| FOUNDRY NETWORKS INC Item 1A Risk Factors Intense competition in the market for networking solutions could prevent us from maintaining or increasing revenue and sustaining profitability |
| The market for networking solutions is intensely competitive |
| In particular, Cisco Systems, Inc |
| maintains a dominant position in this market and several of its products compete directly with our products |
| Cisco’s substantial resources and market dominance have enabled it to reduce prices on its products within a short period of time following the introduction of these products, which typically causes its competitors to reduce prices and, therefore, the margins and the overall 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 |
| Although we are currently among the top providers of network infrastructure solutions, we cannot provide assurance that we will be able to compete successfully against Cisco, currently the leading provider in the networking market |
| We also compete with other companies, such as Extreme Networks, Juniper Networks, F5 Networks, Inc, Nortel Networks, Enterasys Networks, 3Com, Huawei Technologies, Force 10 Networks, and Alcatel |
| Some of our current and potential competitors have greater market leverage, longer operating histories, greater financial, technical, sales, marketing and other resources, more name recognition and larger installed customer bases |
| Additionally, we may face competition from unknown companies and emerging technologies that may offer new LAN, MAN and LAN/WAN solutions |
| Furthermore, a number of these competitors may merge or form strategic relationships that would enable them to apply greater resources and sales coverage than we can, and to offer, or bring to market earlier, products that are superior to ours in terms of features, quality, pricing or a combination of these and other factors |
| In order to remain competitive, we must, among other things, invest significant resources in developing new products with superior performance at lower prices than our competitors, enhance our current products and 11 _________________________________________________________________ [63]Table of Contents maintain customer satisfaction |
| In addition, we must make certain our sales and marketing capabilities allow us to compete effectively against our competitors |
| If we fail to do so, our products may not compete favorably with those of our competitors and our revenue and profitability could suffer |
| We must continue to introduce new products with superior performance and features in a timely manner in order to sustain and increase our revenue, and if we fail to predict and respond to emerging technological trends and customers’ changing needs, our operating results may suffer |
| The networking industry is characterized by rapid technological change, frequent new product introductions, changes in customer requirements, and evolving industry standards |
| Therefore, in order to remain competitive, we must introduce new products in a timely manner that offer substantially greater performance and support a greater number of users per device, all at lower price points |
| Even if these objectives are accomplished, new products may not be successful in the marketplace, or may take more time than anticipated to start generating meaningful revenue |
| The process of developing new technology is complex and uncertain, and if we fail to develop or obtain important intellectual property and accurately predict customers’ changing needs and emerging technological trends, our business could be harmed |
| We must commit significant resources to develop new products before knowing whether our investments will eventually result in products the market will accept |
| After a product is developed, we must be able to forecast sales volumes and quickly manufacture a sufficient volume of products and mix of configurations that meet customer requirements, all at low costs |
| The current life cycle of our products is typically 18 to 24 months |
| The introduction of new products or product enhancements may shorten the life cycle of our existing products or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction, and may cause customers to defer purchasing our existing products in anticipation of the new products |
| This could harm our operating results by decreasing sales, increasing our inventory levels of older products and exposing us to greater risk of product obsolescence |
| In addition, we have experienced, and may in the future experience, delays in developing and releasing new products and product enhancements and in achieving volume manufacturing for such new products |
| This has led to, and may in the future lead to, delayed sales, increased expenses and lower quarterly revenue than anticipated |
| During the development of our products, we have also experienced delays in the prototyping of our ASICs, which in turn has led to delays in product introductions |
| 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 |
| Sales to our ten largest customers accounted for 30prca and 37prca of net product revenue for 2005 and 2004, respectively |
| The loss of continued orders from any of our more significant customers, such as the US government or individual agencies within the US government, Mitsui, or Hewlett Packard, could cause our revenue and profitability to suffer |
| Although our financial performance may depend on large, recurring orders from certain customers and resellers, we do not generally have binding commitments from them |
| For example: • our reseller agreements generally do not require minimum purchases; • our customers can stop purchasing and our resellers can stop marketing our products at any time; and • our reseller agreements generally are not exclusive and are for one-year terms, with no obligation of the resellers to renew the agreements |
| Because our expenses are based on our revenue forecasts, a substantial reduction or delay in sales of our products to, or unexpected returns from, customers and resellers, or the loss of any significant customer or reseller, could harm our business |
| Although our largest customers may vary from period to period, we anticipate that our operating results for any given period will continue to depend on large orders from a small number of customers |
| In addition, a change in the mix of our customers, or a change in the mix of direct and indirect sales, could adversely affect our revenue and gross margins |
| 12 _________________________________________________________________ [64]Table of Contents 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 |
| As part of the changing economic environment, the United States government has become an important customer for the networking industry, and for us in particular, representing approximately 19prca, 27prca, and 31prca of our total revenue for 2005, 2004, and 2003, respectively |
| The process of becoming a qualified government vendor, especially for high-security projects, takes considerable time and effort, and the timing of contract awards and deployment of our products are hard to predict |
| Typically, six to twelve months may elapse between the initial evaluation of our systems by governmental agencies and the execution of a contract |
| The revenue stream from these contracts is hard to predict and may be materially uneven between quarters |
| Government agency contracts are frequently awarded only after formal competitive bidding processes, which are often protracted and may contain provisions that permit cancellation in the event funds are unavailable to the government agency |
| Even if we are awarded contracts, substantial delays or cancellations of purchases could result from protests initiated by losing bidders |
| In addition, government agencies are subject to budgetary processes and expenditure constraints that could lead to delays or decreased capital expenditures in certain areas |
| If we fail to win significant government contract awards, if the government or individual agencies within the government terminate or reduce the scope and value of our existing contracts, or if the government fails to reduce the budget deficit, our financial results may be harmed |
| Additionally, government orders may be subject to priority requirements that may affect scheduled shipments to our other customers |
| 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 |
| The networking industry is subject to claims and related litigation regarding patent and other intellectual property rights |
| Some companies claim extensive patent portfolios that may apply to the network industry |
| As a result of the existence of a large number of patents and the 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 upon intellectual property rights that may be claimed by others |
| From time to time third parties have asserted patent, copyright and trademark rights to technologies and standards that are important to us |
| Third parties may in the future assert claims or initiate litigation against us or our manufacturers, suppliers or customers alleging infringement of their intellectual property rights with respect to our existing or future products |
| We are committed to vigorously defending ourselves against such claims |
| Regardless of the merits of our position, we have in the past and may in the future incur substantial expenses in defending against third party claims |
| In the event of a determination adverse to us, we could incur substantial monetary liability and be required to change our business practices |
| Either of these could have a material adverse effect on our financial position, results of operations, or cash flows |
| A number of companies have developed a licensing program in an attempt to realize revenue from their patent portfolios |
| We carefully review all license requests, but are unwilling to license technology not required for our product portfolio |
| Moreover, a refusal by us to a license request could result in threats of litigation or actual litigation, which, if or when initiated, could harm our business |
| We are a party to lawsuits in the normal course of our business |
| Litigation in general, and intellectual property and securities litigation in particular, can be expensive, lengthy and disruptive to normal business operations |
| Moreover, the results of complex legal proceedings are difficult to predict |
| We believe that we have defenses in the lawsuits pending against us as indicated in Note 3, “Commitments and Contingencies — Litigation,” to Condensed Consolidated Financial Statements, and we are vigorously contesting these allegations |
| Responding to the allegations has been, and probably will continue to be, expensive and time-consuming for us |
| An unfavorable resolution of the lawsuits could adversely affect our business, results of operations, or financial condition |
| If we fail to protect our intellectual property, our business and ability to compete could suffer |
| Our success and ability to compete are substantially dependent on our internally developed technology and know-how |
| Our proprietary technology includes our ASICs, our IronCore, JetCore, and Terathon hardware 13 _________________________________________________________________ [65]Table of Contents architecture, our IronWare software, our IronView network management software, and certain mechanical designs |
| 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 |
| Although we have patent applications pending, there can be no assurance that patents will be issued from pending applications, or that claims allowed on any future patents will be sufficiently broad to protect our technology |
| We provide software to customers under license agreements included in the packaged software |
| These agreements are not negotiated with or signed by the licensee, and thus may not be enforceable in some jurisdictions |
| Despite our efforts to protect our proprietary rights through confidentiality and license agreements, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology |
| These precautions may not prevent misappropriation or infringement of our intellectual property |
| Monitoring unauthorized use of our products is difficult and the steps we have taken may not prevent misappropriation of our technology, particularly in some foreign countries in which the laws may not protect our proprietary rights as fully as in the United States |
| Our ability to increase our revenue depends on expanding our direct sales operations and reseller distribution channels and providing excellent customer support |
| If we are unable to effectively develop and retain our sales and support staff, or establish and cultivate relationships with our indirect distribution channels, our ability to grow and increase our revenue could be harmed |
| Additionally, if our resellers and system integrators are not successful in their sales efforts, sales of our products may decrease and our operating results could suffer |
| Resellers and system integrators typically sell directly to end-users and often provide system installation, technical support, professional services, and other support services in addition to network equipment sales |
| System integrators also typically integrate our products into an overall solution, and a number of resellers and service providers are also system integrators |
| As a result, we cannot assure that our resellers will market our products effectively or continue to devote the resources necessary to provide us with adequate sales, marketing and technical support |
| Additionally, if we do not manage distribution of our products and services effectively, or if our resellers’ financial conditions or operations weaken, our revenue and gross margins could be adversely affected |
| In an effort to gain market share and support our customers, we may need to expand our direct sales operations and customer service staff to support new and existing customers |
| The timing and extent of any such expansion are uncertain |
| We currently outsource our technical support to a third-party provider in Australia to support our customers on that continent |
| In the future, we may utilize third-party contractors in other regions of the world as part of our expansion effort |
| Expansion of our direct sales operations, reseller channels, and customer service operations may not be successfully implemented, and the cost of any expansion may exceed the revenue generated |
| Our reported results of operations will be materially and adversely affected by our adoption of SFAS 123R SFAS 123R, which became effective for us on January 1, 2006, will result in our recognition of substantial compensation expense relating to our employee stock options and employee stock purchase plans |
| In 2005 and prior periods, we used the intrinsic value method to measure compensation expense for stock-based awards to our employees |
| Under the new accounting standard, we are required to adopt a fair value-based method for measuring the compensation expense related to employee stock awards, which we expect will lead to substantial additional compensation expense and will have a material adverse effect on our reported results of operations |
| The balance of unearned stock-based compensation, on a pre-tax basis, to be expensed in the period 2006 through 2009 related to share-based awards unvested at December 31, 2005, as previously calculated under the disclosure-only requirements of SFAS 123, is approximately dlra51dtta0 million |
| To the extent that we grant restricted stock and additional stock options to employees and directors, stock-based compensation expense will be increased by the additional unearned compensation resulting from those additional grants |
| In addition, our tax rate may fluctuate significantly between periods based on the extent of employee gains recognized on stock option exercises |
| Note 2 to Consolidated Financial Statements in this Form 10-K provides our pro forma net income and earnings per share as if we had used a fair value-based method similar to the methods required under SFAS 123R to measure the compensation expense for employee stock awards during the periods presented |
| The adoption of SFAS 123R may adversely affect our 14 _________________________________________________________________ [66]Table of Contents stock price and management may decide to limit the use of stock options as an incentive and retention tool, which could, in turn, hurt our ability to recruit employees and retain existing employees |
| Because our financial results are difficult to predict and may fluctuate significantly, we may not meet quarterly financial expectations, which could cause our stock price to decline |
| Our quarterly revenue and operating results are difficult to predict and may fluctuate significantly from quarter to quarter |
| Our ability to increase revenue in the future is dependent on increased demand for our products and our ability to ship larger volumes of our products in response to such demand, as well as our ability to develop or acquire new products and subsequently achieve customer acceptance of newly introduced products |
| Delays in generating or recognizing revenue could cause our quarterly operating results to be below the expectations of public market analysts or investors, which could cause the price of our common stock to fall |
| We continue our practice of not providing guidance |
| In the future, we may begin to provide guidance again, but could again discontinue the practice if we believe the business outlook is too uncertain to predict |
| Any such decision could cause our stock price to decline |
| We may experience a delay in generating or recognizing revenue for a number of reasons |
| Unfulfilled orders at the beginning of each quarter are typically substantially less than our expected revenue for that quarter |
| Therefore, we depend on obtaining orders in a quarter for shipment in that quarter to achieve our revenue objectives |
| In addition, our reseller agreements typically allow the reseller to delay scheduled delivery dates without penalty |
| Moreover, demand for our products may fluctuate as a result of seasonality |
| For example, sales to the US government are typically stronger in the third calendar quarter and demand from European customers is generally weaker in the summer months |
| Orders are generally cancelable at any time prior to shipment |
| Reasons for cancellation could include our inability to deliver products within the customer’s specified timeframe due to component shortages or high priority government orders that take precedence to commercial enterprise orders, as well as other reasons |
| Our revenue for a particular period may also be difficult to predict and may be adversely affected if we experience a non-linear (back-end loaded) sales pattern during the period |
| We typically experience significantly higher levels of sales towards the end of a period as a result of customers submitting their orders late in the period or as a result of manufacturing issues or component shortages which may delay shipments |
| Such non-linearity in shipments can increase costs, as irregular shipment patterns result in periods of underutilized capacity and additional costs associated with higher inventory levels, inventory planning and management |
| Furthermore, orders received towards the end of the period may not ship within the period due to our manufacturing lead times |
| In addition, we may incur increased costs and expenses related to sales and marketing, including expansion of our direct sales operations and distribution channels, product marketing, customer support, expansion of our corporate infrastructure, legal matters, and facilities expansion |
| We base our operating expenses on anticipated revenue levels, and a high percentage of our expenses are fixed in the short-term |
| As a result, any significant shortfall in revenue relative to our expectations could cause a significant decline in our quarterly operating results |
| Because of the uncertain nature of the economic environment and rapidly changing market we serve, period-to-period comparisons of operating results may not be meaningful |
| In addition, you may not be able to rely on prior results for any period as an indication of future performance |
| In the future, our revenue may remain the same, decrease or increase, and we may not be able to sustain or increase profitability on a quarterly or annual basis |
| As a consequence, operating results for a particular quarter are extremely difficult to predict |
| Weak economic and market conditions or geopolitical turmoil may adversely affect our revenue, gross margins and expenses |
| Our quarterly revenue and operating results may fluctuate due to the effects of general economic conditions in the United States and globally, and, in particular, market conditions in the communications and networking industries |
| Additionally, current political turmoil in many parts of the world, including terrorist and military actions, may weaken the global economy |
| If economic conditions in the United States and globally do not improve, or if they worsen, we may experience material negative effects on our business, operating results and financial condition |
| 15 _________________________________________________________________ [67]Table of Contents There can be no assurance that we will be able to improve or even maintain our financial results or that economic and market conditions will continue to improve and will not deteriorate |
| Our gross margins and average selling prices of our products have decreased in the past and may continue to decrease as a result of competitive pressures and other factors |
| Our industry has experienced erosion of average product selling prices due to a number of factors, particularly competitive and macroeconomic pressures and rapid technological change |
| The average selling prices of our products have decreased in the past and may continue to decrease in response to competitive pressures, increased sales discounts, new product introductions by our competitors or other factors |
| Both we and our competitors occasionally lower sales prices in order to gain market share or create more demand |
| Furthermore, as a result of the cautious capital spending in the technology sector, coupled with more broad macro-economic factors, both we and our competitors may pursue more aggressive pricing strategies in an effort to maintain sales levels |
| Such intense pricing competition could cause our gross margins to decline and may adversely affect our business, operating results or financial condition |
| Our gross margins may be adversely affected if we are unable to reduce manufacturing costs and effectively manage our inventory levels |
| Although management continues to closely monitor inventory levels, declines in demand for our products could result in additional provisions for excess and obsolete inventory |
| Additionally, our gross margins may be negatively affected by fluctuations in manufacturing volumes, component costs, the mix of product configurations sold and the mix of distribution channels through which our products are sold |
| For example, we generally realize higher gross margins on direct sales to an end user than on sales through resellers or to our OEMs |
| As a result, any significant shift in revenue through resellers or to our OEMs could harm our gross margins |
| If product or related warranty costs associated with our products are greater than we have experienced, our gross margins may also be adversely affected |
| We need additional qualified personnel to maintain and expand our business |
| If we are unable to promptly attract and retain qualified personnel, our business may be harmed |
| We believe our future success will depend in large part on our ability to identify, attract and retain highly-skilled managerial, engineering, sales and marketing, finance and manufacturing personnel |
| Competition for these personnel can be intense, especially in the San Francisco Bay Area, and we may experience some difficulty hiring employees in the timeframe we desire, particularly engineering and sales personnel |
| Volatility or lack of positive performance in our stock price may also adversely affect our ability to retain key employees, all of whom have been granted stock options |
| In order to improve productivity, we have historically used stock options to motivate and retain our employees |
| The decision by the accounting standard setting body regarding the accounting treatment of stock options as compensation expense could limit our ability to continue to use stock options as an incentive and retention tool |
| The loss of the services of any of our key personnel, the inability to identify, attract or retain qualified personnel in the future, or delays in hiring required personnel, particularly engineers and sales personnel, could make it difficult for us to manage our business and meet key objectives, such as timely product introductions |
| Our success also depends to a significant degree on the continued contributions of our key management, engineering, sales and marketing, finance and manufacturing personnel, many of whom would be difficult to replace |
| In particular, we believe that our future success may depend on Bobby R Johnson, Jr, President, Chief Executive Officer and Chairman of the Board |
| We do not have employment contracts or key person life insurance for any of our personnel |
| In addition, our 1996 Stock Plan expires in 2006 |
| We intend to solicit the approval of our stockholders for the adoption of a new 2006 Stock Plan |
| There can be no assurance that we will obtain stockholder consent for such a new plan |
| If we are unable to obtain stockholder consent for the plan, our ability to grant new stock options or restricted stock to new and existing employees could be materially and adversely affected, which will make it difficult to attract or retain qualified personnel in the future |
| 16 _________________________________________________________________ [68]Table of Contents 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 |
| Our success will depend, in part, on increasing international sales and expanding our international operations |
| Our international sales primarily depend on our resellers, including Pan Dacom GmbH in Europe, Mitsui in Japan, Stark Technology in China, and Samsung in Korea |
| The failure of our international resellers to sell our products could limit our ability to sustain and grow our revenue |
| In particular, our revenue from Japan depends primarily on Mitsui’s ability to sell our products and on the strength of the Japanese economy |
| There are a number of additional risks arising from our international business, including: • potential recessions in economies outside the United States; • longer accounts receivable collection cycles; • seasonal reductions in business activity; • higher costs of doing business in foreign countries; • infringement claims on foreign patents, copyrights, or trademark rights; • difficulties in managing operations across disparate geographic areas; • difficulties associated with enforcing agreements through foreign legal systems; • adverse fluctuations in currency exchange rates; • political instability and export restrictions; • potential adverse tax consequences; • unexpected changes in regulatory requirements; • military conflict and terrorist activities; and • natural disasters and widespread medical epidemics |
| The factors described above could also disrupt our product and component manufacturers and key suppliers located outside of the United States |
| One or more of such factors may have a material adverse effect on our future international operations and, consequently, on our business, operating results and financial condition |
| Generally, our international sales are denominated in US dollars |
| As a result, an increase in the value of the US dollar relative to foreign currencies could make our products less competitive on a price basis in international markets |
| We invoice some of our international customers in local currencies, which could subject us to fluctuations in exchange rates between the US dollar and the local currencies |
| See also Item 7A “Quantitative and Qualitative Disclosures About Market Risk” for a review of certain risks associated with foreign exchange rates |
| We purchase several key components for our products from sole sources; if these components are not available, our revenue may be harmed |
| We purchase several key components used in our products from suppliers for which we have no readily available alternative, or sole sources, and depend on supply from these sources to meet our needs |
| The inability of any supplier to provide us with an adequate supply of key components, or the loss of any of our suppliers, may cause a delay in our ability to fulfill orders and may have a material adverse effect on our business and financial condition |
| We believe lead-times for various components have lengthened as a result of limits on IT spending and the economic uncertainty, which has made certain components scarce |
| As component demand increases and lead-times become longer, our suppliers may increase component costs |
| If component costs increase, our gross margins may also decline |
| Our principal limited or sole-sourced components include high-speed dynamic and static random access memories, commonly known as DRAMs and SRAMs, ASICs, printed circuit boards, optical components, packet processors, switching fabrics, microprocessors and power supplies |
| Certain components used in our products are purchased from sole sources and may not be readily available from other suppliers as the development period 17 _________________________________________________________________ [69]Table of Contents required to fabricate such components can be lengthy |
| We acquire these components through purchase orders and have no long-term commitments regarding supply or pricing from these suppliers |
| From time to time, we have experienced shortages in allocations of components, resulting in delays in filling orders |
| We may encounter shortages and delays in obtaining components in the future, which could impede our ability to meet customer orders |
| We depend on anticipated product orders to determine our material requirements |
| Lead-times for limited-sourced materials and components can be as long as six months, vary significantly and depend on factors such as the specific supplier, contract terms and demand for a component at a given time |
| Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead-times with the risk of inventory obsolescence due to rapidly changing technology and customer requirements |
| If orders do not match forecasts, or if we do not manage inventory effectively, we may have either excess or insufficient inventory of materials and components, which could negatively affect our operating results and financial condition |
| Our reliance on third-party manufacturing vendors to manufacture our products may cause a delay in our ability to fill orders |
| Our subassemblies for certain products are manufactured by contract manufacturers |
| We then perform final assembly and testing of these products |
| In addition, some Foundry-branded products are manufactured by third party OEMs |
| 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 are contractually obligated to purchase long lead-time component inventory procured by certain suppliers and third-party manufacturers in accordance with our forecasts, although we can generally give notice of order cancellation at least 90 days prior to the delivery date |
| If actual demand for our products is below our projections, we may have excess inventory as a result of our purchase commitments |
| We do not have long-term contracts with these suppliers and third-party manufacturers |
| We have experienced delays in product shipments from our contract manufacturers, which in turn delayed product shipments to our customers |
| In addition, certain of our products require a long manufacturing lead-time, which may result in delayed shipments |
| We may in the future experience similar delays or other problems, such as inferior quality and insufficient quantity of product, any of which could harm our business and operating results |
| We intend to regularly introduce new products and product enhancements, which will require us to rapidly achieve volume production by coordinating our efforts with our suppliers and contract manufacturers |
| We attempt to increase our material purchases, contract manufacturing capacity and internal test and quality functions to meet anticipated demand |
| The inability of our contract manufacturers or OEMs to provide us with adequate supplies of high-quality products, the loss of any of our third-party manufacturers, or the inability to obtain components and raw materials, could cause a delay in our ability to fulfill orders |
| Additionally, from time to time, we transition, via our contract manufacturers, to different manufacturing locations, including lower-cost foreign countries |
| Such transitions are inherently risky and could cause a delay in our ability to fulfill orders or a deterioration in product quality |
| Due to the lengthy sales cycles of some of our products, the timing of our revenue is difficult to predict and may cause us to fail to meet our revenue expectations |
| Some of our products have a relatively high sales price, and their purchase often represents a significant and strategic decision by a customer |
| The decision by customers to purchase our products is often based on their internal budgets and procedures involving rigorous evaluation, testing, implementation and acceptance of new technologies |
| As a result, our sales cycle in these situations can be as long as 12 months and may vary substantially from customer to customer |
| While our customers are evaluating our products and before they may place an order with us, we may incur substantial sales and marketing expenses and expend significant management effort |
| Consequently, if sales forecasted from certain customers for a particular quarter are not realized in that quarter, we may not meet our revenue expectations |
| 18 _________________________________________________________________ [70]Table of Contents If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our ability to manage and grow our business may be harmed |
| Our ability to successfully implement our business plan and comply with regulations requires an effective planning and management process |
| We expect that we will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively in the future |
| Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, could harm our ability to accurately forecast sales demand, manage our supply chain and record and report financial and management information on a timely and accurate basis |
| If our internal controls over financial reporting do not comply with the requirements of the Sarbanes-Oxley Act, our business and stock price could be adversely affected |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports |
| Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal controls over financial reporting |
| We do not expect that our internal controls over financial reporting will prevent all error and all fraud |
| A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met |
| Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs |
| Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been, or will be, detected |
| These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake |
| Controls can also be circumvented by individual acts or by collusion of two or more people |
| Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures |
| Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected |
| Although we have determined, and our independent registered public accounting firm has attested, that our internal controls over financial reporting were effective as of December 31, 2005, we cannot predict the outcome of our testing in future periods and the 2005 results cannot be projected |
| If our internal controls are found to be ineffective in future periods, our reputation could be harmed |
| We may experience a loss of public confidence and incur additional expenses and commitment of management’s time in connection with further evaluations, which could have an adverse effect on our business and stock price |
| The timing of the adoption of industry standards may negatively affect widespread market acceptance of our products |
| Our success depends in part on both the adoption of industry standards for new technologies in our market and our products’ compliance with industry standards |
| Many technological developments occur prior to the adoption of the related industry standard |
| The absence or delay of an industry standard related to a specific technology may prevent market acceptance of products using the technology |
| We intend to develop products using new technological advancements and may develop these products prior to the adoption of industry standards related to these technologies |
| As a result, we may incur significant expenses and losses due to lack of customer demand, unusable purchased components for these products and the diversion of our engineers from future product development efforts |
| Further, if the adoption of industry standards moves too quickly, we may develop products that do not comply with a later-adopted industry standard, which could hurt our ability to sell these products |
| If the industry evolves to new standards, we may not be able to successfully design and manufacture new products in a timely fashion that meet these new standards |
| Even after industry standards are adopted, the future success of our products depends on widespread market acceptance of their underlying technologies |
| At least one networking equipment standards body has reportedly stopped all work on a standard in response to assertions by Nortel that it controls the 19 _________________________________________________________________ [71]Table of Contents patent rights to certain industry standards |
| Attempts by third parties to impose licensing fees on industry standards could undermine the adoption of such standards and decrease industry opportunities |
| If our products contain undetected software or hardware errors, we could incur significant unexpected expenses and lost sales and be subject to product liability claims |
| Our products are complex and may contain undetected defects or errors, particularly when first introduced or as new enhancements and versions are released |
| Despite our testing procedures, these defects and errors may be found after commencement of commercial shipments |
| Any defects or errors in our products discovered in the future or failures of our customers’ networks, whether caused by our products or another vendors’ products, could result in: • negative customer reactions; • product liability claims; • negative publicity regarding us and our products; • delays in or loss of market acceptance of our products; • product returns; • lost sales; and • unexpected expenses to remedy defects or errors |
| We may incur liabilities that are not subject to maximum loss clauses |
| In the ordinary course of business, we enter into purchase orders, sales contracts, and other similar contractual arrangements relating to the marketing, sale, manufacture, distribution, or use of our products and services |
| We may incur liabilities relating to our failure to address certain liabilities or inability to perform certain covenants or obligations under such agreements, or which result from claims and losses arising from certain external events as outlined within the particular contract |
| Such agreements may not contain, or be subject to, maximum loss clauses, and liabilities arising from them may result in significant adverse changes to our financial position or results of operations |
| Our products may not continue to comply with the regulations governing their sale, which may harm our business |
| In the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories |
| Internationally, products that we develop may be required to comply with regulations or standards established by telecommunications authorities in various countries, as well as those of certain international bodies |
| Recent environmental legislation within the European Union (EU) may increase our cost of doing business internationally as we comply with and implement these new requirements |
| The EU has issued a Directive on the restriction of certain hazardous substances in electronic and electrical equipment (RoHS) and enacted the Waste Electrical and Electronic Equipment (WEEE) Directive to mandate the funding, collection, treatment, recycling, and recovery of WEEE by producers of electrical or electronic equipment into Europe |
| Under the RoHS Directive, specified electronic products which we place on the market in the EU must meet restrictions on lead and certain other chemical substances as of July 1, 2006 |
| Implementation of the WEEE Directive in certain of the EU-member countries have been delayed later into 2006 |
| We are currently implementing measures to comply with the RoHS Directive and the WEEE Directive as individual countries issue their implementation guidance |
| Although we believe our products are currently in compliance with domestic and international standards and regulations in countries in which we currently sell, there can be no assurance that our existing and future product offerings will continue to comply with evolving standards and regulations |
| If we fail to obtain timely domestic or foreign regulatory approvals or certification, we may not be able to sell our products where these standards or regulations apply, which may prevent us from sustaining our revenue or maintaining profitability |
| Additionally, future changes in tariffs, or their application, by regulatory agencies could affect the sales of some of our products |
| 20 _________________________________________________________________ [72]Table of Contents We may engage in acquisitions that could result in the dilution of our stockholders, disrupt our operations, cause us to incur substantial expenses and harm our business if we cannot successfully integrate the acquired business, products, technologies or personnel |
| Although we focus on internal product development and growth, we may learn of acquisition prospects that would complement our existing business or enhance our technological capabilities |
| Any acquisition by us could result in large and immediate write-offs, the incurrence of debt and contingent liabilities, or amortization expenses related to amortizable intangible assets, any of which could negatively affect our results of operations |
| Furthermore, acquisitions involve numerous risks and uncertainties, including: • difficulties in the assimilation of products, operations, personnel and technologies of the acquired companies; • diversion of management’s attention from other business concerns; • disruptions to our operations, including potential difficulties in completing ongoing projects in a timely manner; • risks of entering geographic and business markets in which we have no or limited prior experience; and • potential loss of key employees of acquired organizations |
| Although we do not currently have any agreements or plans with respect to any material acquisitions, we may make acquisitions of complementary businesses, products or technologies in the future |
| We may not be able to successfully integrate any businesses, products, technologies or personnel that might be acquired, and our failure to do so could harm our business |
| Our stock price has been volatile historically, which may make it more difficult to sell shares when needed at attractive prices |
| The trading price of our common stock has been, and may continue to be, subject to wide fluctuations |
| Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable, speculation in the press or investment community, and news reports relating to trends in our markets |
| In addition, the stock market in general, and technology companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies |
| These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance |
| Additionally, volatility or lack of positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options |
| Anti-takeover provisions could make it more difficult for a third party to acquire us |
| Our board of directors has the authority to issue up to 5cmam000cmam000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders |
| The rights of the holders of common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future |
| The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of Foundry without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock |
| We have no present plans to issue shares of preferred stock |
| Further, certain provisions of our charter documents, including provisions eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of Foundry, which could have an adverse effect on the market price of our stock |
| In addition, our charter documents do not permit cumulative voting, which may make it more difficult for a third party to gain control of our board of directors |
| 21 _________________________________________________________________ [73]Table of Contents Our operations may encounter disruptions as we relocate certain activities to another facility |
| We are in the process of relocating our corporate headquarters and certain other functions to another nearby location |
| In addition to the increased operational expenses of the new facility, we may encounter logistical difficulties in relocating business records, equipment, and personnel |
| We planned to move to operate with minimal downtime and most of the move is now complete |
| However, we may not have anticipated all of the logistical impediments or obstacles and there remains some possibility that the relocation may adversely affect our operations and financial results |
| Our operations could be significantly hindered by the occurrence of a natural disaster, terrorist acts or other catastrophic events |
| Our principal operations are susceptible to outages due to fire, floods, earthquakes, power loss, power shortages, telecommunications failures, break-ins and similar events |
| In addition, certain of our local and foreign offices, OEMs, and contract manufacturers are located in areas susceptible to earthquakes and acts of terrorism, which could cause a material disruption in our operations |
| For example, we procure critical components from countries such as Japan and Taiwan, which periodically experience earthquakes and typhoons |
| The prospect of such unscheduled interruptions may continue for the foreseeable future, and we are unable to predict either their occurrence, duration or cessation |
| We do not have multiple site capacity for all of our services in the event of any such occurrence |
| Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems |
| We may not carry sufficient insurance to compensate us for losses that may occur as a result of any of these events |
| Any such event could have a material adverse effect on our business, operating results, and financial condition |