase Period commencing on February 1 shall end on the next July 31. A
Purchase Period commencing on August 1 shall end on the next January 31. The
first Purchase Period shall commence on the IPO Date and shall end on January
31, 2000. The Board of Directors of the Company shall have the power to change
the duration and/or frequency of Purchase Periods with respect to future
purchases without stockholder approval if such change is announced at least five
(5) days prior to the scheduled beginning of the first Purchase Period to be
affected.
-3-
<PAGE>
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's payroll office prior to the applicable Offering
Date, unless a later time for filing the subscription agreement is set by the
Board for all eligible Employees with respect to a given Offering Period. The
subscription agreement shall set forth the percentage of the participant's
Compensation (subject to Section 6(a) below) to be paid as Contributions
pursuant to the Plan.
(b) Payroll deductions shall commence on the first payroll following
the Offering Date and shall end on the last payroll paid on or prior to the last
Purchase Period of the Offering Period to which the subscription agreement is
applicable, unless sooner terminated by the participant as provided in Section
10.
6. Method of Payment of Contributions.
----------------------------------
(a) A participant shall elect to have payroll deductions made on each
payday during the Offering Period in an amount not less than one percent (1%)
and not more than twenty percent (20%) (or such greater percentage as the Board
may establish from time to time before an Offering Date) of such participant's
Compensation on each payday during the Offering Period. All payroll deductions
made by a participant shall be credited to his or her account under the Plan. A
participant may not make any additional payments into such account.
(b) A participant may discontinue his or her participation in the Plan
as provided in Section 10, or, on one occasion only during a Purchase Period may
increase and on one occasion only during a Purchase Period may decrease the rate
of his or her Contributions with respect to the Offering Period by completing
and filing with the Company a new subscription agreement authorizing a change in
the payroll deduction rate. The change in rate shall be effective as of the
beginning of the next calendar month following the date of filing of the new
subscription agreement, if the agreement is filed at least ten (10) business
days prior to such date and, if not, as of the beginning of the next succeeding
calendar month.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased during any Purchase Period to 0%. Payroll
deductions shall re-commence at the rate provided in such participant's
subscription agreement at the beginning of the first Purchase Period which is
scheduled to end in the following calendar year, unless terminated by the
participant as provided in Section 10.
7. Grant of Option.
---------------
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase Date a number of Shares of the Company's Common Stock
determined by dividing such Employee's Contributions accumulated prior to such
Purchase Date and retained in the participant's account as of the Purchase Date
by the applicable Purchase Price; provided however
-4-
<PAGE>
that the maximum number of Shares an Employee may purchase during each Purchase
Period shall be 2,500 Shares (subject to any adjustment pursuant to Section 19
below), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 13.
(b) The fair market value of the Company's Common Stock on a given
date (the "Fair Market Value") shall be determined by the Board in its
-----------------
discretion based on the closing sales price of the Common Stock for such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported by the National Association of
Securities Dealers Automated Quotation (Nasdaq) National Market or, if such
price is not reported, the mean of the bid and asked prices per share of the
Common Stock as reported by Nasdaq or, in the event the Common Stock is listed
on a stock exchange, the Fair Market Value per share shall be the closing sales
price on such exchange on such date (or, in the event that the Common Stock is
not traded on such date, on the immediately preceding trading date), as reported
in The Wall Street Journal. For purposes of the Offering Date under the first
-----------------------
Offering Period under the Plan, the Fair Market Value of a share of the Common
Stock of the Company shall be the Price to Public as set forth in the final
prospectus filed with the Securities and Exchange Commission pursuant to Rule
424 under the Securities Act of 1933, as amended.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10, his or her option for the purchase of Shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of full Shares subject to the option will be purchased at the
applicable Purchase Price with the accumulated Contributions in his or her
account. No fractional Shares shall be issued. The Shares purchased upon
exercise of an option hereunder shall be deemed to be transferred to the
participant on the Purchase Date. During his or her lifetime, a participant's
option to purchase Shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Purchase Date of each
--------
Offering Period, the Company shall arrange the delivery to each participant, as
appropriate, the Shares purchased upon exercise of his or her option. No
fractional Shares shall be purchased; any payroll deductions accumulated in a
participant's account which are not sufficient to purchase a full Share shall be
retained in the participant's account for the subsequent Purchase Period or
Offering Period, subject to earlier withdrawal by the participant as provided in
Section 10 below. Any other amounts left over in a participant's account after
a Purchase Date shall be returned to the participant.
10. Voluntary Withdrawal; Termination of Employment.
-----------------------------------------------
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
each Purchase Date by giving written notice to the Company. All of the
participant's Contributions credited to his or her account will be paid to him
or her promptly after receipt of his or her notice of withdrawal and his or her
option for the current period will be automatically terminated, and no further
Contributions for the purchase of Shares will be made during the Offering
Period.
-5-
<PAGE>
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under Section 14, and his or her option will
be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
11. Automatic Withdrawal. If the Fair Market Value of the Shares on any
--------------------
Purchase Date of an Offering Period is less than the Fair Market Value of the
Shares on the Offering Date for such Offering Period, then every participant
shall automatically (i) be withdrawn from such Offering Period at the close of
such Purchase Date and after the acquisition of Shares for such Purchase Period,
and (ii) be enrolled in the Offering Period commencing on the first business day
subsequent to such Purchase Period.
12. Interest. No interest shall accrue on the Contributions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment as provided in Section 19, the maximum
number of Shares which shall be made available for sale under the Plan shall be
750,000 Shares, plus an annual increase on the first day of each of the
Company's fiscal years beginning in 2000 and ending in 2009 equal to the lesser
of (i) 750,000 Shares, (ii) two percent (2%) of the Shares outstanding on the
last day of the immediately preceding fiscal year, or (iii) such lesser number
of Shares as is determined by the Board. If the Board determines that, on a
given Purchase Date, the number of shares with respect to which options are to
be exercised may exceed (i) the number of shares of Common Stock that were
available for sale under the Plan on the Offering Date of the applicable
Offering Period, or (ii) the number of shares available for sale under the Plan
on such Purchase Date, the Board may in its sole discretion provide (x) that the
Company shall make a pro rata allocation of the Shares of Common Stock available
for purchase on such Offering Date or Purchase Date, as applicable, in as
uniform a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Purchase Date, and continue all Offering Periods then in
effect, or (y) that the Company shall make a pro rata allocation of the shares
available for purchase on such Offering Date or Purchase Date, as applicable, in
as uniform a manner as shall be practicable and as it shall determine in its
sole discretion to be equitable among all participants exercising options to
purchase Common Stock on such Purchase Date,
-6-
<PAGE>
and terminate any or all Offering Periods then in effect pursuant to Section 20
below. The Company may make pro rata allocation of the Shares available on the
Offering Date of any applicable Offering Period pursuant to the preceding
sentence, notwithstanding any authorization of additional Shares for issuance
under the Plan by the Company's stockholders subsequent to such Offering Date.
(b) The participant shall have no interest or voting right in Shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Board, or a committee named by the Board, shall
--------------
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any Shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of a
Purchase Period but prior to delivery to him or her of such Shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Purchase Date of an Offering Period.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
(and his or her spouse, if any) at any time by written notice. In the event of
the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such Shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its discretion, may deliver such Shares and/or cash to the spouse or to any
one or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as the
Company may designate.
16. Transferability. Neither Contributions credited to a participant's
---------------
account nor any rights with regard to the exercise of an option or to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 15) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 10.
-7-
<PAGE>
17. Use of Funds. All Contributions received or held by the Company under
------------
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
18. Reports. Individual accounts will be maintained for each participant
-------
in the Plan. Statements of account will be given to participating Employees at
least annually, which statements will set forth the amounts of Contributions,
the per Share Purchase Price, the number of Shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the stockholders of
----------
the Company, the number of Shares covered by each option under the Plan which
has not yet been exercised and the number of Shares which have been authorized
for issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), as well as the maximum number of shares of
--------
Common Stock which may be purchased by a participant in a Purchase Period, the
number of shares of Common Stock set forth in Section 13(a)(i) above, and the
price per Share of Common Stock covered by each option under the Plan which has
not yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common Stock
(including any such change in the number of Shares of Common Stock effected in
connection with a change in domicile of the Company), or any other increase or
decrease in the number of Shares effected without receipt of consideration by
the Company; provided however that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an option.
(b) Corporate Transactions. In the event of a dissolution or
----------------------
liquidation of the Company, any Purchase Period and Offering Period then in
progress will terminate immediately prior to the consummation of such action,
unless otherwise provided by the Board. In the event of a Corporate Transaction,
each option outstanding under the Plan shall be assumed or an equivalent option
shall be substituted by the successor corporation or a parent or Subsidiary of
such successor corporation. In the event that the successor corporation refuses
to assume or substitute for outstanding options, each Purchase Period and
Offering Period then in progress shall be shortened and a new Purchase Date
shall be set (the "New Purchase Date"), as of which date any Purchase Period and
-----------------
Offering Period then in progress will terminate. The New Purchase Date shall be
on or before the date of consummation of the transaction and the Board shall
notify each participant in writing, at least ten (10) days prior to the New
Purchase Date, that the Purchase Date for his or her option has been changed to
the New Purchase Date and that his or her option will be exercised automatically
on the New Purchase Date, unless prior to such date he or she has withdrawn from
the Offering Period as provided in Section 10. For purposes of this Section 19,
an option granted under the Plan shall be deemed to be assumed, without
-8-
<PAGE>
limitation, if, at the time of issuance of the stock or other consideration upon
a Corporate Transaction, each holder of an option under the Plan would be
entitled to receive upon exercise of the option the same number and kind of
shares of stock or the same amount of property, cash or securities as such
holder would have been entitled to receive upon the occurrence of the
transaction if the holder had been, immediately prior to the transaction, the
holder of the number of Shares of Common Stock covered by the option at such
time (after giving effect to any adjustments in the number of Shares covered by
the option as provided for in this Section 19); provided however that if the
consideration received in the transaction is not solely common stock of the
successor corporation or its parent (as defined in Section 424(e) of the Code),
the Board may, with the consent of the successor corporation, provide for the
consideration to be received upon exercise of the option to be solely common
stock of the successor corporation or its parent equal in Fair Market Value to
the per Share consideration received by holders of Common Stock in the
transaction.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per Share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of Shares of its outstanding Common Stock, and
in the event of the Company's being consolidated with or merged into any other
corporation.
20. Amendment or Termination.
------------------------
(a) The Board may at any time and for any reason terminate or amend
the Plan. Except as provided in Section 19, no such termination of the Plan may
affect options previously granted, provided that the Plan or an Offering Period
may be terminated by the Board on a Purchase Date or by the Board's setting a
new Purchase Date with respect to an Offering Period and Purchase Period then in
progress if the Board determines that termination of the Plan and/or the
Offering Period is in the best interests of the Company and the stockholders or
if continuation of the Plan and/or the Offering Period would cause the Company
to incur adverse accounting charges as a result of a change after the effective
date of the Plan in the generally accepted accounting rules applicable to the
Plan. Except as provided in Section 19 and in this Section 20, no amendment to
the Plan shall make any change in any option previously granted which adversely
affects the rights of any participant. In addition, to the extent necessary to
comply with Rule 16b-3 under the Exchange Act, or under Section 423 of the Code
(or any successor rule or provision or any applicable law or regulation), the
Company shall obtain stockholder approval in such a manner and to such a degree
as so required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods and Purchase
Periods, limit the frequency and/or number of changes in the amount withheld
during an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting
-9-
<PAGE>
and adjustment periods and/or accounting and crediting procedures to ensure that
amounts applied toward the purchase of Common Stock for each participant
properly correspond with amounts withheld from the participant's Compensation,
and establish such other limitations or procedures as the Board (or its
committee) determines in its sole discretion advisable which are consistent with
the Plan.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, applicable state securities laws and the requirements of
any stock exchange upon which the Shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan; Effective Date. The Plan shall become effective upon
----------------------------
the IPO Date. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 20.
24. Additional Restrictions of Rule 16b-3. The terms and conditions of
-------------------------------------
options granted hereunder to, and the purchase of Shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the Shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
-10-
<PAGE>
FOUNDRY NETWORKS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
----------------------
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the
Foundry Networks, Inc. 1999 Employee Stock Purchase Plan (the "Plan") for the
----
Offering Period ______________, ____ to _______________, ____, and subscribe to
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 20% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can increase or decrease the rate of my Contributions on one
occasion only with respect to any increase and one occasion only with respect to
any decrease during any Purchase Period by completing and filing a new
Subscription Agreement with such increase or decrease taking effect as of the
beginning of the calendar month following the date of filing of the new
Subscription Agreement, if filed at least ten (10) business days prior to the
beginning of such month. Further, I may change the rate of deductions for
future Offering Periods by filing a new Subscription Agreement, and any such
change will be effective as of the beginning of the next Offering Period. In
addition, I acknowledge that, unless I discontinue my participation in the Plan
as provided in Section 10 of the Plan, my election will continue to be effective
for each successive Offering Period.
<PAGE>
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "Foundry Networks, Inc. 1999 Employee Stock
Purchase Plan." I understand that my participation in the Plan is in all
respects subject to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only):
____________________________________
____________________________________
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) _____________________________________
(First) (Middle) (Last)
_____________________ _____________________________________
(Relationship) (Address)
_____________________________________
8. I understand that if I dispose of any shares received by me pursuant
to the Plan within 2 years after the Offering Date (the first day of the
Offering Period during which I purchased such shares) or within 1 year after the
Purchase Date, I will be treated for federal income tax purposes as having
received ordinary compensation income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares on the
Purchase Date over the price which I paid for the shares, regardless of whether
I disposed of the shares at a price less than their fair market value at the
Purchase Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days after the
------------------------------------------------------------------------
date of any such disposition, and I will make adequate provision for federal,
- -----------------------------------------------------------------------------
state or other tax withholding obligations, if any, which arise upon the
- ------------------------------------------------------------------------
disposition of the Common Stock. The Company may, but will not be obligated to,
- -------------------------------
withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares under the option, or (2) 15% of the fair market value of the
-2-
<PAGE>
shares on the Offering Date. The remainder of the gain or loss, if any,
recognized on such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
----------------------------------------------------------------------
change. I further understand that I should consult a tax advisor concerning the
- ------
tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The
effectiveness of this Subscription Agreement is dependent upon my eligibility to
participate in the Plan.
SIGNATURE:__________________________
SOCIAL SECURITY #:__________________
DATE:_______________________________
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
____________________________________
(Signature)
____________________________________
(Print name)
-3-
<PAGE>
FOUNDRY NETWORKS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
--------------------
I, __________________________, hereby elect to withdraw my participation in
the Foundry Networks, Inc. 1999 Employee Stock Purchase Plan (the "Plan") for
----
the Offering Period that began on _________ ___, _____. This withdrawal covers
all Contributions credited to my account and is effective on the date designated
below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated:___________________ ______________________________
Signature of Employee
______________________________
Social Security Number
<PAGE>
Exhibit 10.3
FOUNDRY NETWORKS, INC.
1999 DIRECTORS' STOCK OPTION PLAN
---------------------------------
1. Purposes of the Plan. The purposes of this Directors' Stock Option
--------------------
Plan are to attract and retain the best available personnel for service as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Change of Control" means a sale of all or substantially all of
-----------------
the Company's assets, or any merger or consolidation of the Company with or into
another corporation other than a merger or consolidation in which the holders of
more than 50% of the shares of capital stock of the Company outstanding
immediately prior to such transaction continue to hold (either by the voting
securities remaining outstanding or by their being converted into voting
securities of the surviving entity) more than 50% of the total voting power
represented by the voting securities of the Company, or such surviving entity,
outstanding immediately after such transaction.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Common Stock" means the Common Stock of the Company.
------------
(e) "Company" means Foundry Networks, Inc., a Delaware corporation.
-------
(f) "Continuous Status as a Director" means the absence of any
-------------------------------
interruption or termination of service as a Director.
(g) "Corporate Transaction" means a dissolution or liquidation of the
---------------------
Company, a sale of all or substantially all of the Company's assets, or a
merger, consolidation or other capital reorganization of the Company with or
into another corporation.
(h) "Director" means a member of the Board.
--------
(i) "Employee" means any person, including any officer or Director,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
<PAGE>
(k) "Option" means a stock option granted pursuant to the Plan. All
------
options shall be nonstatutory stock options (i.e., options that are not intended
to qualify as incentive stock options under Section 422 of the Code).
(l) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(m) "Optionee" means an Outside Director who receives an Option.
--------
(n) "Outside Director" means a Director who is not an Employee.
----------------
(o) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(p) "Plan" means this 1999 Directors' Stock Option Plan.
----
(q) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(r) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 675,000 Shares of Common Stock (the "Pool"). The Shares may
----
be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan has been terminated, become available for future grant
under the Plan. In addition, any Shares of Common Stock that are retained by the
Company upon exercise of an Option in order to satisfy the exercise price for
such Option, or any withholding taxes due with respect to such exercise, shall
be treated as not issued and shall continue to be available under the Plan. If
Shares that were acquired upon exercise of an Option are subsequently
repurchased by the Company, such Shares shall not in any event be returned to
the Plan and shall not become available for future grant under the Plan.
4. Administration of and Grants of Options under the Plan.
------------------------------------------------------
(a) Administrator. Except as otherwise required herein, the Plan
-------------
shall be administered by the Board.
(b) Procedure for Grants. All grants of Options hereunder shall be
--------------------
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
-2-
<PAGE>
(i) No person shall have any discretion to select which
Outside Directors shall be granted Options or to determine the number of Shares
to be covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an
Option to purchase 112,500 Shares (the "First Option") on the date on which
such person first becomes an Outside Director after the effective date of this
Plan, whether through election by the shareholders of the Company or appointment
by the Board of Directors to fill a vacancy.
(iii) Each Outside Director, including an Outside Director who
did not receive a First Option grant, shall be automatically granted an Option
to purchase 30,000 Shares (the "Subsequent Option") on the date of each Annual
Meeting of the Company's stockholders immediately following which such Outside
Director is serving on the Board, provided that, on such date, he or she shall
have served on the Board for at least six (6) months prior to the date of such
Annual Meeting.
(iv) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, in the event that a grant would cause the number of Shares subject
to outstanding Options plus the number of Shares previously purchased upon
exercise of Options to exceed the Pool, then each such automatic grant shall be
for that number of Shares determined by dividing the total number of Shares
remaining available for grant by the number of Outside Directors receiving an
Option on the automatic grant date. Any further grants shall then be deferred
until such time, if any, as additional Shares become available for grant under
the Plan through action of the stockholders to increase the number of Shares
which may be issued under the Plan or through cancellation or expiration of
Options previously granted hereunder.
(v) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, any grant of an Option made before the Company has obtained
stockholder approval of the Plan in accordance with Section 17 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 17 hereof.
(vii) The terms of each option granted hereunder shall be as
follows:
(1) each option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 below;
(2) the exercise price per Share shall be 100% of the
fair market value per Share on the date of grant of each option, determined in
accordance with Section 8 hereof;
(3) each Option shall be fully vested and exercisable as
of the date of grant.
(c) Powers of the Board. Subject to the provisions and restrictions
-------------------
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the
-3-
<PAGE>
Common Stock; (ii) to determine the exercise price per Share of Options to be
granted, which exercise price shall be determined in accordance with Section 8
of the Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind
rules and regulations relating to the Plan; (v) to authorize any person to
execute on behalf of the Company any instrument required to effectuate the grant
of an Option previously granted hereunder; and (vi) to make all other
determinations deemed necessary or advisable for the administration of the Plan.
(d) Effect of Board's Decision. All decisions, determinations and
--------------------------
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) Suspension or Termination of Option. If the Chief Executive
-----------------------------------
Officer or his or her designee reasonably believes that an Optionee has
committed an act of misconduct, such officer may suspend the Optionee's right to
exercise any option pending a determination by the Board (excluding the Outside
Director accused of such misconduct). If the Board (excluding the Outside
Director accused of such misconduct) determines an Optionee has committed an act
of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the
Company, breach of fiduciary duty or deliberate disregard of the Company rules
resulting in loss, damage or injury to the Company, or if an Optionee makes an
unauthorized disclosure of any Company trade secret or confidential information,
engages in any conduct constituting unfair competition, induces any Company
customer to breach a contract with the Company or induces any principal for whom
the Company acts as agent to terminate such agency relationship, neither the
Optionee nor his or her estate shall be entitled to exercise any Option
whatsoever. In making such determination, the Board of Directors (excluding the
Outside Director accused of such misconduct) shall act fairly and shall give the
Optionee an opportunity to appear and present evidence on Optionee's behalf at a
hearing before the Board or a committee of the Board.
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) above. An Outside Director who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. Term of Plan; Effective Date. The Plan shall become effective on the
----------------------------
effectiveness of the registration statement under the Securities Act of 1933, as
amended, relating to the Company's initial public offering of securities. It
shall continue in effect for a term of ten (10) years unless sooner terminated
under Section 13 of the Plan.
7. Term of Options. The term of each Option shall be ten (10) years from
---------------
the date of grant thereof unless an Option terminates sooner pursuant to Section
9 below.
-4-
<PAGE>
8. Exercise Price and Consideration.
--------------------------------
(a) Exercise Price. The per Share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be 100% of the fair market value
per Share on the date of grant of the Option.
(b) Fair Market Value. The fair market value shall be determined by
-----------------
the Board; provided however that in the event the Common Stock is traded on the
Nasdaq National Market or listed on a stock exchange, the fair market value per
Share shall be the closing sales price on such system or exchange on the date of
grant of the Option (or, in the event that the Common Stock is not traded on
such date, on the immediately preceding trading date), as reported in The Wall
--------
Street Journal, or if there is a public market for the Common Stock but the
- --------------
Common Stock is not traded on the Nasdaq National Market or listed on a stock
exchange, the fair market value per Share shall be the mean of the bid and asked
prices of the Common Stock in the over-the-counter market on the date of grant,
as reported in The Wall Street Journal (or, if not so reported, as otherwise
-----------------------
reported by the National Association of Securities Dealers Automated Quotation
("Nasdaq") System).
(c) Form of Consideration. The consideration to be paid for the
---------------------
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which the
Option shall be exercised (which, if acquired from the Company, shall have been
held for at least six months), or any combination of such methods of payment
and/or any other consideration or method of payment as shall be permitted under
applicable corporate law.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) above; provided however that no Options shall be exercisable prior to
stockholder approval of the Plan in accordance with Section 17 below has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a stockholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise
-5-
<PAGE>
of the Option. No adjustment will be made for a dividend or other right for
which the record date is prior to the date the stock certificate is issued,
except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. If an Outside
----------------------------------------------
Director ceases to serve as a Director, he or she may, but only within ninety
(90) days after the date he or she ceases to be a Director of the Company,
exercise his or her Option to the extent that he or she was entitled to exercise
it at the date of such termination. Notwithstanding the foregoing, in no event
may the Option be exercised after its term set forth in Section 7 has expired.
To the extent that such Outside Director was not entitled to exercise an Option
at the date of such termination, or does not exercise such Option (to the extent
he or she was entitled to exercise) within the time specified above, the Option
shall terminate and the Shares underlying the unexercised portion of the Option
shall revert to the Plan.
(c) Disability of Optionee. Notwithstanding Section 9(b) above, in
----------------------
the event a Director is unable to continue his or her service as a Director with
the Company as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within twelve (12)
months from the date of such termination, exercise his or her Option to the
extent he or she was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its
term set forth in Section 7 has expired. To the extent that he or she was not
entitled to exercise the Option at the date of termination, or if he or she does
not exercise such Option (to the extent he or she was entitled to exercise)
within the time specified above, the Option shall terminate and the Shares
underlying the unexercised portion of the Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee: (A)
-----------------
during the term of the Option who is, at the time of his or her death, a
Director of the Company and who shall have been in Continuous Status as a
Director since the date of grant of the Option, or (B) three (3) months after
the termination of Continuous Status as a Director, the Option may be exercised,
at any time within twelve (12) months following the date of death, by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
had accrued at the date of death or the date of termination, as applicable.
Notwithstanding the foregoing, in no event may the Option be exercised after its
term set forth in Section 7 has expired. To the extent that an Optionee was not
entitled to exercise the Option at the date of death or termination or if he or
she does not exercise such Option (to the extent he or she was entitled to
exercise) within the time specified above, the Option shall terminate and the
Shares underlying the unexercised portion of the Option shall revert to the
Plan.
10. Nontransferability of Options. The Option may not be sold, pledged,
-----------------------------
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution or pursuant to a qualified
domestic relations order (as defined by the Code
-6-
<PAGE>
or the rules thereunder). The designation of a beneficiary by an Optionee does
not constitute a transfer. An Option may be exercised during the lifetime of an
Optionee only by the Optionee or a transferee permitted by this Section.
11. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the stockholders of
----------
the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of Shares of Common Stock set forth in Sections 4(b)(ii),
(iii) and (iv) above, and the number of Shares of Common Stock which have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, as well as the price per Share of Common Stock covered by each
such outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock (including any such change in the number of Shares of Common
Stock effected in connection with a change in domicile of the Company) or any
other increase or decrease in the number of issued Shares of Common Stock
effected without receipt of consideration by the Company; provided however that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option.
(b) Corporate Transactions; Change of Control. In the event of a
-----------------------------------------
Corporate Transaction, including a Change of Control, and except as otherwise
provided in a Stock Option Agreement issued under the Plan, each outstanding
Option shall be assumed or an equivalent option shall be substituted by the
successor corporation or a Parent or Subsidiary of such successor corporation,
unless the successor corporation does not agree to assume the outstanding
Options or to substitute equivalent options, in which case the Options shall
terminate upon the consummation of the transaction.
For purposes of this Section 11(b), an Option shall be considered
assumed, without limitation, if, at the time of issuance of the stock or other
consideration upon such Corporate Transaction or Change of Control, each
Optionee would be entitled to receive upon exercise of an Option the same number
and kind of shares of stock or the same amount of property, cash or securities
as the Optionee would have been entitled to receive upon the occurrence of such
transaction if the Optionee had been, immediately prior to such transaction, the
holder of the number of Shares of Common Stock covered by the Option at such
time (after giving effect to any adjustments in the number of Shares covered by
the Option as provided for in this Section 11); provided however that if such
consideration received in the transaction was not solely common stock of the
successor corporation or its Parent, the Administrator may, with the consent of
the successor corporation, provide for the consideration to be received upon
exercise of the Option to be solely common stock of the successor corporation or
its Parent equal
-7-
<PAGE>
to the Fair Market Value of the per Share consideration received by holders of
Common Stock in the transaction.
(c) Certain Distributions. In the event of any distribution to the
---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option to reflect the effect of such distribution.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the stockholders of the Company to Plan amendments to
the extent and in the manner required by such law or regulation.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan that would impair the rights of any Optionee shall not
affect Options already granted to such Optionee and such Options shall remain in
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Notwithstanding any other
----------------------------------
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver any Shares under the Plan unless such issuance or
delivery would comply with the legal requirements relating to the administration
of stock option plans under applicable U.S. state corporate laws, U.S. federal
and applicable state securities laws, the Code, any stock exchange or Nasdaq
rules or regulations to which the Company may be subject and the applicable laws
of any other country or jurisdiction where Options are granted under the Plan,
as such laws, rules, regulations and requirements shall be in place from time to
time (the "Applicable Laws"). Such compliance shall be determined by the
---------------
Company in consultation with its legal counsel.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by law.
-8-
<PAGE>
15. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
17. Stockholder Approval. If required by the Applicable Laws, continuance
--------------------
of the Plan shall be subject to approval by the stockholders of the Company.
Such stockholder approval shall be obtained in the manner and to the degree
required under the Applicable Laws.
-9-
<PAGE>
FOUNDRY NETWORKS, INC.
1999 DIRECTORS' STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
((Optionee))
((OptioneeAddress1))
((OptioneeAddress2))
You have been granted an option to purchase Common Stock of Foundry
Networks, Inc. (the "Company") as follows:
-------
Date of Grant ((GrantDate))
Vesting Commencement Date ((VestingStartDate))
Exercise Price per Share ((ExercisePrice))
Total Number of Shares Granted ((SharesGrante))
Total Exercise Price ((TotalExercisePrice))
Expiration Date ((ExpirDate))
Vesting Schedule: This Option may be exercised, in whole
----------------
or in part, in accordance with the
following schedule: 100% of the Option
Shares shall be vested and exercisable
in full as of the Date of Grant.
Termination Period: This Option may be exercised for 90 days
------------------
after termination of Optionee's
Continuous Status as a Director, or such
longer period as may be applicable upon
death or Disability of Optionee as
provided in the Plan, but in no event
later than the Expiration Date as
provided above.
-10-
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this option is granted under and governed by the
terms and conditions of the 1999 Directors' Stock Option Plan and the
Nonstatutory Stock Option Agreement, all of which are attached and made a part
of this document.
OPTIONEE: FOUNDRY NETWORKS, INC.
____________________________ By:__________________________
Signature
Title:_______________________
____________________________
Print Name
-11-
<PAGE>
FOUNDRY NETWORKS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
-----------------------------------
1. Grant of Option. The Board of Directors of the Company hereby grants
---------------
to the Optionee named in the Notice of Stock Option Grant attached as Part I of
this Agreement (the "Optionee"), an option (the "Option") to purchase a number
-------- ------
of Shares, as set forth in the Notice of Stock Option Grant, at the exercise
price per share set forth in the Notice of Stock Option Grant (the "Exercise
--------
Price"'), subject to the terms and conditions of the 1999 Directors' Stock
- -----
Option Plan (the "Plan"), which is incorporated herein by reference.
----
(Capitalized terms not defined herein shall have the meanings ascribed to such
terms in the Plan.) In the event of a conflict between the terms and conditions
of the Plan and the terms and conditions of this Nonstatutory Stock Option
Agreement, the terms and conditions of the Plan shall prevail.
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Stock Option Grant
and the applicable provisions of the Plan and this Nonstatutory Stock Option
Agreement. In the event of Optionee's death, disability or other termination of
Optionee's employment or consulting relationship, the exercisability of the
Option is governed by the applicable provisions of the Plan and this
Nonstatutory Stock Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
------------------
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
--------- ---------------
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
----------------
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The Exercise Notice shall be accompanied by payment
of the aggregate Exercise Price as to all Exercised Shares. This Option shall
be deemed to be exercised upon receipt by the Company of such fully executed
Exercise Notice accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with all relevant provisions of law
and the requirements of any stock exchange or quotation service upon which the
Shares are then listed. Assuming such compliance, for income tax purposes the
Exercised Shares shall be considered transferred to the Optionee on the date the
Option is exercised with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
-----------------
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
-12-
<PAGE>
(b) check;
(c) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
4. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution or
pursuant to a domestic relations order (as defined by the Code or the rules
thereunder) and may be exercised during the lifetime of Optionee only by the
Optionee or a transferee permitted by Section 10 of the Plan. The terms of the
Plan and this Nonstatutory Stock Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Stock Option Grant, and may be exercised during such term
only in accordance with the Plan and the terms of this Nonstatutory Stock Option
Agreement.
6. Tax Consequences. Set forth below is a brief summary of certain
----------------
federal tax consequences relating to this Option under the law in effect as of
the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND
REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option. Since this Option does not qualify as an
---------------------
incentive stock option under Section 422 of the Code, the Optionee may incur
regular federal income tax liability upon exercise. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the fair market value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price.
(b) Disposition of Shares. If the Optionee holds the Option Shares
---------------------
for more than one year, gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. The long-
term capital gain will be taxed for federal income tax purposes at a maximum
rate of 20 percent.
-13-
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Nonstatutory Stock Option Agreement.
Optionee has reviewed the Plan and this Nonstatutory Stock Option Agreement in
their entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Nonstatutory Stock Option Agreement and fully understands all
provisions of the Plan and Nonstatutory Stock Option Agreement. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions relating to the Plan and
Nonstatutory Stock Option Agreement.
FOUNDRY NETWORKS, INC.
By:___________________________________
_____________________________
((Optionee))
Title:________________________________
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Nonstatutory Stock Option Agreement. In
consideration of the Company's granting his or her spouse the right to purchase
Shares as set forth in the Plan and this Nonstatutory Stock Option Agreement,
the undersigned hereby agrees to be irrevocably bound by the terms and
conditions of the Plan and this Nonstatutory Stock Option Agreement and further
agrees that any community property interest shall be similarly bound. The
undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the
undersigned with respect to any amendment or exercise of rights under the Plan
or this Nonstatutory Stock Option Agreement.
__________________________________
Spouse of Optionee
-14-
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
------------------
To: Foundry Networks, Inc.
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
--------------------------------------------
This is official notice that the undersigned ("Optionee") intends to
--------
exercise Optionee's option to purchase __________ shares of Foundry Networks,
Inc. Common Stock, under and pursuant to the Company's 1999 Directors' Stock
Option Plan and the Nonstatutory Stock Option Agreement dated _______________,
as follows:
Grant Number: _____________________________
Date of Purchase: _____________________________
Number of Shares: _____________________________
Purchase Price: _____________________________
Method of Payment of
Purchase Price: _____________________________
Social Security No.: _____________________________
The shares should be issued as follows:
Name: _____________________________
Address: _____________________________
_____________________________
_____________________________
Signed: _____________________________
Date: _____________________________
-15-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
Arthur Andersen LLP
San Jose, California
August 17, 1999
<PAGE>
EXHIBIT 99.1
Collaborative Research
399 Main Street
Los Altos, California 94022
(650) 949-4882
August 11, 1999
Drusie Demopoulos
Foundry Networks, Inc.
680 W. Maude Avenue, Suite 3
Sunnyvale, CA 94086
Dear Ms. Demopoulos:
Per our discussion, you have approval to use the following information as stated
below (in bold) showing Collaborative Research's estimated market for Gigabit
Ethernet Layer 4-7 switches in 1998, and projected market for the same in 2002.
From the Foundry Networks, Inc. Registration Statement on Form S-1, section
entitled "Prospectus Summary - Our Business":
"Collaborative Research, an independent research and consulting firm
specializing in the Layer 4-7 switching market, estimates in a February
1999 report that the Layer 4-7 switching market totaled $130 million in
1998 and is expected to grow to $1 billion in 2002."
From the section entitled "Business - Industry Background":
"Collaborative Research, an independent research and consulting firm
specializing in the Layer 4-7 switching market, estimates in a February
1999 report that the Layer 4-7 switching market totaled $130 million in
1998 and is expected to grow to $1.0 billion in 2002."
Sincerely,
/s/ Peter Christy
Peter Christy
Vice President Research Services
Collaborative Research
<PAGE>
EXHIBIT 99.2
August 12, 1999
Drusie Demopoulos
Foundry Networks, Inc.
680 W. Maude Avenue, Suite 3
Sunnyvale, CA 94086
Reference: Approval to Use Dell'Oro Group Information
and Dell'Oro Group Disclaimer
Dear Ms. Demopoulos:
Per our discussion with Mr. Eisenberg, you have approval to use the following
information as stated below (in bold) showing Dell'Oro Group's estimated market
for Gigabit Ethernet Layer 3 LAN switches in 1998, the projected market for the
same in 2002, and the market share of Ethernet technology with respect to the
market for LAN transmission technology in 1998.
From the Foundry Networks, Inc. Registration Statement on Form S-1, section
entitled "Prospectus Summary - Our Business":
"Dell'Oro Group, an independent networking industry research and consulting
firm, estimates in a March 1999 report that the Layer 3 LAN switching
market totaled $637 million in 1998 and is expected to increase $3.9
billion in 2002."
From the section entitled "Business - Industry Background - Evolution of Network
Solutions":
"Ethernet, with Gigabit Ethernet as the most recent evolution of Ethernet
technology, is the dominant LAN transmission technology with over 95%
market share (in terms of port shipments) in 1998 and total shipments of
more than 350 million ports from 1991 to 1998, according to the independent
research firm, Dell'Oro Group."
From the section entitled "Business - Industry Background - Next Generation
Needs and Solutions":
"Dell'Oro Group estimates in a March 1999 report that the Layer 3 LAN
switching market totaled $637 million in 1998 and is expected to increase
to $3.9 billion in 2002."
<PAGE>
Drusie Demopoulos
August 12, 1999
Page 2
Drusie, please be aware that our reports and forecasts are based on information
from many sources, some of which may prove unreliable. In addition, our reports
and forecasts are based on a significant amount of judgment and estimates of
what the future may look like. Often, these estimates change materially as we
produce new reports and forecasts. Therefore, we apply the following disclaimer
to our work. This disclaimer also applies to the statements listed above.
The report on these pages is not a complete analysis regarding any company,
industry, or security. Information, equipment categorizations and
groupings, opinions, forward-looking statements, etc., expressed herein
reflect the judgment of the authors and are subject to change without
notice. Actual events occurring in the past, present, or future may differ
materially from that indicated in this report. The Dell'Oro Group pursues
information with due diligence from sources considered reliable. However,
the information contained in this report is not guaranteed to be accurate,
complete, or reliable. Information contained in this report includes
estimates, and Dell'Oro Group does not guarantee the accuracy of these
estimates. THERE ARE NO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. IN NO EVENT SHALL THE DELL'ORO GROUP BE LIABLE FOR ANY
LOST REVENUES, DATA OR PROFITS, OR OTHER SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES WITH RESPECT TO THE SOFTWARE, RELATED MATERIALS OR
SUPPORT SERVICES, EVEN IF THE DELL'ORO GROUP HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. Furthermore, information presented in this
report supersedes all information the Dell'Oro Group presented in earlier
reports. Information available on the Dell'Oro Group web site
(www.delloro.com) represents preliminary information and is subject to
---------------
change without notice.
Please let me know if we can be of any further assistance to your group at this
time. We wish you best of luck with your IPO.
Sincerely,
/s/ Tobb Dell'Oro
Tobb Dell'Oro
Principal
<PAGE>
EXHIBIT 99.3
[LETTERHEAD OF THE TOLLY GROUP APPEARS HERE]
August 12, 1999
Drusie Demopoulos
Foundry Networks, Inc.
680 W. Maude Avenue, Suite 3
Sunnyvale, CA 94086
Dear Ms. Demopoulos:
Per our discussion, you have approval to use the following information as stated
below (in bold) showing Tolly Group's evaluation of the cost per Gigabit of
throughput for Foundry's BigIron 4000 and 8000 switches.
From the Foundry Networks, Inc. Registration Statement on Form S-1, section
entitled "Business - Solution".
"According to the Tolly Group, an independent test firm, and
Network World, an independent networking publication, our
BigIron 4000 and 8000 products offer the best cost per Gigabit
of throughput for Layer 3 Gigabit Ethernet switches."
Sincerely,
/s/ Kevin Tolly
Kevin Tolly
President & CEO
Tolly Group
<PAGE>
EXHIBIT 99.4
August 12, 1999
Drusie Demopoulos
Foundry Networks, Inc.
680 W. Maude Avenue, Suite 3
Sunnyvale, CA 94086
Dear Ms. Demopoulos:
Per our discussion, you have approval to use the following information as stated
below (in bold) showing Network World's evaluation of the cost per Gigabit of
throughput for Foundry's BigIron 4000 and 8000 switches.
From the Foundry Networks, Inc. Registration Statement on Form S-1, section
entitled "Business - Solution":
"According to testing conducted in April 1999 by the Tolly Group, an
independent test firm, and Network World, an independent networking publication,
our BigIron 4000 and 8000 products offer the best cost per Gigabit of throughput
for Layer 3 Gigabit Ethernet switches."
Sincerely,
/s/ John Gallant
-----------------------------
(name)
(title)
Network World
8/12/99
