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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission file number: 000-26689
FOUNDRY NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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77-0431154 |
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(State or jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification Number) |
2100 Gold Street
P.O. Box 649100
San Jose, CA 95164-9100
Website: www.foundrynetworks.com
(Address of principal executive offices, including zip
code)
Registrant’s telephone number, including area code:
(408) 586-1700
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.0001 par value
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period than the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
The aggregate market value of the registrant’s common
stock, $0.0001 par value per share, held by non-affiliates
of the registrant on June 30, 2004, the last business day
of the registrant’s most recently completed second quarter,
was approximately $1,731,232,640, based upon the closing sale
price on the Nasdaq National Market reported for such date.
Shares of common stock held by each officer and director and by
each person who owns 5% or more of the outstanding common stock
have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
There were 138,194,525 shares of the registrant’s
common stock issued and outstanding as of March 7, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Part III (Items 10-14) incorporates information by
reference from the definitive proxy statement for the 2005
Annual Meeting of Stockholders to be filed hereafter.
FOUNDRY NETWORKS, INC.
TABLE OF CONTENTS
PART I
In addition to historical information, this Annual Report on
Form 10-K contains forward-looking statements. These
forward-looking statements involve risks, uncertainties and
assumptions. 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 sections entitled “Business — Research and
Development,” “Business — Competition,”
“Business — Intellectual Property,” and
“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 to not place undue reliance
on these forward-looking statements, which reflect
management’s opinions only as of the date hereof. Foundry
Networks, Inc., together with its consolidated subsidiaries
(collectively “we” or “us” or
“Foundry”), undertakes no obligation to revise or
publicly release the results of any revision to these
forward-looking statements. Readers should carefully review the
risk factors described in this document and in other documents
we file from time to time with the Securities and Exchange
Commission, including our Quarterly Reports on Form 10-Q to
be filed in fiscal year 2005. All public reports filed by us
with the Securities and Exchange Commission (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 file such
reports with the SEC.
Foundry, a Delaware Corporation founded in 1996, is a leading
provider of networking products. We design, develop,
manufacture, market and sell 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 stackable fixed
configuration switches and modular platforms, referred to as
chassis. Our product breadth allows us to offer 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 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 Metro routers deliver the capabilities and
performance needed to provide efficient and reliable core
routing services to Internet data centers around the world.
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. For enterprises,
we provide a complete end-to-end solution with our
FastIron®, FastIron Edge®, FastIron Workgroup,
IronPointtm,
BigIron®, ServerIron®,
EdgeIrontm,
and
AccessIrontm
product lines. Our enterprise portfolio of products, combined
with our network management and security, meets the needs for
wireless access, wiring closet, data center, WAN access and
campus solutions. 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. Our service provider markets include Metro
service providers, Internet service providers, web hosting and
Internet data centers, application service providers, and
Internet exchanges. 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.
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 and service provider markets.
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Market Trends and Business Drivers
The Ethernet switching and routing market appears to be poised
for growth. According to the 2005 Ethernet Switch Five Year
Forecast Report, published by an independent research firm,
Dell’Oro, the Ethernet switch market is expected to grow
steadily over the next five years. In addition, Dell’Oro
has projected that 10-Gigabit Ethernet switch port shipments
will double in 2005, 2006, and 2007. Although 10-Gigabit
Ethernet port shipments are expected to double in the coming
years, revenues may grow at a slower rate due to pricing
pressures from increased competition and rapid technological
change.
Foundry Networks was an early leader in bringing 10-Gigabit
Ethernet products to market. Working closely with the Institute
of Electrical and Electronics Engineers standards body for
10-Gigabit Ethernet (IEEE 802.3ae), we delivered what we believe
to be the first Layer 3 10-Gigabit switch in 2001. By focusing
on the more sophisticated features available at Layer 3 of Open
Systems Interconnect (OSI) model for data networking, we
believe we delivered a higher performing 10-GbE solution than
competitors who merely implemented Layer 2 switching. Since the
introduction of our first 10-GbE switch product, we have
continued to bring new 10-GbE products and solutions to market.
Our roster of 10-GbE customers includes banking, university,
manufacturing, motion picture, and service providers across the
globe. In 2004, we successfully brought to market a 10-GbE
switch that implements a 10-GbE WAN physical interface (10-GbE
WAN PHY). The significance of the 10-GbE WAN PHY is that it now
makes pure Ethernet WANs possible. 10-GbE is more than the
highest-speed Ethernet available today. 10-GbE offers the
potential to unify and simplify networking on a global scale
with all the benefits and cost efficiencies of Ethernet.
In addition to the need for high-performance, high-reliability,
and high-availability networking solutions, today’s
enterprises and service providers are facing business drivers
that place new demands on their networks. These drivers include:
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Convergence |
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Mobility |
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Security |
Convergence — Although convergence
primarily refers to using the same network for data, voice, and
video, it also refers to the demands placed on networks that
support mission-critical applications such as accounting, order
fulfillment, and other business processes. As businesses seek to
accommodate network user needs, adding bandwidth alone is not an
adequate solution. Not only have the types of traffic
proliferated, but also different applications have different
needs for levels of network service. This need is addressed by
application switching which is also known as Layer 4-7
switching. Application switches extend their features and
functions by examining data in Layers 4 through 7 of OSI model.
Not only does a Layer 4-7 switch provide benefits such as
optimizing computing resources, it can also provide critical
protection from external threats such as denial of service (DoS)
attacks and address costly nuisances such as unwanted email
solicitations, sometimes called “spam email.” This
business driver fuels demand for additional features and
functions that networks can perform. Supplying these features
and functions has the potential to be a significant
differentiator in the market.
Mobility — Wireless networking is
rapidly gaining acceptance in the market place. Wireless
networking provides many benefits, including coverage of areas
that would be difficult to cable and simplification of changes
when personnel move within an organization. On the horizon,
however, is the larger opportunity of mobility. Whereas wireless
focused on lowering the total cost of ownership, mobility seeks
to enhance return on investment. With advanced features and
functions, mobility will enable businesses to achieve
productivity gains by seamlessly extending productivity tools to
multiple locations. This business driver fuels demand for
integration in wired and wireless networking. A company that has
considerable expertise in switch and routing has a competitive
advantage over providers of wireless devices to the extent that
it can offer a superior integrated solution.
Security — In today’s business
environment, perimeter defenses such as firewalls and intrusion
detection are no longer adequate to address security needs.
Security measures must now take into account internal
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threats, network admission control, anomaly
detection (non-business-related network usage such as music
file sharing), and compliance with policies and regulations.
This business driver fuels demand for secure and highly reliable
networking that can support additional security features and
functions.
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:
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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, convergence,
mobility, and enhanced security. We intend to continue to offer
value-added feature sets that provide for reliability,
redundancy, ease of use and management of the network, yielding
a higher return on investment 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 2004, we
expanded the number and types of interface modules available to
the Terathon class of products. These interface modules included
1-Gigabit Ethernet connections and support for Internet Protocol
Verion 6 (IPv6). Also in 2004, we began shipping new 10-Gigabit
Ethernet products in our FastIron Edge and EdgeIron product
lines. Recently in 2005, we announced and began shipping the
FastIron SuperX, a modular switch that provides outstanding port
density in a compact form factor. We also announced that the
FastIron SuperX would be accompanied by BigIron SuperX and
TurboIron SuperX models. These products are designed to
accelerate the adoption of 10-Gigabit Ethernet by offering
attractive price points and high-performance switching and
routing. |
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Mobility — Our wireless product offering, the
IronPoint 200 and IronWare-IP operating system for FastIron Edge
switches, delivers strong security, seamless mobility, enhanced
user policies, centralized management, ease of use, and
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 to
provide centralized wireless access point management. Our high-
performance FastIron Edge Layer 2/3 switches are wireless LAN
capable. We intend to further develop and support new wireless
networking products. |
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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 |
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competitors. In 2003, we delivered new FastIron Edge switches
with power-over-Ethernet. This provides customers 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. The foundation for our
security model is our reliable, robust, high-performance
security architecture. Our architecture is based on our layered
IronShield Security Model, with advanced device, network, and
service protection features. We intend to evolve IronShield
Security to keep ahead of risks. In the near-term, we intend to
deliver an extension to the IronShield security reference model
that addresses new high-profile security services. 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. Since our inception, we have delivered innovative,
effective, and efficient functions and features into our
products to provide network 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) — Although interest
in and adoption of IPv6 is gaining momentum in international
markets, the widespread adoption of IPv6 in the
U.S. commercial sector is likely to take several years.
However, the U.S. federal government has made IPv6 a
requirement for its installations. We deliver products that meet
the requirements of IPv6 using a phased approach. In 2004, we
delivered new IPv6 interface modules for the BigIron MG8 and
NetIron 40G. We intend to further develop and deliver IPv6
solutions. |
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Extend Product Offerings with Adjacent Technologies that
Provide High-Value to Customers. In 2004, we introduced
our line of AccessIron WAN aggregation routers. We designed this
solution to meet the needs of businesses and organizations for
T-Carrier, E-Carrier, and T-Carrier-3 interconnection with WAN
services. Such WAN services are typically provided by telephone
carriers. Our AccessIron routers also include Ethernet ports. We
intend to explore additional product offerings in adjacent
technologies that would benefit our installed customer base by
providing ease of management, cost efficiencies, or productivity
gains. |
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Continue to Expand our Metro Router Capabilities to
Address this Growing Market and Deliver a New Level of Price/
Performance. We remain committed to the service provider
and metro provider markets while growing our enterprise
business. As these markets regain momentum and growth, we are
positioned to provide state-of-the-art solutions. We have
product offerings and planned enhancements for Multi-Protocol
Label Switching, Virtual Private LAN Services (VPLS), traffic
engineering (TE) and multiplexing of different services
over Virtual LAN (VLAN). Our superior wire-speed bandwidth and
port density accommodate the most demanding metro area networks
with room for growth. |
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Continue to Leverage our Product Capabilities to Address
Emerging Markets. This includes metropolitan area
networking (MAN), Gigabit Ethernet storage area networking
(SAN), VoIP, and content distribution networks. As noted above,
the key advantages of 1 and 10 Gigabit Ethernet, such as price,
simplicity and 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
focused on network infrastructure and provide complete solutions
to our customers. |
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Continue our Market Leadership Position in Internet
Traffic Management Systems. We believe demand for
Internet traffic management intelligence capabilities will be a
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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 customers, while
providing a high degree of service reliability. |
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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 a greater worldwide sales
presence. |
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Deliver World Class Service and Support. We
intend to expand our service and support infrastructure to meet
the needs of our growing customer base. Our goal is to minimize
our customers’ network downtime by offering a wide range of
service and support programs to meet individual customer needs,
including prompt on-site hardware repair and replacement,
24-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 updates, 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 works with resellers to assist in
communicating product benefits to end-user customers and
proposing networking solutions. As of December 31, 2004,
our domestic sales organization consisted of 162 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. Product fulfillment and first level
support for our international customers are provided by
resellers and integrators. Our international resellers include
Mitsui & Co., Inc., in Japan, Samsung Electronics Co.,
Ltd. in Korea, Shanghai Gentek Corporation, Inc. and Global
Technology Integrator Ltd. in China, and Pervasive Networks Ltd.
and Spot Distribution Ltd. in Europe. Please see “Risk
Factors — Our operations in international markets
involve inherent risks that we may not be able to control. As a
result, our business may be harmed if we are unable to
successfully address these risks.” As of December 31,
2004, our international field organization consisted of 92 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 product sales
represented 40% of net product revenues in 2004 and 38% in 2003.
Information on net product sales to customers attributable to
our geographic regions is included in Note 2 of Notes to
Consolidated Financial Statements.
OEM/ Co-Branding. We have an OEM/co-branding relationship
with Hewlett-Packard Company (HP). HP markets and sells our
products on a private label basis through their worldwide sales
forces. Our agreement with HP provides that they 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, 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
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our field organizations and channels. These 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 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. We provide
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 one-year hardware and
90-day software warranty. Our standalone switches in the
FastIron Edge, FastIron Workgroup, and EdgeIron product lines
have a five-year hardware 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 and
Irvine, California, Boston, Massachusetts, New York City, New
York, Chicago, Illinois, Denver, Colorado, and Herndon,
Virginia. We also have Centers-of-Excellence in 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 product lines. 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.
Significant Customers
Sales to our ten largest customers accounted for 37% and 44% of
net product revenue for 2004 and 2003, respectively. The loss of
continued orders from any of our more significant customers,
such as the U.S. government or individual agencies within
the U.S. government, Mitsui, or Hewlett Packard, could
cause our revenue and profitability to suffer. Sales to U.S.
government agencies accounted for approximately 27%, 31%, and
15% of our total revenues in 2004, 2003, and 2002, respectively.
Please see “Risk Factors — Although our customer
base has increased, we still depend on large, recurring
purchases from certain significant customers, and a loss,
cancellation or delay in purchases by these customers could
negatively affect our revenue” and “— The
United States government is a significant customer and has been
one key to our financial success. However, government demand is
unpredictable and there is no guarantee of future contract
awards.”
Customers representing 10% or more of net product revenue were
as follows for the years ended December 31:
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Customer A
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Quality Assurance
In 2003, we demonstrated our commitment to quality assurance and
testing by expanding and adding dedicated quality assurance test
labs and facilities. In order to continue to provide the highest
level of customer service, our internal resolution labs were
expanded to approximately twice their previous size.
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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. 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 products 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 currently have four manufacturing partners. Celestica, Inc.,
located in San Jose, California and Monterey, Mexico, 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 may be contractually obligated to purchase
long lead-time component inventory procured by our contract
manufacturers in accordance with our forecasts although we can
generally give notice of order cancellation at least
90 days prior to the delivery date. We also have several
third-party OEMs who manufacture some Foundry-branded products
that we purchase and resell under the Foundry brand.
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 sole sources; if these
components are not available, our revenues may be harmed.”
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
9
developing new switching solutions that provide new levels of
performance, scalability, and functionality. We had 197
engineers at the end of 2004, compared to 159 engineers at the
end of 2003. Our research and development expenses were
$43.9 million in 2004, $40.5 million in 2003, and
$34.9 million in 2002, or 11%, 10%, and 12% of net
revenues, respectively.
Competition
We believe the key competitive factors that affect our markets
are 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. However, our market
continues to evolve 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 Extreme Networks, Inc.,
Juniper Networks, Inc., F5 Networks, Inc., Nortel Networks Ltd.,
Enterasys Networks Inc., 3Com Corp., Huawei Technologies Co.,
Ltd., Force 10 Networks Inc., and Alcatel, among others.
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. As
a result, we anticipate that we will have to continue to adjust
prices on many of our products to stay competitive. Please see
“Risk Factors — Intense competition in the market
for network solutions could prevent us from maintaining or
increasing revenue and sustaining profitability” and
“ — 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.”
Seasonality
General economic conditions have an effect on our business and
financial results. From time to time, the markets in which we
sell our products experience weak economic conditions that may
negatively affect sales. We experience some seasonal trends in
the sale of our products. For example, sales to the
U.S. government are typically stronger in the third
calendar quarter and sales to European customers tend to be
weaker in the summer months.
Backlog
Our backlog generally represents orders for which a purchase
order has been received for product to be shipped 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.
10
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, JetCore, and
Terathon 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, as well as 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 in which 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 practically impossible for a company to determine in advance
whether a product or any of its components may infringe
intellectual property rights that may be 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 litigation
risks and intellectual property infringement claims that are
costly to defend and could limit our ability to use certain
technologies in the future. Additionally, we may be found to
infringe on intellectual property rights of others.”
Employees
As of December 31, 2004, we had 658 employees, consisting
of 332 in sales, customer service and marketing, 197 in
engineering, 81 in manufacturing, and 48 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.
Our headquarters for corporate administration, research and
development, sales and marketing, and manufacturing currently
occupy approximately 110,000 square feet of leased 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 under lease agreements in the
following locations:
| |
|
|
|
|
| Americas |
|
EMEA |
|
APAC |
| |
|
|
|
|
|
San Jose, California
|
|
London, England |
|
Tokyo, Japan |
|
Irvine, California
|
|
Munich, Germany |
|
Singapore |
|
Salt Lake City, Utah
|
|
Paris, France |
|
Hong Kong |
|
Chicago, Illinois
|
|
Amsterdam, Netherlands |
|
Sydney, Australia |
|
Fort Lauderdale, Florida
|
|
Milan, Italy |
|
Beijing, China |
|
New York City, New York
|
|
|
|
|
|
Herndon, Virginia
|
|
|
|
|
|
Toronto, Canada
|
|
|
|
|
11
We intend to expand our existing facilities during 2005 and
believe that suitable additional or substitute space will be
available as needed to accommodate this expansion and for any
additional sales offices that may be needed. Our principal web
server equipment and operations are maintained in our corporate
headquarters in San Jose, California.
|
|
| Item 3. |
Legal Proceedings |
On October 25, 2004, we entered into a settlement agreement
and patent cross-license (the agreements) covering technologies
that were at issue in litigation with Nortel Networks (Nortel).
The agreements resolved ongoing litigation in both Massachusetts
and California. Pursuant to the agreements, we paid
$35.0 million to Nortel in early November 2004 and, based
on the results of a third-party valuation analysis, we recorded
an operating expense of $30.2 million in the third quarter
of 2004. The remaining $4.8 million paid to Nortel
represents consideration for a four-year cross-license with
Nortel.
Another long-standing litigation matter was resolved on
February 10, 2005, when the Ninth Circuit Court of Appeals
(Court of Appeals) dismissed the plaintiff’s appeal In
re Foundry Networks, Inc. Securities Litigation. The
dismissal was in response to plaintiff’s motion to dismiss
their appeal of the District Court judgment in favor of us. This
litigation began in December 2000, when several similar
stockholder 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 District Court had dismissed
the case with prejudice and entered judgment in our favor, after
which the plaintiffs filed a Notice of Appeal with the Court of
Appeals. Oral argument before the Court of Appeals was scheduled
for February 17, 2005. However, on February 9, 2005,
plaintiffs filed their unopposed motion of dismissal of their
appeal, making the District Court’s judgment final. No
settlement was paid in the action. We believe the dismissal
validates our position that the lawsuit was without merit.
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 (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
alleges 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 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
12
assignment or surrender of control of certain claims we may have
against the underwriters. The settlement 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 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 February 6, 2004, the District Court
severed the two cases. Fact discovery is now closed. A Markman
claim construction hearing was held on January 14, 2005,
and the parties are awaiting the Court’s claim
construction. On February 28, 2005, the parties filed
summary judgment motions. Trial in the matter is expected to
begin in November 2005. The severed trial, to which we are not a
party, is scheduled to begin April 26, 2005. We have
analyzed the validity of Lucent’s claims and believe that
Lucent’s suit is without merit. We are committed to
vigorously defending ourselves 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. On March 22, 2004,
Lucent filed an Answer and Counter Claim seeking a declaration
of invalidity as to our asserted patent. On April 9, 2004,
Lucent filed an Amended Answer and Counter Claim asserting
infringement of U.S. patent #5649131. We have analyzed
the validity of Lucent’s counter claim and believe it is
without merit. Discovery has begun and is scheduled to close on
June 17, 2005. A Markman claims construction hearing is
scheduled for March 24, 2005. Trial is scheduled to begin
August 1, 2005.
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. From time to time, third
parties assert patent infringement claims against us in the form
of letters, lawsuits and other forms of communication. In
addition, from time to time, we receive notification from
customers claiming that they are entitled to indemnification or
other obligations from us related to infringement claims made
against them by third parties. 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. We review the need for any such liability on a
quarterly basis and record any necessary adjustments to reflect
the effect of ongoing negotiations, settlements, rulings, advice
of legal counsel, and other information and events pertaining to
a particular case in the period they become known. At
December 31, 2004, we have not recorded any such
liabilities 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 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.
|
|
| 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 2004.
PART II
|
|
| Item 5. |
Market For Registrant’s Common Equity, Related
Stockholder Matters, and Issuer Purchases of Equity
Securities |
Price Range of Common Stock
Foundry’s common stock began trading on the Nasdaq National
Market on September 28, 1999 and is traded under the symbol
“FDRY”. As of December 31, 2004, there were
approximately 356 holders of record
13
of the common stock. The following table sets forth the high and
low closing sale prices of our common stock as reported on the
Nasdaq National Market.
| |
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
2004
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
$ |
13.96 |
|
|
$ |
9.91 |
|
|
Third quarter
|
|
$ |
13.57 |
|
|
$ |
8.50 |
|
|
Second quarter
|
|
$ |
18.84 |
|
|
$ |
11.30 |
|
|
First quarter
|
|
$ |
33.75 |
|
|
$ |
15.80 |
|
|
2003
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
$ |
27.68 |
|
|
$ |
21.88 |
|
|
Third quarter
|
|
$ |
23.77 |
|
|
$ |
15.25 |
|
|
Second quarter
|
|
$ |
16.00 |
|
|
$ |
7.92 |
|
|
First quarter
|
|
$ |
10.13 |
|
|
$ |
7.39 |
|
Dividend Policy
We have never paid cash dividends on our capital stock. We
currently anticipate that we will retain our future earnings, if
any, and therefore do not expect to pay cash dividends in the
foreseeable future.
Unregistered Securities Sold in 2004
We did not sell any unregistered shares of our common stock
during 2004.
Issuer Purchases of Equity Securities
We do not have a stock repurchase program and did not repurchase
any of our equity securities during the quarter ended
December 31, 2004.
|
|
| 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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands, except per share amounts) | |
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
$ |
409,104 |
|
|
$ |
399,628 |
|
|
$ |
300,742 |
|
|
$ |
311,176 |
|
|
$ |
377,156 |
|
| |
Gross margin
|
|
|
265,681 |
|
|
|
258,770 |
|
|
|
160,550 |
|
|
|
153,035 |
|
|
|
242,826 |
|
| |
Gross margin percentage
|
|
|
65 |
% |
|
|
65 |
% |
|
|
53 |
% |
|
|
49 |
% |
|
|
64 |
% |
|
Income (loss) from operations(1)
|
|
|
63,365 |
|
|
|
112,057 |
|
|
|
27,171 |
|
|
|
(1,591 |
) |
|
|
130,896 |
|
|
Net income(1)
|
|
|
47,967 |
|
|
|
75,082 |
|
|
|
22,537 |
|
|
|
2,886 |
|
|
|
88,121 |
|
|
Basic net income per share(1)
|
|
$ |
0.35 |
|
|
$ |
0.60 |
|
|
$ |
0.19 |
|
|
$ |
0.02 |
|
|
$ |
0.80 |
|
|
Diluted net income per share(1)
|
|
$ |
0.34 |
|
|
$ |
0.55 |
|
|
$ |
0.18 |
|
|
$ |
0.02 |
|
|
$ |
0.69 |
|
14
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments
|
|
$ |
617,441 |
|
|
$ |
505,684 |
|
|
$ |
326,453 |
|
|
$ |
274,734 |
|
|
$ |
252,245 |
|
|
Working capital
|
|
|
519,144 |
|
|
|
430,038 |
|
|
|
390,543 |
|
|
|
354,054 |
|
|
|
339,369 |
|
|
Total assets
|
|
|
811,192 |
|
|
|
658,144 |
|
|
|
451,535 |
|
|
|
412,138 |
|
|
|
398,466 |
|
|
Long-term liabilities
|
|
|
17,613 |
|
|
|
7,707 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total stockholders’ equity
|
|
|
706,338 |
|
|
|
590,495 |
|
|
|
398,099 |
|
|
|
361,832 |
|
|
|
345,016 |
|
|
|
| (1) |
2004 includes an operating expense of $18.7 million, net of
tax, related to our litigation settlement with Nortel in the
third quarter of 2004. |
|
|
| 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 contains 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 to not 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 file such
reports with the SEC.
Overview
Founded in 1996, Foundry designs, develops, manufactures,
markets and sells 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 U.S. government
agencie