<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 000-26689
FOUNDRY NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0431154
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2100 Gold Street
P.O. Box 649100
San Jose, CA 95164-9100
(Address of principal executive offices, including zip code)
(408) 586-1700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
As of November 9, 2000, there were 117,709,525 shares of the registrant's
common stock outstanding, par value $0.0001.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999......................................... 3
Condensed Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2000 and 1999................. 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999...................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
Factors That May Affect Future Results........................ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 25
Item 2. Changes in Securities and Use of Proceeds..................... 25
Item 3. Defaults Upon Senior Securities............................... 25
Item 4. Submission of Matters to a Vote of Security Holders........... 25
Item 5. Other Information............................................. 25
Item 6. Exhibits and Reports on Form 8-K.............................. 25
SIGNATURES............................................................. 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
FOUNDRY NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $150,157 $120,378
Short-term investments............................ 79,460 39,789
Accounts receivable, net.......................... 79,171 28,932
Inventories, net.................................. 35,256 16,743
Deferred tax assets............................... 6,995 5,220
Prepaid expenses and other current assets......... 3,778 1,340
-------- --------
Total current assets............................ 354,817 212,402
Property and equipment, net....................... 3,240 1,096
-------- --------
$358,057 $213,498
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 31,244 $ 7,557
Income taxes payable.............................. 16,605 9,925
Accrued payroll and related benefits.............. 10,573 4,138
Accrued warranty.................................. 5,096 2,092
Other accrued liabilities......................... 4,039 4,013
Deferred revenue.................................. 11,779 4,169
-------- --------
Total current liabilities....................... 79,336 31,894
-------- --------
Stockholders' equity:
Common stock, $0.0001 par value; Authorized--
300,000,000 shares at September 30, 2000; Issued
and outstanding--117,161,690 and 114,189,450
shares at September 30, 2000 and December 31,
1999, respectively............................... 12 11
Treasury stock.................................... (4) (4)
Additional paid-in capital........................ 218,638 191,623
Notes receivable from stockholders................ (3,643) (755)
Deferred stock compensation....................... (6,548) (11,771)
Retained earnings................................. 70,266 2,500
-------- --------
Total stockholders' equity...................... 278,721 181,604
-------- --------
$358,057 $213,498
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
FOUNDRY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- ------------------ --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue, net............................ $ 113,241 $ 38,896 $ 272,045 $ 78,383
Cost of revenue......................... 39,538 17,274 94,853 35,265
--------- -------- --------- --------
Gross profit........................ 73,703 21,622 177,192 43,118
Operating expenses:
Research and development.............. 9,194 2,199 19,528 5,824
Sales and marketing................... 19,566 6,654 44,687 13,627
General and administrative............ 2,977 1,025 6,865 2,680
Amortization of deferred stock
compensation......................... 1,382 2,248 4,915 7,150
--------- -------- --------- --------
Total operating expenses............ 33,119 12,126 75,995 29,281
--------- -------- --------- --------
Income from operations.................. 40,584 9,496 101,197 13,837
Interest income, net.................... 3,283 47 8,023 71
--------- -------- --------- --------
Income before provision for income
taxes.................................. 43,867 9,543 109,220 13,908
Provision for income taxes.............. 16,641 3,737 41,454 4,828
--------- -------- --------- --------
Net income.............................. $ 27,226 $ 5,806 $ 67,766 $ 9,080
========= ======== ========= ========
Basic net income per share.............. $ 0.24 $ 0.14 $ 0.62 $ 0.24
========= ======== ========= ========
Weighted average shares used in
computing basic net income per share... 112,199 41,810 108,777 38,262
========= ======== ========= ========
Diluted net income per share............ $ 0.21 $ 0.05 $ 0.53 $ 0.08
========= ======== ========= ========
Weighted average shares used in
computing diluted net income per
share.................................. 126,885 113,418 127,045 108,600
========= ======== ========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
FOUNDRY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 67,766 $ 9,080
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 882 333
Amortization of deferred stock compensation........... 4,915 7,150
Provision for allowance for doubtful accounts......... 1,545 782
Provision for excess and obsolete inventories......... 2,948 1,466
Deferred tax assets................................... (1,775) --
Tax benefit from stock option exercises............... 17,024 --
Change in operating assets and liabilities:
Accounts receivable................................... (51,784) (14,733)
Inventories........................................... (21,461) (8,060)
Prepaid expenses and other current assets............. (2,438) (313)
Accounts payable...................................... 23,687 3,355
Accrued payroll and related benefits.................. 6,435 1,746
Accrued warranty...................................... 3,004 1,100
Income taxes payable.................................. 6,680 3,832
Other accrued liabilities............................. 26 1,613
Deferred revenue...................................... 7,610 2,016
--------- --------
Net cash provided by operating activities........... 65,064 9,367
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..................... (3,026) (224)
Maturities of short-term investments.................... 88,037 --
Purchases of short-term investments..................... (127,708) --
--------- --------
Net cash used in investing activities............... (42,697) (224)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit....................... -- 2,000
Principal payments on capital lease obligations......... -- (132)
Proceeds from issuance of common stock.................. 7,044 3,160
Repurchases of common stock............................. (14) (4)
Net proceeds from issuance of redeemable convertible
preferred stock........................................ -- 1,000
Repayments of notes receivable.......................... 382 --
--------- --------
Net cash provided by financing activities........... 7,412 6,024
--------- --------
INCREASE IN CASH AND CASH EQUIVALENTS..................... 29,779 15,167
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 120,378 4,567
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 150,157 $ 19,734
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three and nine months ended September 30, 2000 and 1999 is
unaudited)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements included herein have been
prepared by Foundry Networks, Inc., without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and include the accounts
of Foundry Networks, Inc. and its wholly-owned subsidiaries (collectively
"Foundry" or the "Company"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The condensed balance sheet as of December 31, 1999 has
been derived from the audited financial statements as of that date, but does
not include all disclosures required by generally accepted accounting
principles. These financial statements and notes should be read in conjunction
with the Company's audited consolidated financial statements and notes thereto
included in Foundry's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments which are, in the opinion of management, necessary for
a fair presentation of financial position, results of operations and cash flows
for the periods presented. These adjustments are of a normal, recurring nature.
The results of operations for the three and nine months ended September 30,
2000 are not necessarily indicative of the results that may be expected for
future quarters or for the year ending December 31, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The Company's condensed consolidated financial statements reflect the
operations of the Company and its wholly-owned subsidiaries in France, Canada,
Germany, Netherlands, United Kingdom, Singapore and Italy. All significant
intercompany transactions and balances have been eliminated. Assets and
liabilities of foreign operations are translated to U.S. dollars at current
rates of exchange, and revenues and expenses are translated using average
rates. Foreign currency transaction and translation gains and losses have not
been material to date.
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 amounts reported in the consolidated financial
statements. Actual results could differ materially from those estimates.
Cash, Cash Equivalents and Short-Term Investments
Foundry considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash and cash equivalents consist
of commercial paper, corporate and government debt securities and cash
deposited in checking and money market accounts.
Foundry accounts for its investments under the provision of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Investments in highly liquid
financial instruments with original maturities greater than three months but
less than one year are classified as short-term investments. As of September
30, 2000 and December 31, 1999 Foundry's short-term investments, which were
stated at amortized cost and classified as held-to-maturity, consisted of
commercial paper, corporate and U.S. debt securities.
6
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash equivalents and short-term investments are all due within one year and
consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 2000
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Money market funds.................. $ 10,055 $-- $ -- $ 10,055
Commercial paper.................... 75,037 -- (7) 75,030
Government securities............... 106,390 12 (26) 106,376
Corporate debt securities........... 8,800 -- -- 8,800
-------- --- ---- --------
$200,282 $12 $(33) $200,261
======== === ==== ========
Included in cash and cash
equivalents........................ $120,822 $-- $ -- $120,822
Included in short-term investments.. 79,460 12 (33) 79,439
-------- --- ---- --------
$200,282 $12 $(33) $200,261
======== === ==== ========
<CAPTION>
December 31, 1999
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Money market funds.................. $ 22,136 $-- $ -- $ 22,136
Commercial paper.................... 78,597 -- (14) 78,583
Government securities............... 43,444 -- -- 43,444
Corporate debt securities........... 11,511 -- (12) 11,499
-------- --- ---- --------
$155,688 $-- $(26) $155,662
======== === ==== ========
Included in cash and cash
equivalents........................ $115,899 $-- $ (6) $115,893
Included in short-term investments.. 39,789 -- (20) 39,769
-------- --- ---- --------
$155,688 $-- $(26) $155,662
======== === ==== ========
</TABLE>
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):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Purchased parts...................................... $19,453 $12,176
Work-in-process...................................... 13,764 2,700
Finished goods....................................... 2,039 1,867
------- -------
$35,256 $16,743
======= =======
</TABLE>
Revenue Recognition
Foundry generally recognizes product revenue upon shipment to customers,
unless Foundry has future obligations or has to obtain customer acceptance in
which case revenue is deferred until these obligations are met. Revenue from
customer support services is deferred and recognized on a straight-line basis
over the contractual period, generally one year. At shipment date, Foundry
establishes an accrual for estimated costs to
7
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
repair or replace products that may be returned under warranty. Foundry's
warranty period extends one year from the date of sale. Contracts with
distributors typically 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.
Net Income Per Share
Basic net income per common share and diluted net income per common share
are presented in conformity with SFAS No. 128, "Earnings Per Share," for all
periods presented. Pursuant to Securities and Exchange Commission (SEC) Staff
Accounting Bulletin (SAB) No. 98, "Computations of Earnings Per Share," 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
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 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 three
and nine months ended September 30, 2000 and 1999, diluted net income per
common share has been calculated assuming the conversion of all dilutive
potential common stock.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Net income............................. $ 27,226 $ 5,806 $ 67,766 $ 9,080
-------- -------- -------- --------
Basic:
Weighted average shares of common
stock outstanding................... 116,867 57,088 115,786 56,418
Less: Weighted average shares subject
to repurchase....................... (4,668) (15,278) (7,009) (18,156)
-------- -------- -------- --------
Weighted average shares used in
computing basic net income per
common share........................ 112,199 41,810 108,777 38,262
======== ======== ======== ========
Basic net income per common share...... $ 0.24 $ 0.14 $ 0.62 $ 0.24
======== ======== ======== ========
Diluted:
Weighted average shares of common
stock outstanding................... 116,867 57,088 115,786 56,418
Add: Weighted average dilutive
potential common stock.............. 10,018 56,330 11,259 52,182
-------- -------- -------- --------
Weighted average shares used in
computing diluted net income per
common share........................ 126,885 113,418 127,045 108,600
======== ======== ======== ========
Diluted net income per common share.... $ 0.21 $ 0.05 $ 0.53 $ 0.08
======== ======== ======== ========
</TABLE>
Business Segments and Significant Customers
Foundry is organized and operates as one operating segment, the design,
development, manufacturing and marketing of high performance Gigabit Ethernet
switches, Internet routers, server load balancing and transparent caching
switches.
For the three and nine months ended September 30, 2000, no customers
individually accounted for greater than 10% of our net revenue. Prior to fiscal
2000, a limited number of customers and resellers had accounted for a
significant portion of Foundry's revenue.
8
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Operations
Foundry sells to various countries in North and South America, Europe, Asia,
Australia and the Middle East through its foreign sales offices and
subsidiaries. Foreign operations consist of sales, marketing and support
activities. For the three and nine months ended September 30, 2000, sales to
customers in the United States accounted for a majority of Foundry's revenue.
Sales to individual countries outside of the United States represent less than
10% of revenue.
Recent Accounting Pronouncements
In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 and related interpretations summarize the
SEC's view in applying generally accepted accounting principles to selected
revenue recognition issues. We are required to apply the guidance in SAB No.
101 to our financial statements no later than our fourth quarter of fiscal
2000. We currently are reviewing the impact of SAB No. 101 on our revenue
recognition policy and the related impact on our consolidated financial
statements. At this time, we do not believe SAB No. 101 will have a material
impact on our financial position or results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44),
"Accounting for Certain Transactions involving Stock Compensation--an
interpretation of APB Opinion No. 25." FIN 44 is effective July 1, 2000. The
interpretation clarifies the application of APB Opinion No. 25 for certain
issues, specifically, (a) the definition of an employee, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange or stock
compensation awards in a business combination. We adopted FIN 44 in the quarter
ended September 30, 2000 and the adoption did not have a material impact on our
financial position or the results of our operations.
3. INCOME TAXES
The tax benefits associated with the exercise of non-qualified stock
options, the disqualifying disposition of stock acquired with incentive stock
options, and the disqualifying disposition of stock acquired under the employee
stock purchase plan reduced taxes currently payable by $17.0 million for the
nine months ended September 30, 2000. Such benefits were credited to additional
paid-in capital on the accompanying condensed consolidated balance sheet as of
September 30, 2000.
4. COMPREHENSIVE INCOME
Foundry adopted SFAS No. 130, "Reporting Comprehensive Income" in 1998. SFAS
No. 130 establishes standards for reporting and presentation of comprehensive
income. This standard defines comprehensive income as the changes in equity of
an enterprise except those resulting from stockholder transactions. Other
components of comprehensive income for the three and nine months ended
September 30, 2000 were immaterial and comprised only of foreign currency
translation adjustments.
5. SUBSEQUENT EVENTS:
On October 18, 2000, the board of directors adopted the 2000 Non-Executive
Stock Option Plan pursuant to which the Company may issue non-qualified options
to purchase common stock to our employees and consultants other than officers
and directors. A total of 1,996,188 shares of common stock have been reserved
for issuance under this plan.
9
<PAGE>
FOUNDRY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At a meeting of our board of directors on October 18, 2000, the board
approved an amendment to our Bylaws increasing our authorized number of
directors from three (3) members to seven (7) members, and unanimously
appointed the following persons to the board: Alfred J. Amoroso, C. Nicholas
Keating, Jr. and J. Steven Young. In accordance with the 1999 Directors' Stock
Option Plan (the "Plan"), each newly appointed director received on that date
an automatic initial option grant to purchase 225,000 shares of common stock.
These options will 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, provided
that in the event that an asset sale or merger transaction results in a change
in the ownership of more than 50% of the total combined voting power of our
outstanding securities, all outstanding options shall become immediately vested
prior to the closing of such transaction.
10
<PAGE>
Item 2. 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 our financial statements and related
notes appearing elsewhere in this Form 10-Q. 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 discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors That May
Affect Future Results." Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's opinions only as
of the date hereof. The Company undertakes no obligation to revise or publicly
release the results of any revision to these forward-looking statements.
Readers should carefully review the risk factors described in this document as
well as in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form
10-Q and our 1999 Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 20, 2000.
Overview
Foundry designs, develops, manufactures and markets a comprehensive, end-to-
end suite of high performance networking products for enterprises, educational
institutions, government agencies, web-hosting companies, Application Service
Providers (ASPs), electronic banking and finance service providers, and
Internet Service Providers (ISPs). We commenced commercial shipments of our
FastIron(TM) workgroup Layer 2 switch in May 1997, the initial product released
in our family of stackable products. We shipped NetIron(TM), 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(TM) family. We shipped
BigIron(TM), our second generation of midsize and large-scale chassis-based
products, in the third quarter of 1998. In May 2000, we began shipping our new
product line of high-performance Internet backbone routers, NetIron(TM)400 and
NetIron(TM)800.
We derive our revenue substantially from sales of our stackable and chassis-
based products, including fees for customer support services related to our
products. Our cost of revenue consists primarily of material, labor, overhead
and warranty costs. 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 relationships with Hewlett-Packard and Utstarcom. We have sales
representatives in the United States, Singapore, Italy, Canada, France, United
Kingdom, Sweden, China, Mexico, Brazil, Netherlands, Germany, Australia, New
Zealand, Dubai, Hong Kong, South Korea and Taiwan. We have made significant
investments to expand our international operations and expect international
revenue to increase as a percentage of total revenue.
We generated net income of $22.9 million for the year ended December 31,
1999 and $67.8 million for the nine months ended September 30, 2000. As of
September 30, 2000, we had retained earnings of $70.3 million. Although we have
been profitable in each quarter since the first quarter of fiscal 1999, 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.
At a meeting of our board of directors, on October 18, 2000, the board
approved an amendment to our Bylaws increasing our authorized number of
directors from three (3) members to seven (7) members and unanimously appointed
the following persons to the board: Alfred J. Amorso, C. Nicholas Keating, Jr.
and J. Steven Young.
11
<PAGE>
Results of Operations
The following table sets forth selected items from our statements of income
as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue, net.................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue................................. 34.9 44.4 34.9 45.0
------ ------ ------ ------
Gross profit................................ 65.1 55.6 65.1 55.0
------ ------ ------ ------
Operating expenses:
Research and development...................... 8.1 5.7 7.2 7.4
Sales and marketing........................... 17.4 17.1 16.4 17.4
General and administrative.................... 2.6 2.6 2.5 3.4
Amortization of deferred stock compensation... 1.2 5.8 1.8 9.1
------ ------ ------ ------
Total operating expenses.................... 29.3 31.2 27.9 37.3
------ ------ ------ ------
Income from operations.......................... 35.8 24.4 37.2 17.7
Interest income, net............................ 2.9 0.1 2.9 0.1
------ ------ ------ ------
Income before provision for income taxes........ 38.7 24.5 40.1 17.8
Provision for income taxes...................... (14.7) (9.6) (15.2) (6.2)
------ ------ ------ ------
Net income...................................... 24.0% 14.9% 24.9% 11.6%
====== ====== ====== ======
</TABLE>
Net revenue. Net revenue increased 191% from $38.9 million for third quarter
1999 to $113.2 million for third quarter 2000, and increased 247% from $78.4
million for the nine months ended September 30, 1999 to $272.0 million for the
nine months ended September 30, 2000. These increases in revenue were primarily
due to the market's growing acceptance of Foundry's Gigabit Ethernet
technology, expanded product offerings, our increased sales and marketing
efforts, and overall growth in the networking marketplace. We cannot assure you
that we can sustain current growth rates. Historical growth rates of revenue
may not be indicative of future results.
For the three and nine months ended September 30, 2000, no customers
accounted for greater than 10% of our net revenue. Sales to customers outside
of the United States accounted for approximately 28% and 24% of our net revenue
for the three and nine months ended September 30, 2000, however, no individual
country accounted for 10% or more of total revenue. During the third quarter,
our customer base grew from approximately 2,300 to 2,700 customers worldwide.
Gross profit. Gross profit increased from $21.6 million for third quarter
1999 to $73.7 million for third quarter 2000 and from $43.1 million for the
nine months ended September 30, 1999 to $177.2 million for the nine months
ended September 30, 2000. As a percentage of revenue, gross profit increased
from 56% for third quarter 1999 to 65% for third quarter 2000 and from 55% for
the nine months ended September 30, 1999 to 65% for the nine months ended
September 30, 2000. The increases as a percentage of revenue were primarily due
to a favorable change in the mix of products sold, production efficiencies and
reductions in material and component costs. We expect gross profit, as a
percentage of revenue, to fluctuate from period to period primarily due to the
mix of products sold, production efficiencies and variations in material and
component costs. There is no assurance that we can maintain our current gross
profit percentage.
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.
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Research and development expenses increased from $2.2 million for third quarter
1999 to $9.2 million for third quarter 2000, and from $5.8 million for the nine
months ended September 30, 1999 to $19.5 million for the nine months ended
September 30, 2000. The increases were due to the hiring of additional
engineering personnel, expenses associated with the development of our new
product offerings and expenses associated with enhancements to existing product
lines. Research and development costs are expensed as incurred. 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 from $6.7 million for third quarter 1999 to $19.6 million for third
quarter 2000 and from $13.6 million for the nine months ended September 30,
1999 to $44.7 million for the nine months ended September 30, 2000. The
increases were primarily due a significant increase in sales and marketing
personnel, increased advertising, trade shows and promotional expenses and
increased sales commissions expense as a result of significantly higher
revenue. We expect these expenses to increase in absolute dollars as we
continue to build our field sales and support organizations, pursue aggressive
marketing campaigns and incur increased sales commission expenses resulting
from higher revenue.
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 from $1.0 for third
quarter 1999 to $3.0 million for third quarter 2000 and from $2.7 million for
the nine months ended September 30, 1999 to $6.9 milllion for the nine months
ended September 30, 2000. The increases were due to the addition of personnel
necessary to support increased revenue, an increase in related facilities
expenses and other general corporate expenses consistent with the increased
scale of operations. 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.
Amortization of deferred stock compensation. In connection with the grant of
stock options to employees and a director, we recorded deferred stock
compensation in the aggregate amount of $4.7 million in 1998 and $17.3 million
in 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 reflected within stockholders' equity and is being
amortized to operations over the respective vesting periods. We recorded
amortization of deferred stock compensation expense of approximately $7.2
million and $4.9 million for the nine month periods ended September 30, 1999
and 2000, respectively. At September 30, 2000, we had approximately $6.5
million remaining to be amortized over the corresponding vesting period of each
respective option, generally four years.
Interest income, net. Interest income is primarily the result of the
interest earned on our short-term investments and cash held in interest bearing
accounts less any interest expense incurred on capital lease obligations and
borrowings under our revolving line of credit, which expired in February 2000.
Net interest income increased from $47,000 in third quarter 1999 to $3.3
million in third quarter 2000. Net interest income increased from $71,000 for
the nine months ended September 30, 1999 to $8.0 million for the nine months
ended September 30, 2000. The increases were due to significantly higher cash
and investment balances during the nine months ended September 30, 2000
resulting primarily from increased cash provided by operations and the
Company's initial public offering on September 28, 1999, in which we received
net proceeds of approximately $131.8 million on October 1, 1999.
Income taxes. We have recorded income tax expense for the nine months ended
September 30, 2000 of $41.5 million compared to $4.8 million for the same
period in 1999. The effective tax rate for the nine months
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ended September 30, 2000 was 38%, based upon the estimated annualized tax rate.
The effective tax rate for the same period in 1999 was 35% reflecting the
benefit of net operating loss carryforwards not previously recognized.
Liquidity and Capital Resources
At September 30, 2000 Foundry had cash and cash equivalents and short-term
investments totaling $229.6 million compared to $160.2 million at December 31,
1999. Cash equivalents consisted of commercial paper, corporate and government
debt securities and cash deposited in money market accounts with original
maturities of less than three months. Short-term investments were comprised of
commercial paper, corporate and U.S. debt securities with original maturities
greater than three months but less than one year. Prior to our initial public
offering on September 28, 1999, Foundry financed operations primarily through
the private sales of common and preferred stock and, to a lesser extent, from a
capital equipment lease line and bank line of credit. We raised net proceeds of
$131.8 million from our initial public offering.
Cash provided by operating activities was $9.4 million and $65.1 million for
the nine months ended September 30, 1999 and 2000, respectively. The increase
was due to the income tax benefit realized from exercises of nonqualified stock
options and disqualified dispositions of incentive stock options totaling $17.0
million combined with increased accounts payable and accruals and significantly
higher net income generated by the Company offset by increased accounts
receivables and inventories.
Cash utilized in investing activities was $224,000 and $42.7 million for the
nine months ended September 30, 1999 and 2000, respectively. The cash utilized
during the nine months ended September 30, 2000 primarily represents purchases
of short-term investments, computers and electronic test equipment offset by
proceeds from maturities of short-term investments.
Financing activities provided $6.0 million and $7.4 million in cash for the
nine months ended September 30, 1999 and 2000, respectively. Financing
activities during the nine months ended September 30, 1999 consisted of
proceeds from the issuance of common and preferred stock and proceeds of $2.0
million from the bank line of credit. Financing activities during the nine
months ended September 30, 2000 consisted primarily of proceeds from the
exercise of stock options and, to a lesser extent, repayments of stockholder
notes recievable.
As of September 30, 2000, we did not have any material commitments for
capital expenditures. However, we expect to incur capital expenditures as we
expand our operations. 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.
We believe that our cash and short-term investment balances at September 30,
2000 will enable us to meet our working capital requirements for at least the
next 12 months. However, there can be no assurance that we will not require
additional financing within this time frame or that such additional funding, if
needed, will be available on acceptable terms.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
Although we have been profitable since first quarter 1999, we may not be able
to maintain profitability in the future.
We generated net income of $22.9 million for the year ended December 31,
1999 and $67.8 million for the nine months ended September 30, 2000. As of
September 30, 2000, we had retained earnings of $70.3 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.
Although we have been profitable in each quarter since the first quarter of
fiscal 1999, 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 and build our operational and
administrative infrastructure. We base our operating expenses on anticipated
revenue trends and a high percentage of our expenses are fixed in the short
term. As a result, any shortfall in revenue relative to our expectations could
cause a significant decline in our quarterly operating results.
Although our customer base has increased substantially, we still depend on
large, recurring purchases from certain customers, and any loss, cancellation
or delay in purchases by these customers could cause a shortfall in revenue.
Prior to fiscal 2000, a limited number of customers and resellers accounted
for a significant portion of our revenue. For the quarter and nine months ended
September 30, 2000, no customers accounted for greater than 10% of our net
revenue. This may not necessarily be indicative of future customer
concentrations. Although our customer base has become less concentrated, the
loss of continued orders from our more significant customers could cause our
revenue and profitability to suffer.
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While our financial performance may depend on large, recurring orders from
certain 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.
Financial results for any particular period will not predict results for future
periods.
Because of the uncertain nature of the rapidly changing market we serve,
period-to-period comparisons of operating results are not likely to be
meaningful. In addition, you should not rely on the results for any period as
an indication of future performance. We currently expect that our operating
expenses will continue to increase significantly as we expand our sales and
marketing operations and continue to develop new products. Further, we are
subject to employer payroll taxes when our employees exercise their non-
qualified stock options.
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 Systems Inc. maintains a dominant position in this market and several of
its products compete directly with our products.
We also compete with other large public companies, such as Nortel Networks,
Lucent Technologies, Juniper Networks and Extreme Networks as well as other
smaller public and private companies. Some of our current and potential
competitors have longer operating histories, greater financial, technical,
sales, marketing and other resources, more name recognition and larger
installed customer bases. Additionally, we may face competition from unknown
companies and emerging technologies that may offer new LAN, MAN and LAN/WAN
solutions to enterprises and ISPs.
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.
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.
If we are unable to effectively expand, train and retain our domestic sales
and support staff or establish our indirect distribution channels our ability
to grow and increase revenue could be harmed. Our expansion of our direct sales
operation may not be successfully completed and the cost of our expansion may
exceed the revenue generated.
If we are unable 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.
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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 ISP 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.
We must continue to introduce new products with superior performance in a
timely manner in order to sustain and increase our revenue.
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.
We sell to Internet Service providers, whose unpredictable demands,
requirements and business models subject us to potential adverse revenue
fluctuations.
We have introduced products specifically targeted at the ISP market and
currently have under development other products to address their requirements.
As a result, our success depends on increased sales to ISPs. Although we expect
these sales to increase, we believe that there are a number of risks arising
from doing business with ISPs which may not arise in our relationships with our
other customers, including:
. ISPs demonstrate a low level of brand loyalty and may switch to another
supplier which provides superior performance;
. any failure of an ISP's service to its customers, particularly in the
case of our largest ISP 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 ISP 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 ISP 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 ISP market or maintain our current level of sales in this market.
Our revenue may be adversely affected by a reduction in outside financing made
available to many of our customers.
Our customer base includes emerging enterprise, telecommunications and
Internet companies who rely on venture capital firms and other similar
financing sources to fund their operations and growth. Many of these customers
are finding it increasingly difficult to obtain such financing on attractive
terms, if at all. If these companies are unable to raise adequate capital, they
may significantly reduce or even cease their purchases of our products or may
be unable to pay or delay payment for products they had previously purchased.
Such reductions in spending or payment defaults could have a material adverse
effect on our operating results, which could cause our stock price to decline.
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Some of our revenue may be derived through vendor financing programs which may
be difficult to administer and may expose us to increased credit risks.
Our existing and potential customers may increasingly demand vendor
financing programs through which they can finance their purchase of networking
equipment. We currently have one such program in place, but only on a limited
basis. Several of our large competitors, in contrast, currently offer vendor
financing programs on a broad basis. In the future we may also offer them on a
broad basis in order to meet increased demand and remain competitive. Although
vendor financing programs can increase customer opportunities, they can also be
difficult and costly to administer and may be utilized by customers who carry
heightened credit risk. If we are unable to effectively administer vendor
financing programs on a broad basis, or if we incur material losses due to
customer defaults under the programs, our business could be harmed which could
cause our stock price to decline.
The average selling prices of our products may decrease as a result of
competitive pressures 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 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.
Although our gross margins for recent quarters were among the best in the
industry, we may experience substantial period-to-period fluctuations in future
operating results due to the erosion of our average selling prices. Our gross
margins may be affected by price declines if we are unable to reduce costs. 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. For example, we
generally realize higher gross margins on direct sales to the end user than on
sales through resellers or our OEM. As a result, any significant shift in
revenue through resellers or our OEM could harm our gross margins.
We need additional qualified personnel to maintain and expand our business. If
we are unable to promptly attract and retain qualified personnel, our business
may be harmed.
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. We do not
have employment contracts or key person life insurance covering any of our
personnel.
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Our expansion in international markets will involve inherent risks that we may
not be able to control. As a result, our business may be harmed if we are
unable to successfully address these risks.
Our success will depend, in part, on increasing international sales and
expanding our international operations. Our international sales primarily
depend on our resellers, including Pan Dacom and Total Network Solutions in
Europe, Mitsui in Japan, Bell Canada in Canada 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;
. longer accounts receivable collection cycles;
. seasonal reductions in business activity;
. higher costs of doing business in foreign countries;
. difficulties in managing operations across disparate geographic areas;
. difficulties associated with enforcing agreements through foreign legal
systems;
. political instability and export restrictions;
. potential adverse tax consequences; and
. unexpected changes in regulatory requirements.
One or more of such factors may have a material adverse effect on the
Company's future international operations and, consequently, on its business,
operating results and financial condition.
Generally, 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.
Because we currently denominate sales in U.S. dollars, we do not anticipate
that the adoption of the Euro as a functional legal currency of certain
European countries will have a material affect on our business.
Foundry purchases several key components for products from single or limited
sources; if these components are not available, our revenues may be harmed.
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, Texas
Instruments, Toshiba, Hewlett-Packard, Molex,Intel, Fujitsu and Samsung. 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, ASICs, printed circuit boards, optical components and microprocessors.
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
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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.
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 located in San Jose, California. Celestica assembles and tests our
printed circuit boards, and Sanmina Corporation 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 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, 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.
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;
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. lost sales; and
. unexpected expenses to remedy errors.
If we do not manage our growth effectively, our business will be harmed.
We have experienced rapid growth which has placed, and continues to place, a
significant strain on our resources. Our management team has relatively limited
experience managing rapidly growing companies. 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;
. 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.
Our products may not meet the legal foreign and international standards
required for their sale, which will harm our business.
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. Although our products are currently in compliance with
domestic and international standards and regulations in countries we currently
sell to, there is no assurance that our existing and future product offerings
will continue to comply with evolving standards and regulations. 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;
. 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
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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 to raise more capital, but the availability of additional financing
is uncertain.
We believe that our existing working capital and cash from 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 and could cause our stock price to decline. 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. The terms of debt securities could impose restrictions on our operations
and could cause our stock price to decline.
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
although we do have 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.
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, some companies in the networking
markets have extensive patent portfolios with respect to networking technology.
We do not currently own any patents, although we have patent applications
pending.
From time to time third parties have asserted exclusive patent, copyright,
trademark and other intellectual property rights to technologies and related
standards that are important to us. Such 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. We recently received letters from both IBM and Nortel
alleging that certain of our products that operate on industry standards may
infringe one or more of their patents. We are currently analyzing the validity
of these claims and exploring potential courses of action. Regardless of the
merit of these claims, our investigation could be time-consuming, result in
costly litigation and diversion of technical management personnel, or require
us to develop non-infringing technology or enter into royalty or license
agreements. If there is a successful claim of infringement by any third party,
or if we fail to develop non-infringing technology or license the proprietary
rights, our business could be harmed.
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<PAGE>
Our stock price has been volatile historically, which may make it more
difficult for you to resell shares when you want at prices you find attractive.
The trading price of our common stock has been and may continue to be
subject to wide fluctuations. During the first nine months of 2000, the closing
sale prices of our common stock on the Nasdaq Stock Market (taking into
consideration any stock splits) ranged from $51.88 to $212.00. The trading
price of our common stock has been and may continue to be subject to wide
fluctuations. Our stock price may fluctuate in response to a number of events
and factors, such as quarterly variations in operating results, announcements
of technological innovations or new products and media properties by us or our
competitors, changes in financial estimates and recommendations by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable, and news reports relating to trends in our
markets. In addition, the stock market in general, and technology companies in
particular, have experienced extreme volatility that often has been unrelated
to the operating performance of such companies. These broad market and industry
fluctuations may adversely affect the price of our stock, regardless of our
operating performance.
Management and one large stockholder beneficially own approximately 33.6% of
our stock; their interests could conflict with yours; significant sales of
stock held by them could have a negative effect on Foundry's stock price.
Foundry's directors and executive officers and investment funds affiliated
with Crosspoint Venture Partners ("Crosspoint") beneficially own approximately
33.6% of our outstanding common stock as of September 30, 2000. Seth D. Neiman
is a member of our board of directors and is also a general partner of
Crosspoint. As a result of their ownership and positions, our directors and
executive officers and Crosspoint collectively are able to significantly
influence all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying or preventing a
change in control of Foundry. In addition, sales of significant amounts of
shares held by Foundry and its directors and executive officers, or the
prospect of these sales, could adversely affect the market price of Foundry
common stock.
Anti-takeover provisions could make it more difficult for a third party to
acquire us.
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of common stock may be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change of
control of Foundry without further action by the stockholders and may adversely
affect the voting and other rights of the holders of common stock. We have no
present plans to issue shares of preferred stock. Further, certain provisions
of our charter documents, including provisions eliminating the ability of
stockholders to take action by written consent and limiting the ability of
stockholders to raise matters at a meeting of stockholders without giving
advance notice, may have the effect of delaying or preventing changes in
control or management of Foundry, which could have an adverse effect on the
market price of our stock. In addition, our charter documents do not permit
cumulative voting, which may make it more difficult for a third party to gain
control of our board of directors.
Our operations could be significantly hindered by the occurrence of a natural
disaster or other catastrophic event.
Our operations are susceptible to outages due to fire, floods, power loss,
telecommunications failures, break-ins and similar events. In addition, are
headquarters are located in Northern California, an area susceptible to
earthquakes. We do not have multiple site capacity for all of our services in
the event of any such occurrence. Despite our implementation of network
security measures, our servers are vulnerable to computer viruses, break-ins,
and similar disruptions from unauthorized tampering with our computer systems.
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We may not carry sufficient business interruption insurance to compensate us
for losses that may occur as a result of any of these events. Any such event
could have a material adverse effect on our business, operating results, and
financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. We place our investments with high credit quality
issuers and, by policy, limit the amount of credit exposure to any one issuer
or fund. The portfolio includes only marketable securities with original
maturities of less than one year and with active secondary or resale markets to
ensure portfolio liquidity. We have no investments denominated in foreign
country currencies and therefore are not subject to foreign currency risk on
such investments. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
Currently, a majority of our sales and expenses are denominated in U.S.
dollars, and, as a result, we have not experienced significant foreign exchange
gains and losses to date. While we continue to effect some transactions in
foreign currencies, we do not anticipate that foreign exchange gains and losses
will be significant in the next 12 months. We have not engaged in foreign
currency hedging activities to date.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See "Factors that May Affect Future Results--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."
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote Of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
<C> <S>
Exhibit Certificate of Incorporation of Registrant (Amended and Restated
3.1 Certificate of Incorporation filed as Exhibit 3.2 to Registrant's
Registration Statement on Form S-1 (Commission File No. 333-82577)
and incorporated herein by reference; Certificate of Amendment to
the foregoing filed as Exhibit 3.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 and
incorporated herein by reference.)
Exhibit Bylaws of Registrant
3.2
Exhibit Financial Data Schedule
27.1
</TABLE>
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Foundry Networks, Inc.
(Registrant)
By: /s/ Timothy D. Heffner
----------------------------------
Timothy D. Heffner
Vice President, Finance and
Administration, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: November 13, 2000
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
Exhibit Certificate of Incorporation of Registrant (Amended and Restated
3.1 Certificate of Incorporation filed as Exhibit 3.2 to Registrant's
Registration Statement on Form S-1 (Commission File No. 333-82577)
and incorporated herein by reference; Certificate of Amendment to
the foregoing filed as Exhibit 3.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 and
incorporated herein by reference.)
Exhibit Bylaws of Registrant
3.2
Exhibit Financial Data Schedule
27.1
</TABLE>
27
