<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 March 31, 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)
680 West Maude Avenue, Suite 3
Sunnyvale, CA 94086
(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 [_]
1
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INDEX
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<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of 3
March 31, 2000 and December 31, 1999
Condensed Consolidated Statements of Income for 4
the Three Months Ended March 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for 5
the Three Months Ended March 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Factors That May Affect Future Results 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
FOUNDRY NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $119,586 $120,378
Short-term investments....................................... 66,369 39,789
Accounts receivable, net..................................... 39,617 28,932
Inventories, net............................................. 20,438 16,743
Deferred tax assets.......................................... 6,987 5,220
Prepaid expenses and other current assets.................... 1,995 1,340
-------- --------
Total current assets....................................... 254,992 212,402
Property and equipment, net.................................. 1,770 1,096
-------- --------
$256,762 $213,498
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 20,339 $ 7,557
Income taxes payable......................................... 9,345 9,925
Accrued payroll and related benefits......................... 5,901 4,138
Accrued warranty............................................. 2,927 2,092
Other accrued liabilities.................................... 2,693 4,013
Deferred revenue............................................. 6,560 4,169
-------- --------
Total current liabilities.................................. 47,765 31,894
-------- --------
Stockholders' equity:
Common stock, $0.0001 par value
Authorized-200,000,000 shares at March 31, 2000;
Issued and outstanding-115,121,114 and 114,189,450 shares
at March 31, 2000 and December 31, 1999, respectively...... 12 11
Treasury stock............................................... (4) (4)
Additional paid-in capital................................... 198,633 191,623
Notes receivable from stockholders........................... (720) (755)
Deferred stock compensation.................................. (9,510) (11,771)
Retained earnings............................................ 20,586 2,500
-------- --------
Total stockholders' equity................................. 208,997 181,604
-------- --------
$256,762 $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
March 31,
------------------
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Revenue, net................................ $70,014 $15,425
Cost of revenue............................. 24,843 7,570
------- -------
Gross profit........................... 45,171 7,855
------- -------
Operating expenses:
Research and development............... 3,941 1,746
Sales and marketing.................... 10,093 2,717
General and administrative............. 1,818 670
Amortization of deferred stock
compensation................. 1,953 1,054
------- -------
Total operating expenses............... 17,805 6,187
------- -------
Income from operations...................... 27,366 1,668
Interest income, net........................ 2,041 24
------- -------
Income before provision for income taxes.... 29,407 1,692
Provision for income taxes.................. 11,321 423
------- -------
Net income.................................. $18,086 $ 1,269
======= =======
Basic net income per share.................. $ 0.17 $ 0.04
======= =======
Weighted average shares used in computing
basic net income per share................. 105,084 34,725
======= =======
Diluted net income per share................ $ 0.14 $ 0.01
======= =======
Weighted average shares used in computing
diluted net income per share............... 126,639 96,464
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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FOUNDRY NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
------- -------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 18,086 $ 1,269
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation............................................ 207 120
Amortization of deferred stock compensation............. 1,953 1,054
Provision for allowance for doubtful accounts........... 193 240
Provision for excess and obsolete inventories........... 646 457
Deferred tax assets..................................... (1,767) --
Change in operating assets and liabilities:
Accounts receivable.................................... (10,972) (5,031)
Inventories............................................ (4,247) (2,477)
Prepaid expenses and other current assets.............. (655) (150)
Accounts payable....................................... 12,782 (433)
Accrued payroll and related benefits................... 1,763 79
Accrued warranty....................................... 835 91
Income taxes payable................................... (580) 423
Other accrued liabilities.............................. (1,320) 657
Deferred revenue....................................... 2,391 276
-------- -------
Net cash provided by (used in) operating
activities........................................ 19,315 (3,425)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (881) (67)
Net purchases of short-term investments.................... (26,580) --
-------- -------
Net cash used in investing activities.............. (27,461) (67)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit.......................... -- 2,000
Principal payments on capital lease obligations............ -- (43)
Proceeds from issuance of common stock, including
income tax benefit....................................... 7,418 13
Repurchase of common stock................................. (99) --
Repayment of note receivable............................... 35 --
-------- -------
Net cash provided by financing activities.......... 7,354 1,970
-------- -------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (792) (1,522)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD...................................................... 120,378 4,567
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $119,586 $ 3,045
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three months ended
March 31, 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. Foundry believes the disclosures included in the
unaudited condensed consolidated financial statements when read in conjunction
with the financial statements and the notes thereto included in Foundry's Annual
Report on Form 10-K dated March 20, 2000 are adequate to make the information
presented not misleading.
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 months ended March 31,
2000 are not necessarily indicative of the results that may be expected for
future quarters or 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.
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 materially affect the amounts reported in the consolidated
financial statements. Actual results could differ materially from those
estimates.
Stock Splits
In July 1999, Foundry's board of directors approved a three for two
stock split of its outstanding common and preferred stock. In December 1999,
Foundry's board of directors approved a two for one stock split of its
outstanding common stock in the form of a stock dividend which became
effective January 10, 2000. All share and per share information included in
these financial statements have been retroactively adjusted to reflect these
stock splits.
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 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 March 31, 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>
March 31, 2000
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Money market funds ........................ $ 47,056 $ -- $ -- $ 47,056
Commercial paper .......................... 59,734 -- -- 59,734
Government securities ..................... 52,072 -- (4) 52,068
Corporate debt securities ................. 23,407 -- (27) 23,380
-------- ----------- ---- --------
$182,269 $ -- $(31) $182,238
======== =========== ==== ========
Included in cash and cash equivalents ..... $115,900 $ -- $ -- $114,900
Included in short-term investments ........ 66,369 -- (31) 66,338
-------- ----------- ---- --------
$182,269 $ -- $(31) $182,238
======== =========== ==== ========
<CAPTION>
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>
<CAPTION>
March 31, December 31,
2000 1999
------- -------
<S> <C> <C>
Purchased parts................. $ 7,421 $12,176
Work-in-process................. 11,179 2,700
Finished goods.................. 1,838 1,867
------- -------
$20,438 $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 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 Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock issued
or granted for nominal consideration prior to the anticipated effective date of
the initial public offering must be
7
<PAGE>
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
month periods ended March 31, 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 Ended
March 31,
----------------------
2000 1999
-------- --------
(in thousands, except
per share data)
<S> <C> <C>
Net income $ 18,086 $1,269
-------- --------
Basic:
Weighted average shares of common stock outstanding............. 114,580 55,981
Less: Weighted average shares subject to repurchase............. (9,496) (21,256)
-------- --------
Weighted average shares used in computing basic net income
per common share............................................... 105,084 34,725
======== ========
Basic net income per common share.................................. $ 0.17 $ 0.04
======== ========
Diluted:
Weighted average shares of common stock outstanding.............. 114,580 55,981
Add: Weighted average dilutive potential common stock............ 12,059 40,483
======== ========
Weighted average shares used in computing diluted net income per
common share.................................................... 126,639 96,464
======== ========
Diluted net income per common share................................ $ 0.14 $ 0.01
======== ========
</TABLE>
8
<PAGE>
Business Segments
Foundry is organized and operates as one operating segment, the design,
development, manufacturing and marketing of high performance Gigabit Ethernet
switches, switching routers, server load balancing and transparent caching
switches.
For the three months ended March 31, 2000, no customers individually
accounted for greater than 10% of our net revenue. In the past, a limited
number of customers and resellers had accounted for a significant portion of
Foundry's revenue.
Foundry sells to various countries in North and South America, Europe,
Asia, and Australia. For the three months ended March 31, 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 Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). SAB 101 summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. Foundry believes that its current revenue
recognition principles comply with SAB 101.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25" (Interpretation No. 44).
Interpretation No. 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 Interpretation No. 44
will have a material impact on our financial position or the results of our
operations.
3. COMMON STOCK
------------
In January 2000, the number of shares of common stock reserved for issuance
under Foundry's 1996 Stock Plan increased from 42,810,000 to 46,235,683 shares
in accordance with the automatic annual share increase provision stated in the
1996 Stock Plan. Also in January 2000, the number of shares of common stock
reserved for issuance under Foundry's 1999 Employee Stock Purchase Plan (the
"Purchase Plan") increased from 1,500,000 to 3,000,000 shares in accordance with
the automatic annual share increase provision stated in the Purchase Plan. On
January 31, 2000 Foundry purchased 131,212 shares of common stock on behalf of
employees under the Purchase Plan.
9
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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--Risk 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). From our inception in May 1996
through April 1997, we were engaged primarily in research and development
activities and did not generate any revenue. A substantial portion of our
operating expenses during this period was related to the design and development
of our custom ASICs, software development and testing prototype designs. We
commenced commercial shipments of our FastIron workgroup Layer 2 switch in May
1997, the initial product released in our family of stackable products. We
shipped NetIron, our first generation Layer 3 switch, in June 1997. During the
second quarter of 1998, we shipped the first products in our Layer 4-7
ServerIron family. We shipped BigIron, our second generation of midsize and
large-scale chassis-based products, in the third quarter of 1998. Since the
first quarter of 1998, our revenue has increased every quarter, and we have been
profitable in each quarter since the first quarter of fiscal 1999, although we
cannot assure you that these results will be indicative of future performance.
We derive our revenue substantially from sales of our stackable and
chassis-based products, including fees for customer support services related to
our products. We market and sell our products primarily through a direct sales
and marketing organization and, to a lesser extent, through resellers and
through our OEM relationship with Hewlett-Packard. We have sales representatives
in the United States, Singapore, Italy, Canada, France, Sweden, China,
Netherlands, Germany, Australia, Taiwan and the United Kingdom. We have made
significant investments to expand our international operations and expect
international revenue to increase as a percentage of total revenue. Currently, 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.
We rely on two third-party manufacturing vendors that produce different
assemblies for our products. Prior to the first quarter of 1999, we performed
final assembly, testing, quality assurance, manufacturing, engineering,
documentation control and repairs of our products at our Sunnyvale facility. In
1999, we transitioned assembly and testing functions from our Sunnyvale facility
to our manufacturing partners. We 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, 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
$1.1 million and $2.0 million for the three month
10
<PAGE>
periods ended March 31, 1999 and 2000, respectively. At March 31, 2000, we had
approximately $9.5 million remaining to be amortized over the corresponding
vesting period of each respective option, generally four years. The amortization
expense relates to options granted to employees and directors.
Results of Operations
The following table sets forth selected items from our statement of
operations as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Revenue, net.................................. 100.0% 100.0%
Cost of revenue............................... 35.5 49.1
----- -----
Gross profit............................... 64.5 50.9
----- -----
Operating expenses:
Research and development..................... 5.6 11.3
Sales and marketing.......................... 14.4 17.6
General and administrative................... 2.6 4.4
Amortization of deferred stock compensation.. 2.8 6.8
----- -----
Total operating expenses.................... 25.4 40.1
----- -----
Income from operations........................ 39.1 10.8
Interest income, net.......................... 2.9 0.2
----- -----
Income before provision for income taxes...... 42.0 11.0
Provision for income taxes.................... 16.2 2.8
----- -----
Net income.................................... 25.8% 8.2%
===== =====
</TABLE>
Net revenue. Net revenue increased 355% from $15.4 million for first
quarter 1999 to $70.0 million for first quarter 2000. The increase in revenue
was primarily due to the market's growing acceptance of Foundry's Gigabit
Ethernet technology and our increased sales and marketing efforts. We do not
believe that the historical growth rates of revenue are indicative of future
results.
For the three months ended March 31, 2000, no customers accounted for
greater than 10% of our net revenue. Sales to customers outside of the United
States accounted for approximately 19% of our net revenue. During the first
quarter, our customer base expanded from 1500 to 1800 customers worldwide.
Cost of revenue. Cost of revenue consists primarily of material, labor,
overhead and warranty costs. Cost of revenue increased from $7.6 million in
first quarter 1999 to $24.8 million in first quarter 2000. The increase was
primarily due to the related increase in net revenue. As a percentage of net
revenue, cost of revenue decreased from 49% for first quarter 1999 to 36% for
first quarter 2000. The decrease as a percentage of revenue is primarily due to
a change in the mix of products sold, production efficiencies and reductions in
material and component costs.
Gross profit. Gross profit increased from $7.9 million for first quarter 1999
to $45.2 million for first quarter 2000. As a percentage of revenue, gross
profit increased from 51% for first quarter 1999 to 65% for first quarter 2000.
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 $1.7 million for
first quarter 1999 to $3.9 million for first quarter 2000. The increase was due
to the hiring of additional engineering personnel and the development of our new
product offerings of next generation routers and switches. 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.
11
<PAGE>
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 $2.7 million for first quarter 1999 to $10.1 million for first
quarter 2000. The increase was primarily due to the hiring of additional sales
and marketing personnel, increased sales commissions expense as a result of
significantly higher revenue and increased advertising and marketing efforts. We
expect these expenses to increase significantly in absolute dollars as we
continue to build our field sales and support organizations and expand sales and
marketing activities in the future.
General and administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance and
administrative personnel, facilities expenses and other general corporate
expenses. General and administrative expenses increased from $670,000 for first
quarter 1999 to $1.8 million for first quarter 2000. The increase was due to the
addition of personnel necessary to support the increase in 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. 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 borrowings under our revolving line of
credit and capital lease obligations. Our revolving line of credit expired on
February 18, 2000 and we had no capital lease obligations as of December 31,
1999 and March 31, 2000. Interest income increased from $24,000 for first
quarter 1999 to $2.0 million for first quarter 2000 due to significantly higher
cash and short-term investment balances in first quarter 2000. We received net
proceeds of approximately $131.8 million upon the closing of our initial public
offering on October 1, 1999.
Income taxes. We have recorded income tax expense for first quarter 2000 of
$11.3 million. This reflects an effective tax rate of 38.7%, based upon the
estimated annualized tax rate. The effective tax rate for first quarter 1999
was 25% primarily due to the application of net operating loss carryforwards.
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 "Factors That
May Affect Future Results--We may not meet quarterly financial expectations,
which could cause our stock price to decline" for a discussion of the risk of
fluctuations in operating results.
Liquidity and Capital Resources
At March 31, 2000 Foundry had cash and cash equivalents and short-term
investments totaling $186.0 million. Cash equivalents consisted of commercial
paper and cash deposited in money market accounts with original maturies 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.
Cash provided by operating activities was $19.3 million for first quarter
2000 due to significantly higher net income for the quarter, increased purchases
of inventories, increased accounts receivable offset by a reduction in accounts
payable. During the first quarter 1999, we utilized cash of $3.4 million to fund
our growth in operations.
Cash utilized in investing activities was $27.5 million for first quarter
2000 and $67,000 for the same quarter in 1999. The cash utilized in first
quarter 2000 primarily represents net purchases of short-term investments and,
to a lesser extent, purchases of computers and electronic test equipment.
Financing activities provided $7.4 million in cash for first quarter 2000,
consisting primarily of proceeds from the exercise of stock options and the
income tax benefit associated with disqualifying dispositions on stock option
exercises.
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Financing activities provided $2.0 million in cash for first quarter
1999, consisting primarily of proceeds from the bank line of credit.
As of March 31, 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 March 31,
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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We may not be able to maintain profitability in the future.
We incurred net losses from inception through December 31, 1998. We
generated net income of $22.9 million for the year ended December 31, 1999 and
$18.1 million for the three months ended March 31, 2000. As of March 31, 2000,
we had retained earnings of $20.6 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.
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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 3Com and Nortel
Networks, as well as other smaller public and private companies. Many of our
current and potential competitors have longer operating histories and
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and larger installed customer
bases than we do. Additionally, we may face competition from unknown companies
and emerging technologies that may offer new LAN, MAN and LAN/WAN solutions to
enterprises and Internet service providers.
In order to remain competitive, we must, among other things, invest
significant resources in developing new products with superior performance at
lower prices than our competitors. We must also enhance our current products and
maintain customer satisfaction. If we fail to do so, our products may not
compete favorably with those of our competitors and our revenue and
profitability could suffer.
Our ability to increase our revenue depends on expanding our North American
direct sales operation and reseller distribution channels and continuing to
provide excellent customer support.
Our inability to effectively expand, train and retain our domestic sales
and support staff or establish our indirect distribution channels could harm our
ability to grow and increase revenue. Our expansion of our direct sales
operation may not be successfully completed and the cost of our expansion may
exceed the revenue generated. In addition, we have recently increased our sales
force in advance of sales, and if this increase does not result in an increase
in sales, our business may suffer.
If we fail to develop relationships with significant resellers, or if these
resellers are not successful in their sales efforts, sales of our products may
decrease and our operating results would suffer.
We need to increase our customer service and support staff to support new
and existing customers and resellers. The design and installation of networking
products can be complex and our customers, particularly our 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.
If we fail to introduce new products with superior performance in a timely
manner, our ability to sustain and increase our revenue could suffer.
The current life cycle of our products is typically 18 to 24 months. To
remain competitive, we need to introduce new products in a timely manner that
offer substantially greater performance and support a greater number of users
per device, all at lower price points. We have experienced, and may in the
future experience, delays in developing and releasing new products and product
enhancements. This has led to, and may in the future lead to, delayed sales,
increased expenses and lower quarterly revenue than anticipated. During the
development of our products, we have also experienced delays in the prototyping
of our ASICs, which in turn has led to delays in product introductions. In
addition, when we announce new products or product enhancements that have the
potential to replace or shorten the life cycle of our existing products,
customers may defer purchasing our existing products. This could harm our
operating results by decreasing sales, increasing our inventory levels of older
products and exposing us to greater risk of product obsolescence.
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.
In the past, a limited number of customers and resellers accounted for a
significant portion of our revenue. In the first quarter of 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.
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:
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. our reseller agreements generally do not require minimum purchases;
. our customers can stop purchasing and our resellers can stop marketing
our products at any time;
. our reseller agreements generally are not exclusive and are for one year
terms, with no obligation of the resellers to renew the agreements; and
. our reseller agreements provide for discounts based on expected or
actual volumes of products purchased or resold by the reseller in a
given period.
Because our expenses are based on our revenue forecasts, a substantial
reduction or delay in sales of our products to, or unexpected returns from
customers and resellers, or the loss of any significant customer or reseller
could harm our business. Although our largest customers may vary from period-to-
period, we anticipate that our operating results for any given period will
continue to depend to a significant extent on large orders from a small number
of customers.
Our success depends upon sales to Internet Service Providers, whose
unpredictable demands, requirements and business models subject us to potential
adverse revenue fluctuations.
We have 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 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.
Hewlett-Packard is a major customer and our sole OEM, and the termination of our
relationship with Hewlett-Packard could harm our business.
Although Hewlett-Packard, currently our sole OEM, accounted for less then
10% of our revenue in first quarter 2000, it has been one of our top five
customers since fiscal 1999. In addition to providing revenue through sales of
our products to Hewlett-Packard, we believe that this relationship is important
to facilitate broad market acceptance of our products and enhance our sales,
marketing and distribution capabilities. Therefore, in addition to directly
affecting our revenue, the cancellation of our agreement with Hewlett-Packard
could harm our ability to market and sell our products to potential customers.
In addition, if we were to default under conditions specified in the
agreement, Hewlett-Packard could use our source code to develop and manufacture
competing products. This could harm our performance and ability to compete.
The agreement also creates the potential that we and Hewlett-Packard may
compete for sales to the same customer. If this situation occurs, it could harm
our relationship with Hewlett-Packard and also harm our business.
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We expect the average selling prices of our products to decrease which may
reduce gross margins or revenue.
Our industry has experienced rapid erosion of average product selling
prices due to a number of factors, particularly competitive pressures and rapid
technological change. We may experience substantial period-to-period
fluctuations in future operating results due to the erosion of our average
selling prices. We also anticipate that the average selling prices of our
products will decrease in response to competitive pressures, increased sales
discounts, new product introductions by our competitors or other factors.
If we are unable to hire additional qualified personnel as necessary or if we
lose key personnel, we may not be able to successfully manage our business or
achieve our objectives.
We believe our future success will depend in large part upon our ability to
identify, attract and retain highly skilled managerial, engineering, sales and
marketing, finance and manufacturing personnel. Competition for these personnel
is intense, especially in the San Francisco Bay Area, and we have had difficulty
hiring employees in the timeframe we desire, particularly engineers. We may not
succeed in identifying, attracting and retaining personnel. The loss of the
services of any of our key personnel, the inability to identify, attract or
retain qualified personnel in the future or delays in hiring required personnel,
particularly engineers and sales personnel, could make it difficult for us to
manage our business and meet key objectives, such as timely product
introductions. In addition, companies in the networking industry whose employees
accept positions with competitors frequently claim that competitors have engaged
in unfair hiring practices. We have received one claim like this from another
company and we may receive additional claims in the future. We could incur
substantial costs in defending ourselves against any such claims, regardless of
the merits of such claims.
Our success also depends to a significant degree upon the continued
contributions of our key management, engineering, sales and marketing, finance
and manufacturing personnel, many of whom would be difficult to replace. In
particular, we believe that our future success depends on Bobby R. Johnson, Jr.,
President, Chief Executive Officer and Chairman of the Board, and H. Earl
Ferguson, Vice President, Hardware Engineering. We do not have employment
contracts or key person life insurance covering any of our personnel.
Our ability to increase our international sales is subject to a number of risks
we do not control.
Our success will depend, in part, on increasing international sales and
expanding our international operations. Our international sales primarily depend
on our resellers, including Boreal and Mitech in Europe, Mitsui in Japan, 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;
. 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.
During the first quarter 2000, Foundry established formal subsidiaries in
France, Canada, Netherlands, Germany, United Kingdom and Singapore. We also have
sales offices in Taiwan, China, Sweden, Australia 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.
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To the extent that Foundry is unable to do so in a timely manner, Foundry's
growth in international sales, if any, will be limited and our business, results
of operations and financial condition could be materially adversely affected.
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.
In January 1999, the new "Euro" currency was introduced in European
countries that are part of the European Monetary Union ("EMU"). During 2002,
all EMU countries are expected to completely replace their national currencies
with the Euro. Because a significant amount of uncertainty exists as to the
effect the Euro will have on the marketplace and because all of the final rules
and regulations have not yet been defined and finalized by the European
Commission regarding the Euro currency, we cannot determine the effect this will
have on our business.
Our reliance on single or limited sources for key components may inhibit our
ability to meet customer demand.
We currently purchase several key components used in our products from
single or limited sources and depend on supply from these sources to meet our
needs. Our principal suppliers of key components include Celestica, 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.
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
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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 found
after commencement of commercial shipments. Any defects or errors in our
products discovered in the future or failures of our customers' networks,
whether caused by our products or another vendors' products could result in:
. negative customer reactions;
. product liability claims;
. negative publicity regarding us and our products;
. delays in or loss of market acceptance of our products;
. product returns;
. lost sales; and
. unexpected expenses to remedy errors.
Continued rapid growth will strain our operations and will require us to incur
costs to upgrade our infrastructure.
We have experienced rapid growth which has placed, and continues to place,
a significant strain on our resources. 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.
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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.
Failure to comply with domestic, foreign or international regulations could
prevent us from selling our products.
In the United States, our products must comply with various regulations and
standards defined by the Federal Communications Commission and Underwriters
Laboratories. Internationally, products that we develop may be required to
comply with standards established by telecommunications authorities in various
countries as well as with recommendations of the International Telecommunication
Union. If we do not comply with existing or evolving standards and regulations
or if we fail to obtain timely domestic or foreign regulatory approvals or
certificates, we would not be able to sell our products where these standards or
regulations apply, which may prevent us from sustaining our revenue or
maintaining profitability.
We may engage in future acquisitions that could result in the dilution of our
stockholders, cause us to incur substantial expenses and harm our business if we
cannot successfully integrate the acquired business, products, technologies or
personnel.
As part of our business strategy, we may review acquisition prospects that
would complement our existing business or enhance our technological
capabilities. Future acquisitions by us could result in large and immediate
write-offs, the incurrence of debt and contingent liabilities or amortization
expenses related to goodwill and other intangible assets, any of which could
negatively affect our results of operations. Furthermore, acquisitions involve
numerous risks and uncertainties, including:
. difficulties in the assimilation of products, operations, personnel and
technologies of the acquired companies;
. diversion of management's attention from other business concerns;
. risks of entering geographic and business markets in which we have no or
limited prior experience; and
. potential loss of key employees of acquired organizations.
Although we do not currently have any agreements or plans with respect to
any material acquisitions, we may make acquisitions of complementary businesses,
products or technologies in the future. We may not be able to successfully
integrate any businesses, products, technologies or personnel that might be
acquired in the future, and our failure to do so could harm our business.
We may need additional capital to fund our future operations which may not be
available to us on favorable terms when required, or at all, and could cause our
stock price to decline.
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 disrupt our business and harm our financial condition.
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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. 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.
In July 1999, we received a letter from Resonate, Inc. alleging that our
ServerIron products infringe one of its patents. We have and intend to continue
to contest this claim vigorously. Although we have had no communication from
Resonate on this issue since December 1999, these kinds of disputes are subject
to inherent uncertainties and, therefore, we cannot assure you that we will
prevail in our objection to this claim, nor can we assure you that this dispute
will not result in litigation or that an adverse result or judgment will not
adversely affect our financial condition.
From time to time, other third parties, including leading companies, have
asserted against others and may assert against us exclusive patent, copyright,
trademark and other intellectual property rights to technologies and related
standards that are important to us. Third parties may assert claims or initiate
litigation against us or our manufacturers, suppliers or customers alleging
infringement of their proprietary rights with respect to our existing or future
products. Any of these claims, with or without merit, could be time-consuming,
result in costly litigation and diversion of technical and management personnel,
or require us to develop non-infringing technology or enter into royalty or
license agreements. These royalty or license agreements, if required, may not be
available on acceptable terms, if at all. If there is a successful claim of
infringement or if we fail to develop non-infringing technology or license the
proprietary rights on a timely basis, our business could be harmed.
Our stock price 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.
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Our executive officers, directors and entities affiliated with them
beneficially own approximately 45% of our outstanding common stock as of March
31, 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.
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.
Future sales of our common stock may depress our stock price.
Of the 115,121,114 shares outstanding at March 31, 2000, 106,713,036 shares
are freely tradable in the public market. The 8,408,078 remaining outstanding
shares of our common stock will become available for sale in the future,
subject, in some cases, to the expiration of one-year holding periods and/or the
lapse of our repurchase option on unvested shares of common stock held by
employees. Sales of a substantial number of shares of common stock in the public
market after the expiration of the holding periods or the repurchase option
could cause the market price of our common stock to decline.
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 do expect to effect some transactions in
foreign currencies in the next 12 months, we do not anticipate that foreign
exchange gains and losses will be significant. We have not engaged in foreign
currency hedging activities to date.
21
<PAGE>
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 have used
approximately $76.8 million of those 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. We
expect to use the remaining proceeds of the offering for similar purposes. In
addition, we may use a portion of the net proceeds to acquire or invest in
complimentary businesses, technologies, product lines or products. However,
specific amounts for any future use of proceeds have not yet been determined and
we have no current plans, agreements or commitments with respect to any such
acquisition, and we are not currently engaged in any negotiations with respect
to any such transaction. Pending these uses, we intend to invest the net
proceeds in short-term, interest-bearing, investment grade securities with
original maturities of less than one year.
Item 3. Defaults Upon Senior Securities. - Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - Not applicable.
Item 6. Exhibits and Reports on Form 10-Q.
Exhibit 27.1 - Financial Data Schedule
22
<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: May 10, 2000
23
<PAGE>
EXHIBIT INDEX
-------------
27.1 Financial Data Schedule
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER OF 2000 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 119,586
<SECURITIES> 66,369
<RECEIVABLES> 41,164
<ALLOWANCES> 1,547
<INVENTORY> 20,438
<CURRENT-ASSETS> 254,992
<PP&E> 3,609
<DEPRECIATION> 1,839
<TOTAL-ASSETS> 256,762
<CURRENT-LIABILITIES> 47,765
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 208,985
<TOTAL-LIABILITY-AND-EQUITY> 256,762
<SALES> 70,014
<TOTAL-REVENUES> 70,014
<CGS> 24,843
<TOTAL-COSTS> 24,843
<OTHER-EXPENSES> 17,805
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,041)
<INCOME-PRETAX> 29,407
<INCOME-TAX> 11,321
<INCOME-CONTINUING> 18,086
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,086
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.14
</TABLE>
