Item 1. Business
Overview
Foundry Networks, founded in 1996, is a leading provider of next-generation networking products. We design, develop, manufacture and market solutions to meet the needs of high-performance network infrastructures for Layer 2-7 switching and routing and wired and wireless local area networks (LANs), metropolitan area networks (MANs), wide area networks (WANs), and the web. We sell a wide variety of both fixed configuration switches, typically referred to as stackables, and modular platforms, referred to as chassis. Our combined product breadth allows us to offer global end-to-end solutions within and throughout a customer’s networking infrastructure, regardless of the geographically dispersed nature of the entire organization. Our products can be found from the wireless access points and wiring closets connecting the desktops together within an enterprise, to the mission critical LAN backbone and data center. We provide robust and high-performance routing solutions from the Internet core to the edge of the Internet data centers and a customer’s network of web and application servers. Our Metro routers deliver the capabilities and performance needed to provide efficient and reliable core routing services to Internet data centers around the world. Our Layer 2 and Layer 3 switches provide the intelligence, speed and cost effectiveness required to support the increasing use of bandwidth-intensive and Internet-based applications. Our high-performance Internet traffic management systems with network intelligence capabilities allow enterprises and service providers to build highly available network infrastructures that direct traffic flow efficiently.
Our networking products have been deployed in key enterprise markets that include automotive, energy, retail, healthcare, banking, trading, insurance, aerospace, government agencies, technology, motion pictures, video and animation, transportation, e-commerce, and universities. Our service provider markets include Metro service providers, Internet service providers, web hosting and Internet data centers, application service providers, and Internet exchanges. For enterprises, we provide a complete end-to-end solution with our FastIron®, FastIron Edge®, IronPointTM, BigIron®, ServerIron®, and EdgeIronTM product lines. Our enterprise portfolio of products, combined with our network management and security, meets the needs for wireless access, wiring closet, data center, and campus solutions. For service providers, we offer our high-performance BigIron switches, NetIron® Metro routers, and ServerIron web switches. Our switching and routing products can be managed with our IronView® Network Manager products. Our products support a wide array of interfaces such as wireless, 10/100 Ethernet, 1 Gigabit Ethernet (copper and fiber), 10 Gigabit Ethernet, Packet over SONET and ATM so that our customers can leverage their existing infrastructures. We sell our products through a direct sales force, resellers, and OEM partners. By providing high levels of performance and intelligence capabilities at competitive price points, we provide comprehensive solutions to address the growing enterprise, government, and service provider markets.
Next Generation Needs
Two trends continue to drive the network infrastructure market. First, as businesses seek to accommodate network user needs, adding bandwidth alone is not an adequate solution. Due to the increased use of multiple traffic
types for many applications, enterprises and service providers have an acute need for solutions that provide network intelligence to distinguish among and prioritize network traffic based on types of traffic, content being requested, and the applications deployed. Network intelligence allows anyone supporting electronic business on the web to maintain network reliability and offer differentiated, fee-based quality of service.
Second, as the Internet has evolved, traffic crossing the WANs has shifted from primarily voice traffic to primarily data traffic. Historically, the basic technology used to move traffic within WANs has been SONET, which was primarily designed to carry voice traffic. As the majority of wide area traffic has migrated to data, service providers are looking for a technology that is better suited to handle data traffic. Gigabit Ethernet, which has emerged as the ubiquitous LAN technology, is gaining momentum as the solution for MANs. This momentum has been propelled in part by the low cost and availability of off-the-shelf Ethernet networking equipment and the large pool of qualified networking specialists that are proficient in Ethernet technology. 10 Gigabit Ethernet is a key factor in this momentum for MANs because providers can quickly build out high-speed networks. The general acceptance and large volume of Ethernet installations in LANs have, over time, led to improved performance and significantly lower prices.
As bandwidth demand increases and bandwidth-intensive applications are being made available to enterprise and private users, a new class of service provider is beginning to emerge, the Metro service provider (Metro SP). We have had significant success in providing our Ethernet solutions for MANs across the globe. Metro SPs provide the critical intermediary network between enterprises and long-haul regional networks. Using long-haul Gigabit Ethernet as the enabling technology, these service providers deliver new services such as broadband Internet access, bandwidth-on-demand and virtual LANs across the Metro and regional areas to business and private users. In this application, Gigabit Ethernet provides high-bandwidth, high-reliability, and high-density solutions that enable multi-services such as voice-over-IP and virtual private networks to be delivered over a common backbone.
Strategy
Our objective is to be a leading provider of next-generation, high-performance network solutions. We intend to achieve this objective by providing a broad suite of the most cost-effective, highest-performing network switching products. Key elements of our strategy include:
Continue to Deliver Products that Meet the Needs of the High-End Switching Segment. Our high-performance Ethernet switches have achieved both commercial success and high levels of customer satisfaction. We will continue to broaden our product offerings to meet customer business needs with a full range of networking products. We will continue to broaden our high-end enterprise and service provider switch portfolio to meet the needs for greater bandwidth, more flexible interfaces, advances in Internet networking protocols, and enhanced security. This commitment has been demonstrated by our introduction of TerathonTM ASICs, JetCoreTM ASICs, Gigabit-over-Copper, and second-generation 10 Gigabit Ethernet products. We intend to continue to offer value-added feature sets that provide for redundancy and ease of use and management of the network, yielding a higher return on investment and with a lower total cost of ownership.
We have successfully introduced products that implement solutions in five strategic areas, and we intend to continue to enhance our product portfolio in these areas:
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10 Gigabit Ethernet-Our 10GbE solutions have achieved commercial success in the marketplace and we remain a leader in 10 Gigabit Ethernet. Our 10GbE customers include healthcare, government, research, university, and media organizations. As the boundaries of LANs, MANs and WANs continue to blur, companies will want to unify networks at a lower cost, with fewer management and operational requirements. 10GbE is the logical evolution of Ethernet that delivers the reliability of optical networks. 10GigE addresses the key concerns facing businesses today-the continued need for additional bandwidth while building a reliable network. In 2003, we announced and delivered our Terathon class of products that provide exceptional 10GbE port density. We also delivered 1GbE modules in 2003 to meet the demands of our customers for connectivity options. Our first two products with the new Terabit-capacity switching fabric were the BigIron MG8 enterprise switch and the NetIron 40G Metro router. We intend to sustain our leadership in 10GbE with additional products and modules.
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Wireless Networking-We introduced our first wireless product offering, the IronPoint 200 wireless access point, in conjunction with the ratification of key industry standards in the third quarter of 2003. Our wireless
product offering delivers strong security, seamless mobility, enhanced user policies, centralized management, ease of use, and seamless integration with our wired networks. The IronPoint 200 offers enterprises maximum flexibility with optimal controls for increased productivity and secure deployments. Effective and efficient management of networking resources is key to cost containment and reliability. Therefore, we also developed an IronPoint edition of the IronView Network Manager system. This software provides centralized wireless access point management. Our high-performance FastIron Edge Layer 2/3 switches can be software upgraded to enable integrated wireless LAN capability. Our wireless-enabled switches will provide seamless wireless LAN support, including Layer 2/3 mobility, enhanced monitoring and reporting with sFlow, secure web guest authentication, IPsec/VPN pass-through for existing VPN support, enhanced authentication, security and user policy control, and enhanced AP management. As a result, we offer one of the most complete suites of integrated infrastructure management applications for wired and wireless networks. We intend to further develop and support new wireless networking products and upgrades.
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Voice-over-IP (VoIP)-An increasing number of enterprises are migrating to converged environments in which voice, video, and data are carried by the same network to take advantage of valuable business benefits such as reduced costs and increased productivity. A converged network needs more than just new devices such as IP telephones or IP video cameras. A converged environment needs a network foundation that provides superior performance and high availability. We deliver both the high-performance networking products in our FastIron Layer 2/3 Enterprise Switches and the tools necessary to configure and optimize a converged environment with our IronView Network Manager system. Our adherence to industry and international standards has been validated by our customers who have successfully used a wide variety of IP phones and cameras from different suppliers, including those of our competitors. In 2003, we delivered new FastIron Edge switches with power-over-Ethernet. This provides customers with the technology needed to power new devices such as IP phones, realize optimal network performance, and manage network resources. We intend to further develop and expand our networking and management offerings for converged environments so that customers will have more options for efficiencies and productivity.
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Security-As networking has become an essential part of nearly all businesses, agencies, and organizations, security has become an integral part of designing and deploying today’s networks and data centers. As networks and data centers become more complex with greater openness and interoperability, the challenge to securing them similarly increases. Threats are myriad, changing, and imposed from both external and internal sources. Responses to them can be no less dynamic. Our IronShield security encompasses network level features that we have deployed in our full range of Layer 2-7 switches, routers, and intelligent traffic management devices to implement secure networks. Our focus is on using networking devices as policy enforcement points that do not compromise performance. Since our inception, we have delivered innovative, effective, and efficient functions and features into our products to provide network security. In 2003, we published a comprehensive white paper on networking security and provided it free of charge to the public in the interest of contributing to the further development of best practices for networking security. We intend to continue our investment in security and best practices, and to build them into all of our products. We remain committed to a strategy of standard-based implementations and product offerings so that our customers will benefit from ease of use and interoperability.
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Internet Protocol version 6 (IPv6)-The U.S. federal government has joined the growing list of customers requiring IPv6 adoption. Previously, these customers were in international markets. The widespread adoption of IPv6 in the U.S. commercial sector is likely to take several years. In 2003, we delivered the NetIron 4802 stand-alone router with support for IPv6 and the existing IPv4. This device has been deployed by customers with a need to deploy dual-IPv4-IPv6 networks. We also began a phased implementation of IPv6 support in our BigIron and NetIron products. We intend to further develop and deliver IPv6 solutions including software upgrades and new management modules.
Continue to Expand our Metro Router Capabilities to Address this Growing Market and Deliver a New Level of Price/Performance. We will continue to bring new features and functionality to our Metro router platform and add to our product offering by incorporating leading-edge features. These new enhancements include features such as MPLS (Multi-Protocol Label Switching), and VPLS (Virtual Private LAN Services).
We provide a wide range of features for both MPLS and Layer 2 Metro architectures with industry-leading scalability and reliability. We were the first to deliver Layer 3 10 Gigabit Ethernet and we intend to pursue further innovation that will expand our leadership.
Continue to Leverage our Product Capabilities to Address Emerging Markets. This includes metropolitan area networking (MAN), Gigabit Ethernet storage area networking (SAN), voice-over-IP (VoIP), and content distribution networks. As noted above, the key advantages of Gigabit Ethernet, such as price, simplicity, ease of use, will allow this technology to migrate into many new adjacent markets over time. Our strategy is to position ourself to benefit from acceptance of Gigabit Ethernet in such environments as MAN, SAN, VoIP, and content distribution. To accomplish this, we have added the necessary features and enhancements to our products to provide an ideal solution for these customers. We work with select partners when additional non-networking hardware or software is needed for solutions such as VoIP and SAN. This permits us to remain entirely focused on network infrastructure and provide complete solutions to our customers.
Continue our Market Leadership Position in Internet Traffic Management Systems. We believe demand for Internet traffic management intelligence capabilities will be a very important growth area for web-based businesses and Internet service providers and an area of increasing importance to traditional enterprise networks. We intend to maintain our leadership position in this market by continually improving the performance and functionality of our Internet traffic management products. Designed to provide the highest level of performance and network intelligence capabilities, our products enable web-based businesses and Internet service providers to rapidly deliver new revenue-generating applications and services to end-user customers, while providing a high degree of service reliability.
Expand Global Sales Organization. We intend to continue the global expansion of our sales organization utilizing a direct sales organization in the United States and abroad, strategic channel partners outside the United States and select original equipment manufacturers. We intend to increase our worldwide sales force and establish additional channel partner relationships to build greater worldwide sales presence.
Deliver World Class Service and Support. We intend to expand our service and support infrastructure to meet the needs of our growing customer base. Our goal is to minimize our customers’ network downtime by offering a wide range of service and support programs to meet individual customer needs, including prompt on-site hardware repair and replacement, twenty-four hour, seven days-a-week web and telephone support, parts depots in strategic global locations, implementation support, pre-sales service, system software and network management software upgrades, and technical documentation updates.
Sales and Marketing
Our sales strategy includes domestic and international field sales organizations, domestic and international resellers, OEM relationships, and marketing programs.
Domestic field sales. Our domestic field sales organization establishes and maintains direct relationships with key accounts and strategic customers. To a lesser extent, our field organization also works with resellers to assist in communicating product benefits to end-user customers and proposing networking solutions. As of December 31, 2003, our domestic sales organization consisted of 146 sales representatives and systems engineers.
Domestic resellers. Our domestic resellers include regional networking system resellers and vertical resellers who focus on specific markets, such as small Internet service providers. We provide sales and marketing assistance and training to our resellers, who in turn provide first level support to end-user customers. We intend to leverage our relationship with key resellers to penetrate select vertical markets.
International sales. Internationally, product fulfillment and first level support is provided by resellers and integrators. Our international resellers include Mitsui & Co., Inc., in Japan, Samsung Electronics in Korea, Shanghai Gentek Corp. Ltd. and Global Technology Integrator Ltd. in China, Spot Distribution in the United Kingdom, and Pan Dacom Networking AG and GE CompuNet in Germany. As of December 31, 2003, our international field organization consisted of 94 sales representatives and system engineers who conduct sales, marketing, and support activities. Our international sales organization establishes and maintains direct relationships with resellers, integrators and end-users. Our export sales represented 35%, 38%, and 35% of net revenues in 2003, 2002, and 2001, respectively.
OEM/Co-Branding. We have OEM/Co-Branding relationships established with Hewlett-Packard Company, Hitachi, Ltd., Lucent Technologies, Digital China Holdings Ltd. and NEC Corporation. Our OEMs market and sell our products on a private label basis through their worldwide sales forces and also purchase our products for use in their own internal networks. Our agreements with OEMs provide that the OEMs may postpone, cancel, increase or decrease any order prior to shipment without penalty.
Marketing programs. We have numerous marketing programs designed to inform existing and potential customers, the press, industry standard analyst groups, and resellers and OEMs, about the capabilities and benefits of us and our products. Our marketing efforts also support the sale and distribution of our products through our field organizations and channels. Our marketing efforts include advertising, public relations, participation in industry trade shows and conferences, public seminars and Webcasts, participation in independent third-party product tests, presentations, and our maintenance of our web site.
Customer Service and Support
Our service and support organization maintains and supports products sold by our field organization to end-users. Our service and support organization provides 24-hour assistance, including telephone, Internet and worldwide web support. Our customer service offerings also include parts depots in strategic locations globally, implementation support, and pre-sales service. Our resellers and OEMs are responsible for installation, maintenance and support services to their customers.
We provide all customers with our standard, limited one-year hardware and 90-day software warranty. We also have four levels of customer service offerings to meet specific support needs. Our Titanium service program provides the most comprehensive support and includes advance hardware replacement within four hours delivered by a trained technician for on-site support. Our Gold service program is targeted towards customers who have trained internal resources to maintain their network 24x7. Our Gold program is designed to provide all the tools needed by these trained resources to maximize the uptime of their network. Our Silver service program is tailored for customers who typically purchase spares inventory as part of their overall contingency plan. Our Bronze service program is targeted towards budget conscious customers who are looking for basic telephone and web-based support and run a 9 to 5 operation.
We have regional Centers-of-Excellence in San Jose, Boston, New York, Chicago, Denver, Herndon, Irvine, London, Hong Kong, Toronto and Tokyo. These Centers-of-Excellence include executive briefing centers and serve as major customer demonstration centers, regional technical support centers, and equipment depot centers. The Centers-of-Excellence are fully equipped to demonstrate our award-winning, high-performance product lines including NetIron Metro routers, BigIron Layer 3 switches, FastIron Enterprise switches, and ServerIron Layer 4-7 traffic management switches. They also support interoperability testing, provide hands-on training for customers, and showcase our end-to-end LAN, MAN and WAN solutions. These Centers-of-Excellence allow us to deliver superior customer service and expand service offerings to our rapidly growing worldwide installed base.
Quality Assurance
In 2003, we demonstrated our commitment to quality assurance and testing by expanding and adding dedicated quality assurance test labs and facilities. Our software quality assurance test processes have been enhanced and deepened. In particular, we have focused heavily on test automation so that testing is both comprehensive and expandable. In order to continue to provide the highest level of customer service, our internal resolution labs were expanded in 2003 to approximately twice their previous size. Because quality is a priority in all of our operating units, we have a quality council consisting of interdepartmental leaders that meet weekly to monitor quality and to drive continuous improvement. The results of our enhancements are measured by several metrics, including the number of events reported to customer support in relation to systems shipped.
Manufacturing
We operate under a modified “turn-key” process, utilizing strategic manufacturing partners that are ISO 9000 certified and have global manufacturing capabilities. We maintain control and procurement responsibility for all proprietary components. All designs, documentation, selection of approved suppliers, quality control, and configuration are performed at our facilities. Our manufacturing operations consist of quality assurance for
subassemblies and final assembly and test. Our manufacturing process also includes the configuration of hardware and software in unique combinations to meet a wide variety of individual customer requirements. We use automated testing equipment and “burn-in” procedures, as well as comprehensive inspection and testing, to ensure the quality and reliability of our products. Our approach to manufacturing provides the flexibility of outsourcing while maintaining quality control of products delivered to customers. We have selected this approach to ensure our ability to respond to rapid growth and sudden market shifts.
We currently have four manufacturing partners. Celestica, Inc., located in San Jose, California, Flash Electronics, Inc., in Fremont, California, and Proworks Inc, located in San Jose, California, assemble and test printed circuit boards. Sanmina-SCI Corp., located in San Jose, assembles and tests printed circuit boards and our backplane products. Celestica, Inc., Sanmina-SCI Corp., and Flash Electronics, Inc. have global manufacturing facilities providing full back-up capability and local content for foreign sales if required. We perform all prototype and pre-production procurement and component qualification with support from our manufacturing partners. Our agreements with our contract manufacturers allow them to procure long lead-time component inventory on our behalf based on a rolling production forecast provided by us. We are contractually obligated to purchase long lead-time component inventory procured by our contract manufacturers in accordance with our forecast, unless we give notice of order cancellation at least 90 days prior to the scheduled delivery date.
We design all ASICs, printed circuit boards and sheet metal, and work closely with semiconductor partners on future component selection and design support. All materials used in our products are subject to a full qualification cycle and controlled by use of an “approved vendor listing” that must be followed by our sources. We perform extensive testing of all of our products, including in-circuit testing of all printed circuit board assemblies, full functional testing, elevated temperature burn-in and power cycling at maximum and minimum configuration levels. Please see “Risk Factors-Our reliance on third-party manufacturing vendors to manufacture our products may cause a delay in our ability to fill orders” for a review of certain risks associated with our manufacturing operations.
We currently purchase components from several sources, including certain integrated circuits, power supplies and long-range optics, which we believe are readily-available from other suppliers. Our proprietary ASICs, which provide key functionality in our products, are fabricated in foundries operated by, or subcontracted by, Texas Instruments Inc., Fujitsu Ltd., and Broadcom Corp. An alternative supply for these ASICs would require an extensive development period. Please see “Risk Factors-We purchase several key components for our products from several sources; if these components are not available, our revenues may be harmed.”
Backlog
Our backlog represents orders for which a purchase order has been received for product to be shipped generally within 90 days to customers with approved credit status. Orders are subject to cancellation, rescheduling or product specification changes by the customers. Although we believe that our backlog is firm, orders may be cancelled by the customer without penalty. For this reason, we believe our backlog at any given date is not a reliable indicator of future revenues.
Research and Development
Our future success depends on our ability to enhance existing products and develop new products that incorporate the latest technological developments. We work with customers and prospects, as well as partners and industry research organizations, to identify and implement new solutions that meet the current and future needs of businesses. Whenever possible, our products are based on industry standards to ensure interoperability. We intend to continue to support emerging industry standards integral to our product strategy.
Our research and development operations involve development activities that utilize both custom and commercial silicon, which enables us to quickly bring new products and features to market. We are currently developing new switching solutions that provide new levels of performance, scalability and functionality We had 159 engineers at the end of 2003, compared to 153 engineers at the end of 2002 and 135 engineers in 2001. Our research and development expenses were $40.5 million in 2003, $34.9 million in 2002 and $33.9 million in 2001, or 10%, 12% and 11% of net revenues, respectively.
Competition
We believe we perform favorably with respect to key competitive factors that affect our markets, including technical expertise, pricing, new product innovation, product features, service and support, brand awareness and distribution. Our products have won numerous awards. We intend to remain competitive through ongoing investment in research and development efforts to enhance existing products and introduce new products. We will seek to expand our market presence through aggressive marketing and sales efforts and through the continued implementation of cost reduction efforts. However, our market is still evolving and we may not be able to compete successfully against current and future competitors.
The market in which we operate is highly competitive. Cisco Systems, Inc. (“Cisco”) maintains a dominant position in our market and several of its products compete directly with ours. Cisco’s substantial resources and market dominance have enabled it to reduce prices on its products within a short period of time following introduction, which reduces the profitability of its competitors. Purchasers of networking solutions may choose Cisco’s products because of its longer operating history, broader product line and strong reputation in the networking market. In addition, Cisco may have developed or could in the future develop new technologies that directly compete with our products or render our products obsolete. We believe our technology and the purpose-built features of our products make them unique and allow us to compete effectively against Cisco and other competitors. Although we believe that we are currently among the top providers of networking solutions, there can be no assurance that we will be able to compete successfully against Cisco, currently the market leader in network infrastructure solutions.
In addition to Cisco, we compete against other companies, such as Extreme Networks, Inc., Juniper Networks, Inc., Nortel Networks Ltd., Enterasys Networks Inc., 3Com Corp., Huawei Technologies Co., Ltd., and Alcatel. Some of our current and potential competitors have longer operating histories and substantially greater financial, technical, sales, marketing and other resources, as well as greater name recognition and larger installed customer bases than we do. Furthermore, companies that do not offer a directly competitive product to our products could develop new products or enter into agreements with other networking companies to provide a product that competes with our products or provides a more complete solution than we can offer. Additionally, we may face competition from unknown companies and emerging technologies that may offer new LAN, MAN, and WAN solutions. Please see “Risk Factors-Intense competition in the market for network solutions could prevent us from maintaining or increasing revenue and sustaining profitability. ”
Intellectual Property
Our success and ability to compete are heavily dependent on our internally developed technology and know-how. Our proprietary technology includes our ASICs, our IronCore and JetCore hardware architecture, our IronWare software, our IronView network management software, and certain mechanical designs. Different variations and combinations of these proprietary technologies are implemented across our product offerings. We rely on a combination of patent, copyright, trademark and trade secret laws and contractual restrictions on disclosure to protect our intellectual property rights in these proprietary technologies.
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, imitate, 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 some foreign countries where the laws may not protect our proprietary rights as fully as in the United States.
The networking industry is increasingly characterized by the existence of a large number of patents, frequent claims of infringement, and related litigation regarding patent and other intellectual property rights. In addition, leading companies in the networking market may have extensive patent portfolios. As a result of the existence of a large number of patents and rapid rate of issuance of new patents in the networking industry, it is not economically practical for a company of our size to determine in advance whether a product or any of its components may infringe intellectual property rights claimed by others. See Item 3 “Legal Proceedings” below for pending litigation related to intellectual property matters and “Risk Factors-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.”
Employees
As of December 31, 2003, we had 588 employees, consisting of 308 in sales and marketing, 159 in engineering, 67 in manufacturing and 54 in general and administrative. None of our employees is represented by a labor union, with the exception of several foreign employees who are required by local country employment laws to have labor union representation. We have never experienced a work stoppage and believe our employee relations are good.
We are committed to our responsibility to maintain employment practices that promote affirmative action and equal opportunity in hiring, promotions, compensation and employee development without regard to race, color, religion, sex, national origin, age, disability, sexual orientation, marital status or veteran status.
Item 2.
Item 2. Properties
Our headquarters for corporate administration, research and development, sales and marketing, and manufacturing occupy approximately 110,000 square feet of space in San Jose, California. We also lease space in various other geographic locations, domestically and internationally, for sales and service personnel. In addition to smaller sales offices, we have regional offices in the following locations:
We believe our existing facilities are adequate to meet current requirements, and that suitable additional or substitute space will be available as needed to accommodate any further physical expansion of corporate operations and for any additional sales offices. Our principal web server equipment and operations are maintained in our corporate headquarters in San Jose, California.
Item 3.
Item 3. Legal Proceedings
In December 2000, several similar shareholder class action lawsuits were filed against us and certain of our officers in the United States District Court for the Northern District of California, following our announcement of our anticipated financial results for the fourth quarter ended December 31, 2000. The lawsuits were subsequently consolidated as a class action by the District Court, under the caption In re Foundry Networks, Inc. Securities Litigation, Master File No. C-00-4823-MMC, lead plaintiffs were selected and filed a consolidated amended complaint which alleged violations of federal securities laws and purported to seek damages on behalf of a class of shareholders who purchased our common stock during the period from September 7, 2000 to December 19, 2000. We then brought four successful motions to dismiss the complaint. Although the District Court granted each of the four dismissal motions, it also provided plaintiffs leave to amend the complaint. On August 29, 2003, following the dismissal of the four amended complaints, the District Court granted our motion to dismiss the case with prejudice and without leave to amend and, on September 2, 2003, entered judgment in our favor, dismissing the plaintiff’s fifth amended complaint. On September 29, 2003, plaintiff filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit (“Court of Appeals”). On January 15, 2004, the plaintiff/appellants filed their opening brief with the Court of Appeals. We have reviewed the appeal and are in the process of preparing our response. We believe the District Court’s judgment validates our conviction that the lawsuit is without merit and we will defend the District Court’s judgment vigorously.
A class action lawsuit was filed on November 27, 2001 in the United States District Court for the Southern District of New York on behalf of purchasers of our common stock alleging violations of federal securities laws. The case was designated as In re Foundry Networks, Inc. Initial Public Offering Securities Litigation, No. 01-CV-10640 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS) (S.D.N.Y.). The case is brought purportedly on behalf of all persons who purchased our common stock from September 27, 1999 through December 6, 2000. The operative amended complaint names as defendants us and
three of our officers (the “Foundry Defendants”), including our Chief Executive Officer and Chief Financial Officer; and investment banking firms that served as underwriters for our initial public offering in September 1999. The amended complaint alleged violations of Sections 11 and 15 of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the initial public offering (“IPO”) failed to disclose that (i) the underwriters agreed to allow certain customers to purchase shares in the IPO in exchange for excess commissions to be paid to the underwriters, and (ii) the underwriters arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also appears to allege that false or misleading analyst reports were issued. Similar allegations were made in lawsuits challenging over 300 other initial public offerings conducted in 1999 and 2000. The cases were consolidated for pretrial purposes. On February 19, 2003, the Court ruled on all defendants’ motions to dismiss. In ruling on motions to dismiss, the Court must treat the allegations in the complaint as if they were true solely for purposes of deciding the motions. The motion was denied as to claims under the Securities Act of 1933 in the case involving us. The same ruling was made in all but 10 of the other cases. The Court dismissed the claims under Section 10(b) of the Securities Exchange Act of 1934, against us and one of the individual defendants and dismissed all of the Section 20(a) “control person” claims. The Court denied the motion to dismiss the Section 10(b) claims against our remaining individual defendants on the basis that those defendants allegedly sold our stock following the IPO, allegations found sufficient purely for pleading purposes to allow those claims to move forward. A similar ruling was made with respect to 62 of the individual defendants in the other cases. We have accepted a settlement proposal presented to all issuer defendants. Under the terms of this settlement, plaintiffs will dismiss and release all claims against the Foundry Defendants in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the IPO cases and for the assignment or surrender of control of certain claims we may have against the underwriters. The settlement, which is still being finalized, will require approval of the Court, which cannot be assured, after class members are given the opportunity to object to the settlement or opt out of the settlement.
In March 2001, Nortel Networks Corp. (“Nortel”) filed a lawsuit against us in the United States District Court for the District of Massachusetts alleging that certain of our products infringe several of Nortel’s patents and seeking injunctive relief and unspecified damages. Nortel has also brought suit, on the same or similar patents, against a number of other networking companies. We have analyzed the validity of Nortel’s claims and believe that Nortel’s suit is without merit. We are committed to vigorously defending ourself against these claims. On October 9, 2002, we filed a lawsuit against Nortel in the United States District Court, Northern District of California alleging that certain of Nortel’s products infringe one of our patents and alleging breach of contract by Nortel. We are seeking injunctive relief and damages.
In May 2003, Lucent Technologies Inc. (“Lucent”) filed a lawsuit against us in the United States District Court for the District of Delaware alleging that certain of our products infringe several of Lucent’s patents, and seeking injunctive relief, as well as unspecified damages. Lucent also brought suit on the same patents (and one additional patent) against one of our competitors. On August 12, 2003, we filed a motion to sever the cases, and on February 6, 2004, the District Court granted the motion. The parties are in the process of rescheduling the court dates in view of the District Court’s order to sever the cases. We have analyzed the validity of Lucent’s claims and believe that Lucent’s suit is without merit. We are committed to vigorously defending ourself against Lucent’s claims.
On February 13, 2004, we filed a lawsuit against Lucent in the United States District Court, Eastern District of Texas, Marshall Division. The lawsuit alleges that certain of Lucent’s products infringe one of our patents. We are seeking injunctive relief and damages.
From time to time, we are subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, patents and other intellectual property rights. In addition, from time to time, third parties assert patent infringement claims against us in the form of letters, lawsuits and other forms of communication. Regardless of the merits of our position, litigation is always an expensive and uncertain proposition. In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any such provision would be adjusted on a quarterly basis to reflect the effect of ongoing negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. To date, we have not recorded any such provisions in accordance with SFAS 5. We believe we have valid defenses
with respect to the legal matters pending against us. In the event of a determination adverse to us, we could incur substantial monetary liability, or be required to change our business practices. Any unfavorable determination could have a material adverse effect on our financial position, results of operations, or cash flows.
Item 4.
Item 4. Submission Of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2003.
PART II
Item 5.
Item 5. Market For Registrant’s Common Equity and Related Stockholder Matters
Price Range of Common Stock
Foundry’s common stock commenced trading on the Nasdaq National Market on September 28, 1999 and is traded under the symbol “FDRY”. As of December 31, 2003, there were approximately 380 holders of record of the common stock. The following table sets forth the high and low closing sale prices for our common stock as reported on the Nasdaq National Market.
Dividend Policy
We have never paid cash dividends on our capital stock. We currently anticipate that we will retain our future earnings, if any, to fund the development and growth of our business and, therefore, do not anticipate paying cash dividends in the foreseeable future.
Unregistered Securities Sold in 2003
We did not sell any unregistered shares of our common stock during 2003.
Item 6.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below should be read together with the consolidated financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the other information contained in this Form 10-K.
Item 7.
Item 7. 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 consolidated financial statements and related notes appearing elsewhere in this Form 10-K. This discussion and analysis contain forward-looking statements that involve risks, uncertainties and assumptions. Our 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 and the Market Price of Our Stock.” Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake 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 we file from time to time with the SEC. All public reports filed by us with the SEC are available free of charge on our website at www.foundrynetworks.com or from the SEC at www.sec.gov as soon as practicable after we electronically file such reports with the SEC.
Overview
Founded in 1996, Foundry designs, develops, manufactures and markets a comprehensive, end-to-end suite of high performance data networking solutions, including Ethernet Layer 2 and Layer 3 switches, Metro routers, and Internet traffic management products. Our customers include Internet and Metro service providers, and enterprises such as e-commerce sites, entertainment, health and wellness, financial and manufacturing companies, universities, and government agencies. Our product suite includes the FastIron® family of Layer 2/3 enterprise switches, the IronPointTM family of wireless access points, the BigIron® family of Layer 3 backbone switches, the EdgeIron® family of Layer 2 wiring closet switches, the NetIron® family of Metro routers, the ServerIron® family of Layer 4-7 traffic management switches, and the IronViewTM Network Management software system.
Business Environment
At the end of 2000, the data networking industry entered a period of market contraction as global economies entered a recessionary period and the global IT environment experienced excess network capacity from the large volume of networking equipment deployed during the previous two years in anticipation of high network traffic growth. This was particularly evident with telecom carriers and service providers who significantly reduced their IT budgets in response to excess capacity when network traffic did not increase as expected. According to an independent research group, after two years of significant growth in excess of 25% in 1999 and 2000, the market for Ethernet-based products decreased 13% in 2001 and 3% in 2002, before stabilizing and showing a slight 1% growth rate in 2003.
In response to this economic environment, we shifted our sales focus from telecom carriers and service providers to enterprises and government agencies. We also evolved our core strategy from one of ‘performance’, to one of ‘features and performance.’ Since many of our enterprise customers had not only reduced their IT budgets, but also the size of their IT staffs, we focused our development efforts on product enhancements that would reduce total cost of ownership and allow enterprise customers to manage their networks with fewer resources.
Although the data networking industry experienced slight growth in 2003, many of our customers remain cautious about their capital spending and many of our competitors continue to struggle financially. We believe economic conditions have improved, but are uncertain as to the duration and strength of the economic recovery.
2003 Financial Performance
•
Our gross margins improved from 53% in 2002 to 65% in 2003. This improvement was achieved primarily as a result of economies of scale associated with our year-over-year revenue growth of 33%, significant cost reduction for both components and assemblies, and, to a lesser extent, increased sales of higher-end, higher gross margin products.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period reported. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Management bases their estimates and judgments on historical experience, market trends, and other factors that are believed to be reasonable under the circumstances. The results of these estimates form the basis for judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, reflect the more significant judgments and estimates that can have a significant effect on our results of operations and the value of certain assets and liabilities on our consolidated financial statements. Management has discussed the development, selection, and disclosure of these estimates with the Audit Committee of our Board of Directors. These and other significant accounting policies are more fully described in Note 1 to the consolidated financial statements included in this Form 10-K.
Revenue Recognition
We generate the majority of our revenue from sales of stackable and chassis-based networking equipment, with the remainder of our revenue coming from customer support fees, training and installation services. We recognize revenue when persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. When sales arrangements contain multiple elements (i.e., hardware, training, and installation), judgment is applied to determine the appropriate accounting, including how we allocate revenue to each element and when we recognize revenue for each element.
Product revenue is generally recognized at the time of shipment, unless an acceptance period or other contingency exists, in which case revenue is recognized upon the earlier of customer acceptance or expiration of the acceptance period, or upon satisfaction of the contingency.
At the time product revenue is recognized, we estimate the amount of warranty costs to be incurred and record the amount as a cost of revenue. Our standard warranty period extends 12 months from the date of sale, and our estimate of the amount necessary to settle warranty claims is based primarily on our past experience with repair costs related to warranty claims. Although we believe our estimate is adequate and that the judgment we apply is appropriate, actual warranty costs could differ materially from our estimate. If actual warranty costs are greater than initially estimated, our cost of revenues could increase in the future. We also provide a provision for estimated customer returns at the time product revenue is recognized. Our provision is based primarily on actual historical sales returns and our return policies. Our resellers generally do not have a right of return, and our contracts with original equipment manufacturers only provide for rights of return in the event our products do not meet specifications or there is an epidemic failure, as defined in the contracts. If historical data used by us to calculate estimated sales returns does not reasonably approximate future returns, revenue in future periods could be affected.
Allowance for Doubtful Accounts
Customers are subject to a credit review process, which evaluates the customer’s financial condition and ability to pay, and are generally assigned a credit limit that may be increased only after a successful collection history with the customer has been established. We continually monitor and evaluate the collectibility of our trade receivables and actively manage our accounts receivable to minimize bad debt. We record specific allowances for doubtful accounts when we become aware of a specific customer’s inability to meet its financial obligation to us, such as in the case of bankruptcy filings or significant deterioration in financial condition. We estimate allowances for doubtful accounts for all other customers based on factors such as current economic and industry trends, the extent to which receivables are past due and historical collection experience. If circumstances change, estimates regarding the collectibility of receivables would be adjusted. We mitigate some collection risk by requiring certain international customers to provide letters of credit or bank guarantees prior to placing an order with us. Although we believe our allowance for doubtful accounts is adequate and that the judgment we applied is appropriate, our actual amount of bad debt could differ materially from our estimate.
Inventories
The networking industry is characterized by rapid technological change, frequent new product introductions, changes in customer requirements, and evolving industry standards. Our inventory purchases and commitments are made based on anticipated demand for our products. We perform a detailed assessment of our inventory each period, which includes a review of, among other factors, demand requirements, manufacturing lead-times, technological changes, product life cycles and development plans, component cost trends, product pricing and quality issues. Based on this analysis, we estimate the amount of excess, obsolete and impaired inventory, and provide reserves to record inventory at the lower of cost or estimated net realizable value. Once inventory has been written down to the lower or cost or estimated net realizable value, it is reflected on our balance sheet at its new carrying cost until it is sold or otherwise disposed of. Revisions to our inventory reserves may be required if actual factors differ from our estimates.
We subcontract substantially all of our manufacturing to companies that assemble and test our products. Our agreements with some of these companies allow them to procure long lead-time component inventory on our behalf based on a rolling production forecast provided by us. We may be contractually obligated to purchase long lead-time component inventory procured by certain contract manufacturers in accordance with our forecast, unless we give
notice of order cancellation at least 90 days prior to the delivery date. As of December 31, 2003, we were potentially committed to purchase approximately $50.1 million of such inventory. If actual demand for our products is below the level in our production forecasts, we may have excess inventory or a liability as a result of our purchase commitments with our contract manufacturers.
Deferred Tax Asset Valuation Allowance
We recognize deferred tax assets based on differences between the financial statement carrying amounts and the tax bases of assets. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Significant management judgment is required in determining whether valuation allowances should be recorded against our deferred tax assets. Management assesses the likelihood that our deferred tax assets will be realized against projected future taxable income, and to the extent that realization is not believed to be more likely than not, a valuation allowance is established. In the event we determine that we are unable to realize some or all of our deferred tax assets in the future, an adjustment to our deferred tax assets would be necessary, resulting in a charge to income in the period such determination is made. Likewise, if we later determine that it is more likely than not that our deferred tax assets would be realized, the previously provided valuation allowance would be reversed. Our deferred tax assets as of December 31, 2003 and 2002 were $33.3 million and $28.6 million, respectively.
Loss Contingencies
We are subject to the possibility of loss contingencies in the normal course of our business, including those related to intellectual property and securities litigation. A loss contingency is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We continually reassess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential ranges of probable losses, and will recognize a liability, if any, for these contingencies based on a careful analysis of each issue with the assistance of outside legal counsel and other experts.
Results of Operations
Net Revenues
The following table presents net product and service revenues for the years ended December 31, 2003, 2002, and 2001 (dollars in thousands):
Net product revenues were $351.3 million, $265.0 million, and $281.4 million in 2003, 2002, and 2001, respectively, representing an increase of 33% in 2003 and a decrease of 6% in 2002. The 33% increase in 2003 can be attributed to an increase in overall IT spending, increased market share and expanded sales coverage. During 2003, we focused our sales efforts on broadening our customer base, particularly in non-cyclical customer verticals such as healthcare, research enterprises, government agencies, and universities, that typically demonstrate continued capital spending during slow economic cycles. Sales to the U.S. government were particularly strong in 2003, accounting for 31% of our total revenues, compared to 15% in 2002, due to the government’s effort to both expand and upgrade their networks. In late 2002, the federal government certified many of our JetCore-based products for sale to the Department of Defense (“DOD”). Once certified, we generated significant revenue from sales of these products to the DOD. Our success within the global enterprise market and the U.S. federal government can be attributed to our ability to offer a compelling value proposition, our product architecture, which provides an easy migration path to new technologies with minimal disruption, and our financial strength relative to other data networking vendors. We also experienced significant revenue growth in Japan in 2003, due to the establishment
of a direct sales force in 2002 to complement our reseller relationship with Mitsui, one of our largest resellers. In 2003, our expanded sales coverage in Japan resulted in sales growth of 57% in that country.
Product revenues decreased 6% in 2002 from 2001, due to lower average selling prices caused by weak economic conditions, competitive pressures, and reduced IT spending. Although our product revenues grew from $54.7 million in the first quarter of 2002 to $76.6 million in the fourth quarter of 2002, as a result of market acceptance of our new products introduced in early 2002, we were unable to achieve product revenue growth year-over-year due to difficult economic and IT spending conditions.
The following table presents net chassis and stackable product revenues for the years ended December 31, 2003, 2002, and 2001 (dollars in thousands):
We offer products in two configuration platforms, a fixed configuration stackable or a flexible configuration chassis. A stackable has a fixed configuration that cannot be altered. Chassis use a modular platform that can be populated and reconfigured with various management and line card modules as frequently as desired by the customer. For example, customers can use our chassis products at the edge of their network and then reconfigure the chassis to be used in the backbone or core of their network. Our selling prices and gross margins on chassis-based products are generally higher than our stackable products because of the flexible configuration offered by chassis-based products. Our chassis products accounted for 80%, 78%, and 77% of our net product revenues in 2003, 2002, and 2001, respectively. We do not expect sales of our chassis and stackable products to fluctuate significantly as a percentage of total product revenues in the future.
Service revenues consist primarily of revenue from customer support contracts, and to a lesser extent, from providing training and installation services. Net service revenues were $48.3 million, $35.7 million, and $29.8 million in 2003, 2002, and 2001, respectively, and accounted for 12% of total revenues in 2003 and 2002, and 10% in 2001. The revenue increases in absolute dollars were due to a larger installed base of our networking equipment each year as customers purchased new support contracts with their new equipment purchases and renewed maintenance contracts on existing equipment. Our customer base grew from 3,700 customers at the end of 2001, to 5,200 customers in 2002, and to 6,500 customers at the end of 2003.
For the year ended December 31, 2003, two customers accounted for greater than 10% of our total revenues. Mitsui, a reseller in Japan, accounted for 12% of our total revenues, and a U.S. government integrator accounted for 11% of our total revenues. In 2002, Mitsui accounted for 11% of our revenues. No individual customer accounted for more than 10% of our total revenues in 2001. Sales to the U.S. government represented approximately 31% and 15% of our total revenues in 2003 and 2002, respectively, and less than 10% of our total revenues in 2001.
International sales represented 35%, 38%, and 35% of our total revenues for the years ended December 31, 2003, 2002, and 2001, respectively. One individual country outside of the United States, Japan, accounted for 13% and 11% of our total revenues in 2003 and 2002, respectively. No individual country outside of the United States accounted for greater than 10% of our total revenues in 2001. Sales to customers located in Japan increased in 2003 as a result of our expanded sales presence in Japan.
Gross Margins
The following table presents gross margins and gross margin percentages for product and service revenues for the years ended December 31, 2003, 2002, and 2001 (dollars in thousands):
Our cost of product revenues consists primarily of materials, labor, manufacturing overhead, warranty costs, and provisions for excess and obsolete inventory. Product gross margins were $218.2 million, $130.4 million, and $131.2 million in 2003, 2002, and 2001, or 62%, 49%, and 47% of product revenues, respectively. The increase in product gross margin as a percentage of product revenues in 2003 was due primarily to cost efficiencies associated with increased business volume in 2003 and significant reductions of our component and sub-assembly costs. Product margins improved to a lesser extent as a result of increased sales of our high-end, high-margin products in 2003 and lower provisions for excess and obsolete inventory. During 2003, our total port shipments of all products increased by 32% from 2002, but our shipments of Gigabit Ethernet ports, a higher gross margin product, grew by 67%. This shift in product mix was due to our customers’ increasing preference for Gigabit Ethernet, a Layer 4-7 switching technology and higher gross margin product, instead of 10/100 Ethernet, a Layer 2/3 technology and lower gross margin product. This product mix shift contributed to our gross margin improvement in 2003. During the first nine months of 2003, our component and assembly costs were reduced significantly, which dramatically improved our gross margins. In the fourth quarter of 2003, our component and assembly costs stabilized. Lead-times for various components have lengthened recently as a result of IT spending and the general economic recovery. As component demand increases and lead-times become longer, our suppliers are less inclined to reduce component costs. If we are unable to further reduce component costs, or our selling prices decline, our gross margins may also decline. See “Risk Factors-Our gross margins may decline over time and the average selling prices of our products may decrease as a result of competitive pressures and other factors.”
The 2% increase in product gross margins from 47% in 2001 to 49% in 2002 was due to significantly lower inventory provisions in 2002, offset by increased manufacturing overhead expenses due to the expansion of our manufacturing facility. Inventory provisions were $12.0 million in 2003, $16.4 million in 2002, and $24.9 million in 2001. Significant inventory reserves were provided in 2001 in connection with our transition from IronCore ASIC-based products to products incorporating our next-generation JetCore ASICs.
Our cost of service revenues consists primarily of costs of providing services under customer support contracts. These costs include material costs, labor, and overhead. Service gross margins were 84% in 2003 and 2002, and 73% in 2001. Despite significantly higher service revenues in 2003, our service gross margin percentage remained unchanged from 2002, due primarily to increased service inventory and labor costs associated with supporting a larger customer base. As noted above, our customer base grew considerably between 2001 and 2003. Service gross margin as a percentage of service revenue increased in 2002, compared to 2001, due to a write-off of service inventory at customer sites in 2001. Many of our customers ceased operations during 2001 due to the economic recession and, as a result, we were unable to recover our service inventory. We expect service gross margins to experience variability over time due to the timing of technical support initiations and renewals and additional investments in our customer support infrastructure.
Research and Development, Sales and Marketing, and General and Administrative Expenses
The following table presents research and development, sales and marketing, and general and administrative expenses for the years ended December 31, 2003, 2002, and 2001 (dollars in thousands):
Research and development expenses consist primarily of salaries and related personnel expenses, prototype materials and expenses related to the development of our ASICs, software development and testing costs, and the depreciation of property and equipment used in research and development activities. Research and development expenses were $40.5 million, $34.9 million, and $33.9 million in 2003, 2002, and 2001, or 10%, 12%, and 11% of revenue, respectively. The increase in research and development expenses in 2003 was due primarily to prototype expenses incurred in connection with development of our terabit-capacity Ethernet switching products, and, to a lesser extent, an increase in our average headcount from 147 engineers in 2002 to 159 engineers in 2003. Research and development expenses increased $1.0 million in 2002 due to an increase in headcount from an average of 118 engineers in 2001 to 147 engineers in 2002, offset by reduced prototype expenses in 2002 as a result of the completion of our next-generation JetCore ASICS in 2001. We believe continued investment in product enhancements and new product development is critical to achieving our strategic objectives, and, as a result, we expect research and development expenses to continue to increase in absolute dollars.
Sales and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales and customer support activities, costs associated with trade shows, advertising, and promotions, and the cost of facilities. Sales and marketing expenses were $88.4 million, $82.9 million, and $90.8 million in 2003, 2002, and 2001, or 22%, 28%, and 29% of revenues, respectively. The increase in absolute dollars from 2002 to 2003 was primarily due to higher sales commissions as a result of increased revenues in 2003, higher travel costs associated with expanding our sales coverage, and to a lesser extent, increased marketing expenses associated with the launch of new products in 2003. The decrease in absolute dollars from 2001 to 2002 was primarily due to a 5% reduction in our domestic sales force in 2002. We believe that continued investment in sales and marketing activities is critical to our success, and expect these expenses to increase slightly in absolute dollars in 2004 as we initiate additional sales and marketing programs to support our products.
General and administrative expenses consist primarily of salaries and related expenses for executive, finance and administrative personnel, costs of facilities, bad debt, legal fees, and other general corporate expenses. General and administrative expenses were $17.6 million, $14.5 million, and $27.2 million in 2003, 2002, and 2001, or 4%, 5%, and 9% of revenue, respectively. The $3.1 million increase in 2003 was primarily due to an increase of $3.0 million in legal expenses related to litigation matters discussed in Part I Item 3 “Legal Proceedings,” and an increase of $0.9 million in executive bonuses, offset by a $1.2 million decrease in bad debt expense as a result of the effect of improved economic conditions on the financial condition of our customer base. The decrease of $12.7 million from 2001 to 2002 was primarily due to the effect of the economic recession in 2001. In 2001, we recorded a provision for doubtful accounts receivable of $9.1 million, a charge of $2.8 million in 2001 for the write-down of a note receivable from a stockholder, and $1.1 million of costs related to consolidation of facilities. In 2002, we recorded only $0.3 million for doubtful accounts, and did not incur any expenses for write-downs of notes receivable or consolidation of facilities. We expect general and administrative expenses to increase slightly in 2004, compared to 2003.
Amortization of deferred stock compensation. In connection with the granting of stock options to employees and a director, we recorded deferred stock compensation in the aggregate amount of $17.3 million in 1999 and $0.3 million in 2000, representing the difference between the exercise price and the deemed fair market value of our common stock on the date stock options were granted. We recorded no additional deferred stock compensation after 2000. Deferred stock compensation was amortized to operations over the respective vesting periods of the
options. We recorded amortization of deferred stock compensation expense of approximately $231,000, $1.1 million, and $2.7 million for fiscal 2003, 2002, and 2001, respectively. We have no remaining deferred stock compensation at December 31, 2003.
Interest income. We earn interest income on funds maintained in interest-bearing money market and investment accounts. We recorded interest income of $5.2 million, $5.0 million, and $8.7 million in 2003, 2002, and 2001, respectively. Despite higher levels of cash and investments throughout 2003, interest income remained nearly unchanged from 2002 due to lower average interest rates in 2003. Interest income decreased from 2001 to 2002, primarily due to lower average interest rates on our portfolio of fixed income securities in 2002. See Item 7A
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Our investments are made in accordance with an investment policy approved by our Board of Directors. The primary objective of our investment activities is to preserve capital while maximizing yields without significantly increasing risk. Our exposure to interest rate risk relates to our investment portfolio. We do not use interest rate swaps in our investment portfolio. We place our investments with high-credit quality issuers and, by policy, limit the amount of credit exposure with any one issuer or fund. For liquidity purposes, our investment policy requires that we maintain a minimum of $75 million in money market accounts of suitable credit quality. We have performed a hypothetical sensitivity analysis assuming an immediate parallel shift in the yield curve of plus or minus 50 basis points, while all other variables remain constant. A hypothetical 50 basis point decline in interest rates would reduce our annualized interest income by approximately $1.9 million at December 31, 2003.
Our investment portfolio is classified as held-to-maturity and is recorded at amortized cost, and includes only securities with original maturities of less than two years and with secondary or resale markets to ensure portfolio liquidity. Since we hold our investments to maturity, we are exposed to risk in the event an issuer is not able to meet its obligations at maturity. To mitigate this risk, our investment policy does not allow us to invest more than $15 million with any one issuer. We do not have any investments denominated in foreign country currencies, and therefore are not subject to foreign currency risk on such investments.
Currently, the 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. We do not currently enter into forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. However, in the event our exposure to foreign currency risk increases, we may choose to hedge those exposures. For most currencies, we are a net payer of foreign currencies and, therefore, benefit from a stronger U.S. dollar and are adversely affected by a weaker U.S. dollar relative to those foreign currencies. We have performed a sensitivity analysis as of December 31, 2003 using a modeling technique that measures the change in fair values arising from a hypothetical 10% adverse movement in foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. Foreign currency exchange rates used were based on market rates in effect at December 31, 2003. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would not result in a material loss in the fair values of foreign currency denominated assets and liabilities at December 31, 2003.
Item 8.
Item 8. Consolidated Financial Statements And Quarterly Summary
FOUNDRY NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Foundry Networks, Inc.:
We have audited the accompanying consolidated balance sheets of Foundry Networks, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2) for the years ended December 31, 2003 and 2002. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The consolidated financial statements of Foundry Networks, Inc. for the year ended December 31, 2001, prior to the adjustments discussed in Note 1, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 21, 2002.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Foundry Networks, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule for the years ended December 31, 2003 and 2002, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed above, the consolidated financial statements of Foundry Networks, Inc. for the year ended December 31, 2001 were audited by other auditors who have ceased operations. As disclosed in Note 1, the Company changed the presentation of revenues and cost of revenues for the year ended December 31, 2001 to conform to the presentation required in 2002 and 2003 in accordance with Rule 5.03 of Regulation S-X as service revenues exceeded 10% of total revenues for the years ended December 31, 2003 and 2002. We audited the reclassification adjustments that impacted product revenues, cost of product revenues, service revenues, and cost of service revenues. In our opinion, all such adjustments and disclosures are appropriate and the adjustments have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the consolidated financial statements of the Company for the year ended December 31, 2001 other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the consolidated financial statements for the year ended December 31, 2001 taken as a whole.
/S/ ERNST & YOUNG LLP
Palo Alto, California
January 26, 2004
This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Foundry Networks Inc.’s filing on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. See Exhibit 23.2 for further discussion.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Foundry Networks, Inc.:
We have audited the accompanying consolidated balance sheets of Foundry Networks, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of income, redeemable convertible preferred stock and stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements and the schedule referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Foundry Networks, Inc. and subsidiaries as of December 31, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 15(a)(2) is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
San Jose, California
January 21,
FOUNDRY NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
The accompanying notes are an integral part of these Consolidated Financial Statements.
FOUNDRY NETWORKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
The accompanying notes are an integral part of these Consolidated Financial Statements.
FOUNDRY NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
The accompanying notes are an integral part of these Consolidated Financial Statements.
FOUNDRY NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these Consolidated Financial Statements.
FOUNDRY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Organization of the Company
Foundry Networks, Inc. (together with its subsidiaries, collectively “Foundry” or “we”) designs, develops, manufactures, and markets a comprehensive, end-to-end suite of high performance data networking solutions, including Ethernet Layer 2 and Layer 3 switches, Metro routers and Internet traffic management products. Our customers include Internet and Metro service providers, and enterprises such as e-commerce sites, entertainment, health and wellness, financial and manufacturing companies, universities and government agencies.
Principles of Consolidation and Foreign Currency Translation
Foundry’s consolidated financial statements reflect the operations of Foundry and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Assets and liabilities of foreign operations are translated to U.S. dollars at the exchange rate in effect at the applicable balance sheet date, and revenues and expenses are translated using average exchange rates prevailing during that period. Translation adjustments have not been material to date and are included as a component of stockholders’ equity.
Reclassifications
Certain prior period items have been reclassified to conform to the December 31, 2003 presentation. The Company changed the presentation of revenues and cost of revenues for the year ended December 31, 2001 as service revenues exceeded 10% of total revenues for the years ended December 31, 2003 and 2002.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Actual results could differ from those estimates. Estimates are used in accounting for, but are not limited to, allowances for doubtful accounts and sales returns, inventory provisions, product warranty, income taxes and contingencies. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period in which they are determined.
Cash Equivalents and Marketable Investments
We consider all investments with original maturities of 90 days or less to be cash equivalents. Cash and cash equivalents consist of commercial paper, corporate and government debt securities, and cash deposited in checking and money market accounts. Our investment portfolio includes only marketable securities with original maturities of less than two years and with secondary or resale markets to ensure portfolio liquidity.
Investments in financial instruments with original maturities greater than 90 days but less than one year are classified as short-term investments. Investments with maturities greater than one year from the balance sheet date are classified as long-term investments. All of our investments are stated at amortized cost and classified as held-to-maturity.
FOUNDRY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cash equivalents and investments consist of the following (in thousands):
Allowance for Doubtful Accounts
We recognize an allowance for doubtful accounts to ensure trade receivables are not overstated due to uncollectibility. Accounts receivable are not sold or factored. Exposure to credit risk is controlled through credit approvals, credit limits, and continuous monitoring procedures. Customers are subject to a credit review process which evaluates their financial position and ability to pay. Specific allowances for bad debts are recorded when we become aware of a customer’s inability to meet its financial obligation to us, such as in the case of bankruptcy filings or a significant deterioration in financial position. Estimates are used in determining allowances for all other customers based on factors such as current economic and industry trends, the extent to which receivables are past due and historical collection experience. Accounts are deemed past due once they exceed the due date on the invoice. We mitigate collection risk by requiring certain international customers to secure letters of credit or bank guarantees prior to placing an order with us. If circumstances change, estimates regarding the collectibility of receivables would be adjusted.
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Inventories
Inventories are stated on a first-in, first-out basis at the lower of cost or estimated net realizable value, and include purchased parts, labor and manufacturing overhead. Inventories consist of the following (in thousands):
The networking industry is characterized by rapid technological change, frequent new product introductions, changes in customer requirements, and evolving industry standards. Our inventory purchases and commitments are made based on anticipated demand for our products. We perform a detailed assessment of our inventory each period, which includes a review of, among other factors, demand requirements, manufacturing lead-times, product life cycles and development plans, component cost trends, product pricing and quality issues. Based on this analysis, we estimate the amount of excess, obsolete and impaired inventory, and provide reserves to record inventory at its lower of cost or estimated net realizable value. Once inventory has been written down to the lower of cost or estimated net realizable value, it is reflected on our balance sheet at its new carrying value until it is sold or otherwise disposed of. Revisions to our inventory reserves may be required if actual factors differ from our estimates.
Inventory provisions of $12.0 million, $16.4 million, and $24.9 million were recorded for the years ended December 31, 2003, 2002, and 2001, respectively. Approximately $4.5 million and $6.1 million of our purchased parts and work-in-process inventories were consigned to contract manufacturers’ sites as of December 31, 2003 and 2002, respectively.
Concentrations
Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash equivalents, short and long-term investments and accounts receivable. We seek to reduce credit risk on financial instruments by investing in high-quality debt issuances and, by policy, limit the amount of credit exposure with any one issuer or fund. For certain of our financial instruments, including cash, cash equivalents, investments and accounts receivable, accounts payable, and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. We estimate fair value based on quoted market prices using current market rates. Our estimate of fair value may not be representative of values that could have been realized as year end or that will be realized in the future. As of December 31, 2003, ten customers accounted for 55% of our outstanding trade receivables.
We purchase several key components used in the manufacture of our products from several sources and depend on supply from these sources to meet our needs. In addition, we depend on several contract manufacturers for major portions of our manufacturing requirements. The inability of our suppliers or contract manufacturers to fulfill our production requirements could negatively affect our future results.
Property and Equipment
Property and equipment are stated at cost. Depreciation expense is computed using the straight-line method over estimated useful lives of the assets. Estimated useful lives of two years are used for computers and equipment. Estimated useful lives of three years are used for furniture and fixtures. Leasehold improvements are amortized over the shorter of their estimated useful life or the lease term.
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Property and equipment consisted of the following:
Revenue Recognition
General. We generate the majority of our revenue from sales of stackable and chassis-based networking equipment, with the remainder of our revenue coming from customer support fees, training and installation services. We recognize revenue when persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. When sales arrangements contain multiple elements (i.e., hardware, training and installation), we allocate revenue to each element based on its relative fair value, generally the price charged when the item is sold separately, and recognize revenue for each element when revenue recognition criteria have been met for that element. This is in accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), which was effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. EITF 00-21 addresses certain aspects of accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. We adopted EITF 00-21 prospectively in the third quarter of 2003, and its adoption did not have a material effect on our results of operations or financial position.
Product. Product revenue is generally recognized at the time of shipment, unless an acceptance period or other contingency exists, in which case revenue is recognized upon the earlier of customer acceptance or expiration of the acceptance period, or upon satisfaction of the contingency. Shipping charges billed to customers are included in product revenue, and the related shipping costs are included in cost of product revenues.
At the time product revenue is recognized, we estimate the amount of warranty costs to be incurred and record the amount as a cost of revenue. Our standard warranty period extends 12 months from the date of sale, and our estimate of the amount necessary to settle warranty claims is based primarily on our past experience. We also provide a provision for estimated customer returns at the time product revenue is recognized. Our provision is based primarily on actual historical sales returns and our return policies. Our resellers generally do not have a right of return, and our contracts with original equipment manufacturers only provide for rights of return in the event our products do not meet specifications or there is an epidemic failure, as defined in the contracts.
Services. Service revenues consist primarily of revenue from customer support services and, to a lesser extent, training and installation services. Our suite of customer support programs provides customers with access to technical assistance, software updates and upgrades, hardware repair and replacement parts.
Support services are offered under renewable, annual fee-based contracts or as part of multiple-element arrangements. Revenue from customer support contracts is deferred and recognized ratably over the contractual support period, which is generally one to five years.
Revenue from training and installation services is recognized when services have been performed, and accounted for less than 1% of total revenues for each of the years ended December 31, 2003, 2002, and 2001.
Segment Reporting
Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision making group, in deciding
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how to allocate resources and in assessing performance. We are organized as, and operate in, one reportable segment: the design, development, manufacturing and marketing of a comprehensive, end-to-end suite of high-performance data networking solutions, including Ethernet Layer 2 and Layer 3 switches, Metro routers and Internet traffic management products.
We sell to customers located in various countries in North and South America, Europe, Asia, and Australia. Our foreign offices conduct sales, marketing and support activities. We determine revenues by geographic location based on the physical destination of our product shipments. Our international sales represented 35%, 38%, and 35% of revenues for the years ended December 31, 2003, 2002, and 2001, respectively. One individual country outside of the United States, Japan, accounted for 13% and 11% of revenues in 2003 and 2002, respectively. No individual country outside of the United States accounted for greater than 10% of revenues in 2001. Substantially all of our long-lived assets are located in the United States.
For the year ended December 31, 2003, two customers accounted for greater than 10% of our revenues. Mitsui, a reseller in Japan, accounted for 12% of revenues in 2003, and a U.S. government integrator accounted for 11% of revenues in 2003. In 2002, Mitsui accounted for 11% of our revenues. No individual customer accounted for more than 10% of our revenues in 2001. Sales to the U.S. government represented approximately 31% and 15% of our revenues in 2003 and 2002, respectively, and accounted for less than 10% of our revenues in 2001.
Advertising Costs
We expense all advertising costs as incurred. Advertising expenses for the years ended December 31, 2003, 2002 and 2001 were $3.5 million, $3.8 million and $8.3 million, respectively.
Software Development Costs
We account for internally-generated software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” Capitalization of eligible product development costs begins upon the establishment of technological feasibility, which we have defined as completion of a working model. Internally-generated costs that were eligible for capitalization, after consideration of factors such as realizable value, were not material and were charged to research and development expense for the years ended December 31, 2003, 2002 and 2001.
Computation of Per Share Amounts
Basic earnings per share (“EPS”) has been calculated using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted EPS has been calculated using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase, and potentially dilutive common stock equivalents. Weighted-average dilutive common stock equivalents include the potentially dilutive effect of in-the-money stock options, determined based on the average share price for each period using the treasury stock method. Under the treasury stock method, the tax-effected proceeds that would be received assuming the exercise of all in-the-money stock options are assumed to be used to repurchase shares in the open market. Certain common stock equivalents were excluded from the calculation of diluted EPS because the exercise price of these common stock equivalents was greater than the average market price of the common stock for the respective period and, therefore, their inclusion would have been anti-dilutive. Anti-dilutive common stock equivalents for the years ended December 31, 2003, 2002, and 2001, were 1.9 million, 15.7 million, and 10.4 million, respectively.
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Accounting for Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), we have elected to follow the intrinsic value method of accounting for employee stock options as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, we only recognize compensation expense when options are granted with an exercise price below fair market value at the date of grant. Any resulting compensation expense is recognized ratably over the vesting period.
We currently grant stock options under several stock option plans that allow for the granting of non-qualified and incentive stock options to our employees, directors and consultants. Stock options generally vest ratably over three to five years from the date of grant and have a term of ten years. We also have an employee stock purchase plan that allows eligible employees to purchase shares of our common stock at 85% of the lower of the fair market value of the common stock at the beginning of each offering period or at the end of each purchase period through payroll deductions that may not exceed 20% of an employee’s compensation.
The following table illustrates the effect on reported net income and earnings per share as if we had accounted for our employee stock options and employee stock purchase plan under the fair value method prescribed by SFAS 123.
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The weighted average fair value of stock options granted under all plans during 2003, 2002, and 2001 was $6.15, $3.41, and $8.61 per share, respectively. We estimate the fair value of our stock options using the Black-Scholes option valuation model, which is the most commonly used model for purposes of disclosure pursuant to SFAS 123, as amended by SFAS 148. However, the Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Black-Scholes model requires the input of highly-subjective assumptions, including expected stock price volatility. Because our employee stock options have characteristics significantly different than those of traded shares, and because the changes in the assumptions can materially affect fair value estimates, in management’s opinion, the Black-Scholes model does not provide a reliable measure of the fair value of our options. The following weighted-average assumptions were used to estimate the fair value of employee stock options granted:
Recent Accounting Pronouncements
More-Than Incidental Software
On July 31, 2003, the EITF reached a consensus on its tentative conclusions on Issue No. 03-5, “Applicability of AICPA Statement of Position 97-2, ”Software Revenue Recognition,“ to Non-Software Deliverables in an Arrangement Containing More-Than Incidental Software”. EITF 03-5 discusses that software deliverables are within the scope of SOP 97-2 as are non-software deliverables for which the related software is essential to the functionality of the non-software deliverables. EITF 03-5 is effective for fiscal periods beginning after August 2003. The adoption of EITF 03-5 did not have a material effect on our financial position, results of operations or liquidity.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 addresses consolidation by business enterprises of variable interest entities (“VIEs”) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (“Revised Interpretation”) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretation. However, the Revised Interpretation must be applied no later than December 31, 2003. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretation. Special Purpose Entities (“SPEs”) created prior to February 1, 2003 may be accounted for under the original or revised interpretation’s provisions no later than our first quarter of fiscal 2004. Non-SPEs created prior to February 1, 2003, should be accounted for under the revised interpretation’s provisions no later than our first quarter of fiscal 2004. We do not currently have any arrangements with variable interest entities that will require consolidation of their financial information in our financial statements.
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2. COMMITMENTS AND CONTINGENCIES:
Guarantees and Product Warranties
FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement provisions of FIN 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002 and are applicable to our product warranty liability and to indemnification obligations contained in commercial agreements, including customary intellectual property indemnifications for our products contained in agreements with our resellers and end-users. Our adoption of FIN 45 did not have a material effect on our results of operations or financial position.
We provide all customers with a standard one-year hardware and 90-day software warranty. Customers can upgrade the standard warranty and extend the warranty for one-to-five years by purchasing one of our customer support programs. At the time product revenue is recognized, we establish an accrual for estimated warranty expenses and record the amount as a component of cost of revenues. Our warranty accrual represents our best estimate of the amount necessary to settle future and existing claims as of the balance sheet date. We periodically assess the adequacy of our warranty accrual and adjust the amount as considered necessary.
Changes in our product warranty liability for the year ended December 31, 2003 were as follows:
We offer our customers renewable support arrangements, including extended warranties, that generally range from one to five years. We do not separate extended warranty revenues from routine support service revenues, as it is not practical to do so. The change in our deferred support revenue balance was as follows for the year ended December 31, 2003:
In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify the counter-party to such an arrangement from any losses relating to a breach of representations and warranties, a failure to perform certain covenants, or claims and losses arising from certain external events as outlined within the particular contract, which may include, for example, losses arising from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses. No amounts are reflected in our financial statements as of December 31, 2003 related to these indemnifications as, historically, payments made related to these indemnifications have not been material to our financial position or results of operations.
Leases
We lease our facilities and office buildings under operating leases that expire at various dates through April 2011. Most of our leases contain renewal options. Rent expense under operating leases was $5.3 million, $5.3 million, and $7.6 million for the years ended December 31, 2003, 2002, and 2001, respectively. At December 31,
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2003, future minimum lease payments under all noncancelable operating leases were as follows (in thousands):
Purchase Commitments with Contract Manufacturers
We use contract manufacturers to assemble and test our products. In order to reduce manufacturing lead-times and ensure adequate inventories, our agreements with some of these contract manufacturers allow them to procure long lead-time component inventory on our behalf based on a rolling production forecast provided by us. We may be contractually obligated to purchase long lead-time component inventory procured by certain contract manufacturers in accordance with our forecast, unless we give notice of order cancellation at least 90 days prior to the delivery date. As of December 31, 2003, we were committed to purchase approximately $50.1 million of such inventory.
Litigation
In December 2000, several similar shareholder class action lawsuits were filed against us and certain of our officers in the United States District Court for the Northern District of California, following our announcement of our anticipated financial results for the fourth quarter ended December 31, 2000. The lawsuits were subsequently consolidated as a class action by the District Court, under the caption In re Foundry Networks, Inc. Securities Litigation, Master File No. C-00-4823-MMC, lead plaintiffs were selected and filed a consolidated amended complaint which alleged violations of federal securities laws and purported to seek damages on behalf of a class of shareholders who purchased our common stock during the period from September 7, 2000 to December 19, 2000. We then brought four successful motions to dismiss the complaint. Although the District Court granted each of the four dismissal motions, it also provided plaintiffs leave to amend the complaint. On August 29, 2003, following the dismissal of the four amended complaints, the District Court granted our motion to dismiss the case with prejudice and without leave to amend and, on September 2, 2003, entered judgment in our favor, dismissing the plaintiff’s fifth amended complaint. On September 29, 2003, plaintiff filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit (“Court of Appeals”). On January 15, 2004, the plaintiff/appellants filed their opening brief with the Court of Appeals. We have reviewed the appeal and are in the process of preparing our response. We believe the District Court’s judgment validates our conviction that the lawsuit is without merit and we will defend the District Court’s judgment vigorously.
A class action lawsuit was filed on November 27, 2001 in the United States District Court for the Southern District of New York on behalf of purchasers of our common stock alleging violations of federal securities laws. The case was designated as In re Foundry Networks, Inc. Initial Public Offering Securities Litigation, No. 01-CV-10640 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS) (S.D.N.Y.). The case is brought purportedly on behalf of all persons who purchased our common stock from September 27, 1999 through December 6, 2000. The operative amended complaint names as defendants us and three of our officers (the “Foundry Defendants”), including our Chief Executive Officer and Chief Financial Officer; and investment banking firms that served as underwriters for our initial public offering in September 1999. The amended complaint alleged violations of Sections 11 and 15 of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the initial public offering
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(“ IPO”) failed to disclose that (i) the underwriters agreed to allow certain customers to purchase shares in the IPO in exchange for excess commissions to be paid to the underwriters, and (ii) the underwriters arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also appears to allege that false or misleading analyst reports were issued. Similar allegations were made in lawsuits challenging over 300 other initial public offerings conducted in 1999 and 2000. The cases were consolidated for pretrial purposes. On February 19, 2003, the Court ruled on all defendants’ motions to dismiss. In ruling on motions to dismiss, the Court must treat the allegations in the complaint as if they were true solely for purposes of deciding the motions. The motion was denied as to claims under the Securities Act of 1933 in the case involving us. The same ruling was made in all but 10 of the other cases. The Court dismissed the claims under Section 10(b) of the Securities Exchange Act of 1934, against us and one of the individual defendants and dismissed all of the Section 20(a) “control person” claims. The Court denied the motion to dismiss the Section 10(b) claims against our remaining individual defendants on the basis that those defendants allegedly sold our stock following the IPO, allegations found sufficient purely for pleading purposes to allow those claims to move forward. A similar ruling was made with respect to 62 of the individual defendants in the other cases. We have accepted a settlement proposal presented to all issuer defendants. Under the terms of this settlement, plaintiffs will dismiss and release all claims against the Foundry Defendants in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the IPO cases and for the assignment or surrender of control of certain claims we may have against the underwriters. The settlement, which is still being finalized, will require approval of the Court, which cannot be assured, after class members are given the opportunity to object to the settlement or opt out of the settlement.
In March 2001, Nortel Networks Corp. (“Nortel”) filed a lawsuit against us in the United States District Court for the District of Massachusetts alleging that certain of our products infringe several of Nortel’s patents and seeking injunctive relief and unspecified damages. Nortel has also brought suit, on the same or similar patents, against a number of other networking companies. We have analyzed the validity of Nortel’s claims and believe that Nortel’s suit is without merit. We are committed to vigorously defending ourself against these claims. On October 9, 2002, we filed a lawsuit against Nortel in the United States District Court, Northern District of California alleging that certain of Nortel’s products infringe one of our patents and alleging breach of contract by Nortel. We are seeking injunctive relief and damages.
In May 2003, Lucent Technologies Inc. (“Lucent”) filed a lawsuit against us in the United States District Court for the District of Delaware alleging that certain of our products infringe several of Lucent’s patents, and seeking injunctive relief, as well as unspecified damages. Lucent also brought suit on the same patents (and one additional patent) against one of our competitors. On August 12, 2003, we filed a motion to sever the cases, and on February 6, 2004, the District Court granted the motion. The parties are in the process of rescheduling the court dates in view the District Court’s order to sever the cases. We have analyzed the validity of Lucent’s claims and believe that Lucent’s suit is without merit. We are committed to vigorously defending ourself against Lucent’s claims.
On February 13, 2004, we filed a lawsuit against Lucent in the United States District Court, Eastern District of Texas, Marshall Division. The lawsuit alleges that certain of Lucent’s products infringe one of our patents. We are seeking injunctive relief and damages.
From time to time, we are subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, patents and other intellectual property rights. In addition, from time to time, third parties assert patent infringement claims against us in the form of letters, lawsuits and other forms of communication. Regardless of the merits of our position, litigation is always an expensive and uncertain proposition. In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any such provision would be adjusted on a quarterly basis to reflect the effect of ongoing negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. To date, we have not recorded any such provisions in accordance with SFAS 5. We believe we have valid defenses
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with respect to the legal matters pending against us. In the event of a determination adverse to us, we could incur substantial monetary liability, and be required to change our business practices. Any unfavorable determination could have a material adverse effect on our financial position, results of operations, or cash flows.
3. INCOME TAXES:
We account for income taxes pursuant to SFAS No. 109, “Accounting for Income Taxes” (SFAS 109). SFAS 109 provides for an asset and liability approach to accounting for income taxes, under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and to tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Components of our deferred tax assets were as follows (in thousands):
We believe that we will likely generate sufficient taxable income in future periods to realize the tax benefits arising from our existing deferred tax assets. In 2003, we recorded a valuation allowance of approximately $1.0 million against a deferred tax asset associated with a capital loss carryover, as we do not believe we can generate significant capital gains from our investments to utilize the capital loss carryover before its statutory expiration in 2007.
As of December 31, 2003, we had a federal research and development tax credit carryforward of approximately $5.7 million, which will expire beginning in 2021. We also had state research and development tax credit carryforwards of approximately $5.9 million. Of this amount, $5.5 million can be carried forward indefinitely and $0.4 million will expire beginning in 2009.
As of December 31, 2003 and 2002, we had no significant deferred tax liabilities.
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Our provision for income taxes consisted of the following for the years ended December 31 (in thousands):
Income before provision for income taxes consisted of the following (in thousands):
Our provision for income taxes and the corresponding rate differs from the statutory U.S. federal income tax rate as follows for the years ended December 31 (in thousands):
Our income taxes payable for federal and state purposes have been reduced by the tax benefits associated with taxable dispositions of employee stock options. When an employee exercises a stock option issued under a nonqualified plan, or has a disqualifying disposition related to a qualified plan, we receive an income tax benefit for the difference between the fair market value of the stock issued at the time of the exercise and the employee’s option price, tax effected. These benefits are credited directly to stockholders’ equity and amounted to $46.5 million, $4.8 million, and $10.5 million for the years ended December 31, 2003, 2002, and 2001, respectively.
4. STOCKHOLDERS’ EQUITY:
Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred stock, with a par value of $0.0001 per share. Preferred stock may be issued from time-to-time in one or more series. Our board of directors is authorized to determine the rights, preferences, privileges and restrictions on these shares. As of December 31, 2003 and 2002, no shares of preferred stock were outstanding.
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Stock Option Exchange Program
On August 21, 2002, we filed a Tender Offer Statement on Schedule TO with the Securities and Exchange Commission related to a voluntary stock option exchange program for our employees. Our executive officers and directors were not eligible to participate in this program. Under the exchange program, employees were given the opportunity to voluntarily cancel unexercised vested and unvested stock options previously granted to them in exchange for a stock option grant on or about March 21, 2003 equal to one-half the number of tendered options. However, participants who elected to exchange options were also required to exchange other options granted to them in the previous six months. On September 20, 2002, we accepted for exchange options to purchase 5,744,500 shares of our common stock. The cancelled options were exchanged for 2,757,100 replacement stock options on March 24, 2003 at an exercise price of $7.76 per share, which was the fair value of the shares on the grant date. In order to receive the replacement stock option grant, an employee was required to remain employed with us or one of our subsidiaries until March 24, 2003. The replacement options vest on a three-year schedule with a six month cliff, meaning 1/6th of the new option shares vest six months from March 24, 2003, and the remaining shares vest 1/36th per month for the remaining 30 months. The stock option exchange program did not result in stock compensation expense or variable accounting for replacement awards.
Note Receivable from Stockholder
In May 2000, we allowed an employee to exercise stock options in exchange for a secured promissory note of $3.3 million. In December 2001, we wrote down the note by $2.8 million to reflect the adverse effect of the significant decline in our stock price on the employee’s ability to sell the vested stock options at a price at or above the exercise price, as well as general concerns over the collectibility of the note. We determined the fair value of the note to be $480,000 based on the fair market value of our stock in December 2001. Accordingly, we recorded compensation expense of $2.8 million associated with the write-down. At December 31, 2003, this note was past due, but we expect to collect $480,000 in the near future and forgive the remainder of the note, which was written down in 2001. The note is classified as a reduction of stockholders’ equity.
Common Stock
We had 131,622,730 and 121,328,862 shares of common stock issued and outstanding at December 31, 2003 and 2002, respectively.
The following shares of common stock have been reserved for future issuance as of December 31, 2003:
1996 Stock Plan
Under our 1996 Stock Plan (the Plan), the board of directors authorized the issuance of 68,235,683 shares of common stock to employees and consultants as of December 31, 2003, of which 25,509,700 shares are available for future issuance. Nonstatutory options granted under the Plan must be issued at a price equal to at least 85% of the fair market value of our common stock on the date of grant. Incentive stock options granted under the Plan must be issued at a price at least equal to the fair market value of our common stock on the date of grant. In 2003 and 2002, all option grants under the Plan were granted at a price equal to the fair market value of our common stock on the date of grant. Options under the Plan have a term of ten years and vest over a vesting schedule determined by the board of directors, generally three to five years. The number of shares available for issuance under the Plan will be increased on the first day of each fiscal year through 2006 by the lesser of (i) 5,000,000
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shares; (ii) five percent (5%) of the shares outstanding on the last day of the immediately preceding fiscal year; or (iii) such lesser amount of shares as determined by the Board of Directors.
1999 Directors’ Stock Option Plan
Under the Directors’ Plan, each non-employee director who becomes a non-employee director after the effective date of the plan will receive an automatic initial grant of an option to purchase 225,000 shares of common stock upon appointment or election, and annual grants to purchase 60,000 shares of common stock. Options granted under the plan will vest at the rate of 1/4th of the total number of shares subject to the options twelve months after the date of grant and 1/48th of the total number of shares subject to the options each month thereafter. The exercise price of all stock options granted under the Directors’ Plan shall be equal to the fair market value of a share of common stock on the date of grant of the option. Options granted under this plan have a term of ten years. In June 2003, our four non-employee directors received annual grants totaling 240,000 stock options at an exercise price of $14.67 per share. As of December 31, 2003, 1,610,000 options were outstanding with a weighted-average exercise price of $39.90 per share.
2000 Non-Executive Stock Option Plan
Under the Non-Executive Plan, we may issue non-qualified options to purchase common stock to employees and external consultants other than officers and directors. As of December 31, 2003, 1,503,287 shares were outstanding with a weighted average exercise price of $11.10 per share.
The following table summarizes stock option activity under all stock option plans during the three years ended December 31, 2003:
As of December 31, 2003, an aggregate of 3,688,014 shares were available for future option grants to our employees.
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The following table presents information about stock options outstanding and exercisable at December 31, 2003:
As of December 31, 2002, there were 14,436,869 options exercisable at a weighted average exercise price of $13.39 per share.
1999 Employee Stock Purchase Plan
Under the 1999 Employee Stock Purchase Plan (the Purchase Plan), a total of 5,312,918 shares of common stock were reserved for issuance as of December 31, 2003. The number of shares reserved for issuance under the Purchase Plan will be increased on the first day of each fiscal year through 2009 by the lesser of (i) 1,500,000 shares, (ii) 2% of our outstanding common stock on the last day of the immediately preceding fiscal year or (iii) the number of shares determined by the board of directors.
The Purchase Plan allows eligible employees to purchase common stock through payroll deductions, which cannot exceed 20% of an employee’s compensation, at a price equal to the lower of 85% of the fair market value of our common stock at the beginning of each offering period or at the end of each purchase period. During the two purchase periods in 2003, a total of 817,921 shares were issued under the Purchase Plan at an average price of $6.18 per share.
Deferred Stock Compensation
In connection with the grant of stock options to employees and a director, we recorded deferred stock compensation in the aggregate amount of $17.3 million in 1999, and $0.3 million in 2000, representing the difference between the exercise price of the option and the deemed fair market value of our common stock on the date these stock options were granted. We have not recorded additional deferred stock compensation since 2000. Deferred stock compensation was reflected within stockholders’ equity and was amortized to expense over the respective vesting periods of the options. For the years ended December 31, 2003, 2002 and 2001, amortization expense was approximately $231,000, $1.1 million and $2.7 million, respectively. Amortization expense relates to options granted to employees in all operating expense categories, but has not been separately allocated to these categories. Approximately $1.6 million of deferred stock compensation expense was reversed in 2001 as a result of employee terminations. No such reversals were recorded during 2003 and 2002. We have no remaining deferred stock compensation at December 31, 2003.
5. MINORITY INVESTMENT:
In February 2001, we made a $2.5 million minority investment in a privately-held development stage company, who was also a customer. We made no sales to this customer in 2003 or 2002, and sales to this customer in 2001 were insignificant. Our interest in the investee is significantly less than 20% and, as such, we do not have the ability to exercise significant influence. In December 2001, we determined that our investment’s decline in fair value was other than temporary based on a number of factors, including the value of the investee’s most recent round of
FOUNDRY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
financing, general market and industry conditions and the financial condition of and business outlook for the investee. Accordingly, we wrote off the entire minority investment and recorded an expense of $2.5 million in 2001.
6. 401(k) PLAN:
We provide a tax-qualified employee savings and retirement plan that entitles eligible employees to make tax-deferred contributions. Under the 401(k) Plan (“the Plan”), employees may elect to reduce their current annual compensation up to the lesser of 20% or the statutorily prescribed limit, which was $12,000 in calendar year 2003. Employees age 50 or over may elect to contribute an additional $1,000. The Plan provides for discretionary contributions as determined by our board of directors each year. In January 2003, the board of directors approved a matching contribution program whereby we will match dollar for dollar contributed by each employee up to $1,250 per year for each employee. Our matching contributions to the Plan totaled $474,000 in 2003.
FOUNDRY NETWORKS, INC.
Quarterly Summary (Unaudited)
The following tables set forth our consolidated statement of operations data for each of the eight quarters ended December 31, 2003, including such amounts expressed as a percentage of net revenues. This unaudited quarterly information has been prepared on the same basis as our audited financial statements and, in the opinion of management, reflects all adjustments, consisting only of normal recurring entries, necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
FOUNDRY NETWORKS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
(1)
Deductions for allowance for doubtful accounts refer to write-offs and deductions for allowance for sales returns refer to actual returns.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
On June 24, 2002, the Company’s Board of Directors, upon the recommendation of the audit committee, authorized the termination of Arthur Andersen LLP (“AA”) and the engagement of Ernst & Young LLP.
During the years ended December 31, 2001 and 2000 and the subsequent interim period through June 24, 2002, there were no disagreements between the Company and AA on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to AA’s satisfaction, would have caused AA to make reference to the subject matter of the disagreement in connection with its reports; and there were no reportable events described under Item 304(a)(1)(v) of Regulation S-K.
The audit reports of AA on the consolidated financial statements of the Company as of and for the years ended December 31, 2001 and 2000 did not contain any adverse opinion or disclaimer or opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.
During the years ended December 31, 2001 and 2000 and the subsequent interim period through June 24, 2002, the Company did not consult with Ernst &Young LLP with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or any other matter or reportable events as set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
The Company provided a copy of the above disclosures to AA. Exhibit 16.1 is a copy of AA’s letter dated June 25, 2002, stating its agreement with the above statements.
Item 9A.
Item 9A. Controls and Procedures
We evaluated the design and operation of our disclosure controls and procedures to determine whether they are effective in ensuring that the disclosure of required information is made in accordance with the Exchange Act and the rules and forms of the Securities and Exchange Commission. This evaluation was made under the supervision, and with the participation of, management, including our principal executive officer and principal financial officer, as of the end of the period covered by this Annual Report on Form 10-K. Our principal executive officer and principal financial officer have concluded, based on their review, that our disclosure controls and procedures, including those of our consolidated subsidiaries, are effective to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. No significant changes were made to our internal controls during our most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Certain information concerning our directors and executive officers required by this Item is incorporated by reference from the information contained under the caption “Executive Officers and Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2004 Annual Meeting of Stockholders.
Certain information concerning our Audit Committee, Audit Committee Financial Expert(s) and Code of Ethics is incorporated by reference from information contained in the Company’s Proxy Statement for its 2004 Annual Meeting of Stockholders.
Item 11.
Item 11. Executive Compensation
Incorporated by reference from the information under the captions “Proposal No. 1-Election of Directors,” “Compensation of Executive Officers,” “Option Grants in Last Fiscal Year,” “Aggregated Option Exercise in Last Fiscal Year and Fiscal Year-End Option Values,” “Change of Control Agreements with Named Executive Officers,” “Compensation Committee Report on Executive Compensation,” and “Transactions with Management,” and “Performance Graph” in the Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference from the information under the captions “Record Date; Voting Securities,” “Common Stock Ownership of Certain Beneficial Owners and Management,” “Change of Control Agreements with Named Executive Officers,” and “Equity Compensation Plan Information” in the Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the information under the caption “Transactions with Management” in the Proxy Statement.
Item 14.
Item 14. Principal Auditor Fees and Services
Incorporated by reference from the information under the caption “Principal Auditor Fees and Services” in the Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)
The following documents are filed as part of this Form 10-K:
(1)
Consolidated Financial Statements and Report of Independent Auditors and Public Accountants
(2)
Financial Statement Schedules
See “Item 8. Financial Statements, Quarterly Summary, and Schedule II-Valuation and Qualifying Accounts.” Other schedules are omitted because they are not applicable, or because the information is included in the Financial Statements or the Notes thereto.
(4)
Incorporated herein by reference to the exhibit filed with the Company’s Registration Statement on Form S-1 (Commission File No. 333-82577); Confidential treatment has been granted by the Securities and Exchange Commission with respect to this exhibit.
(b)
Reports on Form 8-K.
The Registrant furnished a Current Report on Form 8-K dated October 22, 2003 to report the announcement of our financial results for the three month period ended September 30, 2003, pursuant to Item 12 of Form 8-K.
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 & Administration,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 15, 2004
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bobby R. Johnson Jr. and Timothy D. Heffner, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS