<PAGE>
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 June 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
Incorporation or organization) Identification No.)
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 August 9, 2000, there were 116,885,430 shares of the registrant's common
stock outstanding, par vlaue $0.0001.
1
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999................ 3
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30,
2000 and 1999.................................................................................. 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 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.......... 10
Factors That May Affect Future Results......................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 24
Item 2. Changes in Securities and Use of Proceeds...................................................... 24
Item 3. Defaults Upon Senior Securities................................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders............................................ 24
Item 5. Other Information.............................................................................. 24
Item 6. Exhibits and Reports on Form 8-K............................................................... 24
SIGNATURES ................................................................................................ 25
</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>
June 30, December 31,
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $158,569 $120,378
Short-term investments.......................................................... 46,880 39,789
Accounts receivable, net........................................................ 53,653 28,932
Inventories, net................................................................ 27,620 16,743
Deferred tax assets............................................................. 6,997 5,220
Prepaid expenses and other current assets....................................... 2,367 1,340
-------- --------
Total current assets......................................................... 296,086 212,402
Property and equipment, net..................................................... 2,734 1,096
-------- --------
$298,820 $213,498
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 26,488 $ 7,557
Income taxes payable............................................................ -- 9,925
Accrued payroll and related benefits............................................ 8,683 4,138
Accrued warranty................................................................ 3,950 2,092
Other accrued liabilities....................................................... 4,712 4,013
Deferred revenue................................................................ 9,192 4,169
-------- --------
Total current liabilities.................................................... 53,025 31,894
-------- --------
Stockholders' equity:
Common stock, $0.0001 par value
Authorized--300,000,000 shares at June 30, 2000;
Issued and outstanding--116,428,673 and 114,189,450 shares at June 30,
2000 and December 31, 1999, respectively................................... 12 11
Treasury stock.................................................................. (4) (4)
Additional paid-in capital...................................................... 214,480 191,623
Notes receivable from stockholders.............................................. (3,803) (755)
Deferred stock compensation..................................................... (7,930) (11,771)
Retained earnings............................................................... 43,040 2,500
-------- --------
Total stockholders' equity................................................... 245,795 181,604
-------- --------
$298,820 $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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue, net................................................................ $ 88,790 $ 24,062 $158,805 $ 39,487
Cost of revenue............................................................. 30,472 10,421 55,317 17,991
-------- -------- -------- --------
Gross profit........................................................... 58,318 13,641 103,488 21,496
-------- -------- -------- --------
Operating expenses:
Research and development.................................................. 6,393 1,879 10,334 3,625
Sales and marketing....................................................... 15,028 4,256 25,121 6,973
General and administrative................................................ 2,070 985 3,888 1,655
Amortization of deferred stock compensation............................... 1,581 3,848 3,533 4,902
-------- -------- -------- --------
Total operating expenses............................................... 25,027 10,968 42,876 17,155
-------- -------- -------- --------
Income from operations...................................................... 33,246 2,673 60,612 4,341
Interest income, net........................................................ 2,700 -- 4,741 24
-------- -------- -------- --------
Income before provision for income taxes.................................... 35,946 2,673 65,353 4,365
Provision for income taxes.................................................. 13,492 668 24,813 1,091
-------- -------- -------- --------
Net income.................................................................. $ 22,454 $ 2,005 $ 40,540 $ 3,274
======== ======== ======== ========
Basic net income per share.................................................. $ 0.21 $ 0.05 $ 0.38 $ 0.09
======== ======== ======== ========
Weighted average shares used in computing basic net income per share........ 109,420 38,111 107,041 36,492
======== ======== ======== ========
Diluted net income per share................................................ $ 0.18 $ 0.02 $ 0.32 $ 0.03
======== ======== ======== ========
Weighted average shares used in computing diluted net income per share...... 126,640 102,269 126,760 104,640
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
FOUNDRY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
2000 1999
-------- -------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 40,540 $ 3,274
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation...................................................................... 510 226
Amortization of deferred stock compensation....................................... 3,533 4,902
Provision for allowance for doubtful accounts..................................... 582 675
Provision for excess and obsolete inventories..................................... 654 1,113
Deferred tax assets............................................................... (1,777) --
Change in operating assets and liabilities:
Accounts receivable.............................................................. (25,303) (7,449)
Inventories...................................................................... (11,531) (3,647)
Prepaid expenses and other current assets........................................ (1,027) (215)
Accounts payable................................................................. 18,931 1,111
Accrued payroll and related benefits............................................. 4,545 360
Accrued warranty................................................................. 1,858 361
Income taxes payable............................................................. (9,925) 1,091
Other accrued liabilities........................................................ 699 1,037
Deferred revenue................................................................. 5,023 527
-------- -------
Net cash provided by operating activities....................................... 27,312 3,366
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................................. (2,148) (145)
Maturities of short-term investments................................................ 77,023 --
Purchases of short-term investments................................................. (84,114) --
-------- -------
Net cash used in investing activities........................................... (9,239) (145)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit................................................... -- 2,000
Principal payments on capital lease obligations..................................... -- (88)
Proceeds from issuance of common stock.............................................. 2,880 1,644
Tax benefit from stock option exercises............................................ 17,024 --
Repurchases of common stock......................................................... (8) (4)
Net proceeds from issuance of redeemable convertible preferred stock................ -- 1,000
Repayments of notes receivable...................................................... 222 --
-------- -------
Net cash provided by financing activities....................................... 20,118 4,552
-------- -------
INCREASE IN CASH AND CASH EQUIVALENTS................................................. 38,191 7,773
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................ 120,378 4,567
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................................. $158,569 $12,340
======== =======
</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 six months ended June 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 six months ended June 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 and Singapore. 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, 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 December 31,
1999 and June 30, 2000 Foundry's short-term investments, which were stated at
amortized cost and classified as held-to-maturity, consisted of corporate and
U.S. debt securities.
6
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Cash equivalents and short-term investments are all due within one year and
consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 2000
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Money market funds........................ $ 9,315 $ -- $ -- $ 9,315
Commercial paper.......................... 71,383 -- -- 71,383
Government securities..................... 86,402 -- (16) 86,386
Corporate debt securities................. 29,996 24 (40) 29,980
-------- ----------- -------- -----------
$197,096 $ 24 $ (56) $ 197,064
======== =========== ======== ===========
Included in cash and cash equivalents..... $150,216 $ -- $ -- $ 150,216
Included in short-term investments........ 46,880 24 (56) 46,848
-------- ----------- -------- -----------
$197,096 $ 24 $ (56) $ 197,064
======== =========== ======== ===========
December 31, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair 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>
June 30, December 31,
2000 1999
------- -------
<S> <C> <C>
Purchased parts................ $12,910 $12,176
Work-in-process................ 12,521 2,700
Finished goods................. 2,189 1,867
------- -------
$27,620 $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 repair or replace products that
may be returned under warranty. Foundry's warranty period extends 12 months 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.
7
<PAGE>
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 six months ended June 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 Six Months
Ended June 30, Ended June 30,
-------------- -------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Net income............................................................... $ 22,454 $ 2,005 $ 40,540 $ 3,274
-------- -------- -------- --------
Basic:
Weighted average shares of common stock outstanding.................... 115,992 56,672 115,220 56,086
Less: Weighted average shares subject to repurchase.................... (6,572) (18,561) (8,179) (19,594)
-------- -------- -------- --------
Weighted average shares used in computing basic net
income per common share............................................... 109,420 38,111 107,041 36,492
======== ======== ======== ========
Basic net income per common share........................................ $ 0.21 $ 0.05 $ 0.38 $ 0.09
======== ======== ======== ========
Diluted:
Weighted average shares of common stock outstanding.................... 115,992 56,672 115,220 56,086
Add: Weighted average dilutive potential common stock.................. 10,648 45,597 11,540 48,554
======== ======== ======== ========
Weighted average shares used in computing diluted net
income per common share............................................... 126,640 102,269 126,760 104,640
======== ======== ======== ========
Diluted net income per common share...................................... $ 0.18 $ 0.02 $ 0.32 $ 0.03
======== ======== ======== ========
</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 six months ended June 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.
Foreign Operations
Foundry sells to various countries in North and South America, Europe,
Asia, and Australia through its foreign sales offices and subsidiaries. Foreign
operations consist of sales, marketing and support activities. For the three and
six months ended June 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.
8
<PAGE>
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 do not anticipate that the
adoption of FIN 44 will 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 reduce taxes currently payable by $17.0 million for the six
months ended June 30, 2000. Such benefits are credited to additional paid-in
capital on the accompanying condensed consolidated balance sheet as of June 30,
2000.
4. COMMON STOCK
At Foundry's 2000 Annual Meeting of Stockholders held on June 20, 2000, the
stockholders approved an amendment to Foundry's 1996 Stock Plan to increase
the number of shares of common stock reserved for issuance under the plan from
46,235,683 to 51,235,683 shares and an amendment to Foundry's Certificate of
Incorporation to increase the authorized number of shares of common stock from
200,000,000 to 300,000,000. Stockholders also re-elected Foundry's two
non-employee board directors, who each received an option to purchased 60,000
Shares of Common Stock under Directors' Stock Option Plan.
On May 25, 2000, the Company issued 60,000 shares of common stock to an
employee upon exercise of an option granted under the 1996 Stock Plan in
exchange for a full-recourse promissory note in the principal amount of $3.3
million. The note is secured by a stock pledge agreement, bears interest at
6.42% per year and matures on the earlier of May 25, 2003 or certain specified
events.
5. 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 six months ended June
30, 2000 was immaterial and comprised only of foreign currency translation
adjustments.
6. SUBSEQUENT EVENT
On July 31, 2000, 194,441 shares of common stock were purchased for Foundry
employees under the 1999 Employee Stock Purchase Plan.
9
<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 April 2000, we shipped new
high end products in each of our major product lines: the NetIron(TM) 1500
Internet backbone router, the BigIron(TM) 15000 Layer 2/3 switch and switching
router, the ServerIron400(TM) and ServerIron800(TM) Layer 4-7 Internet traffic
and content management switches. 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 relationship with Hewlett-Packard. We have sales
representatives in the United States, Singapore, Italy, Canada, France, United
Kingdom, Sweden, China, Brazil, Netherlands, Germany, Australia, 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. Currently, a majority 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, generally one
year.
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.
10
<PAGE>
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 former facility. In
1999, we transitioned assembly and testing functions from our facility to our
manufacturing partners. We have realized lower costs and higher volume
efficiencies as a result of this transition in 1999. However, we may not be able
to continue to realize lower costs in the future which may adversely affect our
gross margin and operating results.
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 ratably over the respective vesting
periods. We recorded amortization of deferred stock compensation expense of
approximately $4.9 million and $3.5 million for the six month periods ended June
30, 1999 and 2000, respectively. At June 30, 2000, we had approximately $7.9
million remaining to be amortized over the corresponding vesting period of each
respective option, generally four years.
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 Six Months
Ended June 30, Ended June 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............................................ 34.3 43.3 34.8 45.6
----- ----- ----- -----
Gross profit......................................... 65.7 56.7 65.2 54.4
----- ----- ----- -----
Operating expenses:
Research and development................................ 7.2 7.8 6.5 9.2
Sales and marketing..................................... 16.9 17.7 15.8 17.6
General and administrative.............................. 2.3 4.1 2.5 4.2
Amortization of deferred stock compensation............. 1.8 16.0 2.2 12.4
----- ----- ----- -----
Total operating expenses............................. 28.2 45.6 27.0 43.4
----- ----- ----- -----
Income from operations..................................... 37.5 11.1 38.2 11.0
Interest income, net....................................... 3.0 -- 3.0 0.1
----- ----- ----- -----
Income before provision for income taxes................... 40.5 11.1 41.2 11.1
Provision for income taxes................................. 15.2 2.8 15.7 2.8
----- ----- ----- -----
Net income................................................. 25.3% 8.3% 25.5% 8.3%
===== ===== ===== =====
</TABLE>
Net revenue. Net revenue increased 269% from $24.1 million for second
quarter 1999 to $88.8 million for second quarter 2000, and increased 302% from
$39.5 million for the six months ended June 30, 1999 to $158.8 million for the
six months ended June 30, 2000. The 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 six months ended June 30, 2000, no customers accounted
for greater than 10% of our net revenue. Sales to customers outside of the
United States accounted for approximately 20% of our net revenue for the three
and six months ended June 30, 2000. During the second quarter, our customer base
grew from 2000 to 2300 customers worldwide.
11
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Gross profit. Gross profit increased from $13.6 million for second quarter
1999 to $58.3 million for second quarter 2000 and from $21.5 million for the six
months ended June 30, 1999 to $103.5 million for the six months ended June 30,
2000. As a percentage of revenue, gross profit increased from 57% for second
quarter 1999 to 66% for second quarter 2000 and from 54% for the six months
ended June 30, 1999 to 65% for the six months ended June 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 reductions in material and component costs.
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 from $1.9 million for
second quarter 1999 to $6.4 million for second quarter 2000, and from $3.6
million for the six months ended June 30, 1999 to $10.3 million for the six
months ended June 30, 2000. The increases were due to the hiring of additional
engineering personnel, expenses associated with the development of our new
product offerings of next generation routers and switches 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 $4.3 million for second quarter 1999 to $15.0 million for second
quarter 2000 and from $7.0 million for the six months ended June 30, 1999 to
$25.1 million for the six months ended June 30, 2000. The increases were
primarily due to the 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 $985,000 for second
quarter 1999 to $2.1 million for second quarter 2000 and from $1.7 million for
the six months ended June 30, 1999 to $3.9 milllion for the six months ended
June 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.
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.
We had no interest income in second quarter 1999 and $2.7 million in second
quarter 2000. Net interest income increased from $24,000 for the six months
ended June 30, 1999 to $4.7 million for the six months ended June 30, 2000. The
increases were due to significantly higher cash and investment balances during
the six months ended June 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.
Income taxes. We have recorded income tax expense for the six months ended
June 30, 2000 of $24.8 million compared to $1.1 million for the same period in
1999. The effective tax rate for the six months ended June 30, 2000 was 37.5%,
based upon the estimated annualized tax rate. The effective tax rate for the
same period in 1999 was 25.0% reflecting the benefit of net operating loss
carryforwards not previously recognized.
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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 single- 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 also "Factors
That May Affect Future Results" for a discussion of the risk of fluctuations in
operating results.
Liquidity and Capital Resources
At June 30, 2000 Foundry had cash and cash equivalents and short-term
investments totaling $205.4 million compared to $160.2 million at December 31,
1999. Cash equivalents consisted of commercial paper, government debt securities
and cash deposited in money market accounts with original maturities of less
than three months. Short-term investments were comprised of 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 October 1, 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 $3.4 million and $27.3 million
for the six months ended June 30, 1999 and 2000, respectively. The increase was
due to increased accounts payable and accruals and significantly higher net
income generated by the Company for the six months ended June 30, 2000, offset
by increases in inventory, accounts receivable and a decrease in income taxes
payable.
Cash utilized in investing activities was $145,000 and $9.2 million for the
six months ended June 30, 1999 and 2000, respectively. The cash utilized during
the six months ended June 30, 2000 primarily represents purchases of short-term
investments and computers and electronic test equipment offset by proceeds from
maturities of short-term investments.
Financing activities provided $4.6 million and $20.1 million in cash for
the six months ended June 30, 1999 and 2000, respectively. Financing activities
during the six months ended June 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 six months ended June 30,
2000 consisted primarily of the income tax benefit totaling $17.0 million
realized from exercises of nonqualified stock options and disqualified
dispositions of incentive stock options and, to a lessor extent, proceeds from
the exercise of stock options and repayments of stockholder notes recievable.
As of June 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 June 30,
2000 totaling $205.4 million 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 $40.5 million for the six months ended June 30, 2000. As of June 30,
2000, we had retained earnings of $43.0 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.
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.
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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.
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 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 six months ended
June 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. Although our largest customers may vary from period-to-
period, we anticipate that our operating results for any given period will
continue to depend on large orders from a small number of customers.
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.
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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. 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. 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.
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, and H. Earl
Ferguson, Vice President, Hardware Engineering. We do not have employment
contracts or key person life insurance covering any of our personnel.
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:
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. potential recessions in economies outside the United States;
. 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.
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.
We have formal subsidiaries in France, Canada, Netherlands, Germany, United
Kingdom and Singapore. We also have sales offices in Taiwan, South Korea, China,
Sweden, Australia, Hong Kong, Brazil and Italy. We believe that our continued
growth and profitability requires further expansion of our international
operations. To successfully expand international sales, we must establish
additional foreign operations, hire additional personnel and recruit additional
resellers.
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 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.
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.
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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, 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 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.
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 ISP. 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.
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
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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.
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 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. 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.
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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 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.
Problems arising from use of our products together with other vendors' products
could 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 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.
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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.
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 is extremely volatile.
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 executive officers and directors have substantial control over Foundry which
could delay or prevent a merger or other change in control of Foundry.
Our executive officers, directors and entities affiliated with them
beneficially own approximately 40% of our outstanding common stock as of June
30, 2000. 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.
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.
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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.
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 and Use of Proceeds.
The net proceeds of our initial public offering which closed on October 1,
1999 were approximately $131,830,800. As of March 31, 2000 we had used $76.8
million of these proceeds and in the second quarter of 2000 we used the
remainder of these proceeds 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.
Item 3. Defaults Upon Senior Securities.--Not applicable.
Item 4. Submission of Matters to a Vote Of Security Holders
On June 20, 2000, the Company held its Annual Meeting of Stockholders. At
the meeting, the stockholders re-elected as the Company's directors Bobby R.
Johnson, Jr. (with 90,628,458 affirmative votes and no votes withheld), Seth D.
Neiman (with 90,628,508 affirmative votes and no votes withheld) and Andrew K.
Ludwick (with 90,628,508 affirmative votes and no votes withheld).
The stockholders also ratified the appointment of Arthur Andersen LLP as
the Company's independent auditors for the fiscal year ending December 31, 2000
(with 90,609,733 shares voting for, 9,906 against, 24,204 abstaining, and none
non-voting).
The stockholders also approved an amendment to the Company's Certificate of
Incorporation to increase the authorized number of shares of common stock from
200,000,000 shares to 300,000,000 shares (with 89,877,956 shares voting for,
746,147 against, 19,740 abstaining, and none non-voting).
The stockholders also approved an amendment to the Company's 1996 Stock
Plan to (a) increase the number of shares of common stock reserved for issuance
under the plan by 5,000,000 shares, and (b) revise the automatic share increase
provision of the plan so that the number of shares of common stock reserved for
issuance under the plan will automatically increase on the first day of each of
the fiscal years 2001 through 2006 in an amount equal to the lesser of (i)
5,000,000 shares, (ii) five percent (5%) of the number of shares of common stock
outstanding on the last day of the immediately preceding fiscal year or (iii)
such lesser number of shares as determined by the Board of Directors (with
76,791,980 shares voting for, 6,221,099 against, 32,571 abstaining, and
7,598,193 non-voting).
Item 5. Other Information--Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 3.1 -- Certificate of Amendment of the Amended and Restated
Certificate of Incorporation *
Exhibit 27.1 -- Financial Data Schedule
* Filed on June 21, 2000 following the stockholders' approval of the amendment
to the Certificate of Incorporation at the 2000 Annual Meeting of Stockholders
held on June 20, 2000. The underlying Certificate of Incorporation is
incorporated herein by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (Commission File No. 333-82577).
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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: August 11, 2000
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EXHIBIT INDEX
3.1 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation*
27.1 Financial Data Schedule
* Filed on June 21, 2000 following the stockholders' approval of the amendment
to the Certificate of Incorporation at the 2000 Annual Meeting of Stockholders
held on June 20, 2000. The underlying Certificate of Incorporation is
incorporated herein by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (Commission File No. 333-82577).
26
