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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

|X|   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number 000-26689

FOUNDRY NETWORKS, INC.
(Exact name of registrant as specified in its charter)

 
Delaware
(State or other jurisdiction of
incorporation or organization)

 
77-0431154
(I.R.S. Employer
Identification No.)
 

2100 Gold Street
P.O. Box 649100
San Jose, CA 95164-9100
(Address of principal executive offices, including zip code)

(408) 586-1700
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

            Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   |X|      No   |_|

            As of November 8, 2002, there were 120,704,186 shares of the registrant’s common stock outstanding, par value $0.0001.

 

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INDEX
 
Page
PART I FINANCIAL INFORMATION  
 
Item 1. Financial Statements (Unaudited):
 
  Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 3
 
  Condensed Consolidated Statements of Income for the Three and Nine Months Ended
      September 30, 2002 and 2001		 4
 
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
      September 30, 2002 and 2001		 5
 
  Notes to Condensed Consolidated Financial Statements 6
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
 
  Risk Factors That May Affect Future Results and Market Price of Stock 17
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
     
Item 4. Controls and Procedures 26
 
PART II OTHER INFORMATION
 
Item 1. Legal Proceedings 27
 
Item 2. Changes in Securities and Use of Proceeds 28
 
Item 3. Defaults Upon Senior Securities 28
 
Item 4. Submission of Matters to a Vote of Security Holders 28
 
Item 5. Other Information 28
 
Item 6. Exhibits and Reports on Form 8-K 28
 
SIGNATURES 30
   
CERTIFICATIONS 31
 

 
 
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PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements.

FOUNDRY NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
  September 30,
2002
(unaudited)		   December 31,
2001
(1)
ASSETS            
Current assets:  
       Cash and cash equivalents   $ 148,855   $ 98,210  
       Short-term investments    161,108    176,524  
       Accounts receivable, net of allowances for doubtful accounts of
          $5,857 and $6,648 and sales returns of $1,501 and $1,501 at
          September 30, 2002 and December 31, 2001, respectively		    39,938    51,830  
       Inventories    46,167    43,277  
       Deferred tax assets    29,703    29,656  
       Prepaid expenses and other current assets    2,746    4,863  
              Total current assets    428,517    404,360  
Property and equipment     16,363    13,184  
Less: Accumulated depreciation     (10,520 )  (6,868 )
              Net property and equipment    5,843    6,316  
Other long-term assets    1,177    1,462  
              Total assets   $ 435,537   $ 412,138  
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:  
       Accounts payable   $ 20,967   $ 15,300  
       Accrued payroll and related expenses    7,218    10,932  
       Warranty accrual    2,499    2,499  
       Other accrued expenses    3,872    4,601  
       Income taxes payable    3,438    1,193  
       Deferred support revenue    17,075    15,781  
              Total current liabilities    55,069    50,306  
Commitments and contingencies (Note 4)  
Stockholders’ equity:  
       Common stock, $0.0001 par value:  
              Authorized—300,000,000 shares at September 30, 2002 and
                 December 31, 2001, respectively		  
              Issued and outstanding—120,656,207 and 119,298,814 shares at
                 September 30, 2002 and December 31, 2001, respectively		    12    12  
       Treasury stock    —    (14,996 )
       Additional paid-in capital    275,752    285,091  
       Note receivable from stockholder    (480 )  (480 )
       Deferred stock compensation    (401 )  (1,302 )
       Retained earnings    105,585    93,507  
              Total stockholders’ equity    380,468    361,832  
              Total liabilities and stockholders’ equity   $ 435,537   $ 412,138  
 

(1) Derived from audited consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

 
 
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FOUNDRY NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share data)
 
Three Months Ended
September 30,
 Nine Months Ended
September 30,
2002
 2001
 2002
 2001
Revenue, net     $ 76,596   $ 74,654   $ 214,024   $ 245,774  
Cost of revenue    35,543    37,152    100,846    117,358  
                  Gross profit    41,053    37,502    113,178    128,416  
Operating expenses:  
         Research and development    8,907    8,436    26,291    24,587  
         Sales and marketing    18,492    22,130    61,653    70,213  
         General and administrative    4,662    5,290    11,024    16,332  
         Amortization of deferred stock compensation    212    592    900    2,560  
                  Total operating expenses    32,273    36,448    99,868    113,692  
Income from operations    8,780    1,054    13,310    14,724  
Interest and other income    1,184    2,023    3,943    7,192  
Income before provision for income taxes    9,964    3,077    17,253    21,916  
Provision for income taxes    2,959    1,169    5,175    8,328  
                  Net income   $ 7,005   $ 1,908   $ 12,078   $ 13,588  
Basic net income per share   $ 0.06   $ 0.02   $ 0.10   $ 0.12  
Weighted average shares used in computing basic net
   income per share		    119,999    118,376    119,204    117,033  
Diluted net income per share   $ 0.06   $ 0.02   $ 0.10   $ 0.11  
Weighted average shares used in computing diluted net
   income per share		    124,859    126,077    123,587    125,617  
 

See accompanying notes to condensed consolidated financial statements.

 
 
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FOUNDRY NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 
Nine Months Ended
September 30,
2002
 2001
CASH FLOWS FROM OPERATING ACTIVITIES:            
          Net income   $ 12,078   $ 13,588  
          Adjustments to reconcile net income to net cash provided by
             operating activities:		  
                   Depreciation    3,652    2,744  
                   Amortization of deferred stock compensation    900    2,560  
                   Provision for doubtful accounts    544    6,285  
                   Provision for excess and obsolete inventories    6,685    12,421  
                   Tax benefit from stock option exercises    411    3,792  
          Change in operating assets and liabilities:  
                   Accounts receivable    11,348    5,177  
                   Inventories    (9,575 )  (15,437 )
                   Other assets    2,355    3,675  
                   Accounts payable    5,667    (8,020 )
                   Accrued payroll and related benefits    (3,714 )  (1,400 )
                   Income taxes payable    2,245    —  
                   Other accrued liabilities    (729 )  213  
                   Deferred support revenue    1,294    1,072  
                             Net cash provided by operating activities    33,161    26,670  
CASH FLOWS FROM INVESTING ACTIVITIES:  
          Purchases of property and equipment    (3,179 )  (3,932 )
          Maturities of short-term investments    238,854    218,756  
          Purchases of short-term investments    (223,438 )  (288,243 )
          Purchase of minority investment    —    (2,500 )
                             Net cash used in investing activities    12,237    (75,919 )
CASH FLOWS FROM FINANCING ACTIVITY:  
          Proceeds from issuances of common stock    5,596    11,569  
                             Net cash provided by financing activity    5,596    11,569  
                   Effect of exchange rate changes on cash    (349 )  (72 )
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS    50,645    (37,752 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD    98,210    168,429  
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 148,855   $ 130,677  
 

See accompanying notes to condensed consolidated financial statements.

 
 
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FOUNDRY NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Information for the three and nine months ended September 30, 2002 and 2001 is unaudited)

1.   DESCRIPTION OF BUSINESS:

            Founded in 1996, Foundry designs, develops, manufactures and markets a comprehensive, end-to-end suite of high performance Gigabit Ethernet Layer 2 and Layer 3 switches, Metro routers and Internet traffic management products for enterprises, educational institutions, government agencies, web-hosting companies, application service providers (ASPs), electronic banking and finance service providers, and Internet service providers (ISPs). Our product suite includes the NetIron family of Metro routers, FastIron family of Ethernet edge switches, EdgeIron layer 2 Ethernet switches, BigIron family of Gigabit Ethernet core switches and ServerIron family of Ethernet Layer 4-7 Internet traffic management switches.

2.   SIGNIFICANT ACCOUNTING POLICIES:

      Basis of Presentation

            The condensed consolidated financial statements included herein have been prepared by Foundry Networks, Inc., without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and include the accounts of Foundry Networks, Inc. and its wholly-owned subsidiaries (collectively “Foundry” or the “Company”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in Foundry’s Annual Report on Form 10-K filed with the SEC.

            The unaudited condensed consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. These adjustments are of a normal, recurring nature. The results of operations for the three and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for future quarters or for the year ending December 31, 2002.

      Principles of Consolidation and Foreign Currency Translation

            The Company’s condensed consolidated financial statements reflect the operations of the Company 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 is included as a component of stockholders’ equity.

      Reclassifications

            Certain items previously reported in specific financial captions have been reclassified to conform with the September 30, 2002 presentation.

      Use of Estimates in Preparation of Financial Statements

            The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period reported. Actual results could differ from those estimates. Estimates are used in accounting for, but not limited to, the accounting for excess and obsolete inventory, product warranty, allowances for doubtful accounts, sales returns, income taxes and depreciation. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are determined.

 
 
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FOUNDRY NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Cash, Cash Equivalents and Short-Term Investments

            Foundry considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of commercial paper, government debt securities and cash deposited in checking and money market accounts.

            Foundry accounts for its investments under the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments in highly liquid financial instruments with original maturities greater than three months but less than one year are classified as short-term investments. As of September 30, 2002 and December 31, 2001, Foundry’s short-term investments, which were stated at amortized cost and classified as held-to-maturity, consisted of investment grade U.S. debt securities and commercial paper. As of September 30, 2002, short-term investments also included corporate debt securities.
 
September 30, 2002
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Estimated
Fair Value
Money market funds     $ 6,311   $ —   $ —   $ 6,311  
Corporate debt securities    5,000    —    —    5,000  
Commercial paper    76,846    —    —    76,846  
Government securities    157,581    31    (44 )  157,568  
    $ 245,738   $ 31   $ (44 ) $ 245,725