Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number: 0-26339

JUNIPER NETWORKS, INC.

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   o

There were 372,083,213 shares of the Company’s Common Stock, par value $0.00001, outstanding on October 31, 2002.

Table of Contents

TABLE OF CONTENTS

-1-

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

JUNIPER NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

See accompanying notes.

-2-

Table of Contents

JUNIPER NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

See accompanying notes.

-3-

Table of Contents

JUNIPER NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

See accompanying notes.

-4-

Table of Contents

JUNIPER NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1. Description of Business

     Juniper Networks, Inc. (“Juniper Networks” or the “Company”) was established for the purpose of providing Internet infrastructure solutions to Internet service providers and other telecommunication service providers. Juniper Networks develops a wide range of core backbone, edge, mobile and cable Internet routing platforms.

     In July 2002, Juniper Networks completed its acquisition of Unisphere Networks, Inc. (“Unisphere Networks”), a subsidiary of Siemens Corporation (“Siemens”). Unisphere Networks developed, manufactured and sold data networking equipment optimized for applications at the edge of service provider networks. In accordance with Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations,” the Company has included in its results of operations, for the three and nine months ended September 30, 2002, the results of Unisphere Networks from July 1, 2002.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

     The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company’s consolidated financial position at September 30, 2002, and its operating results for the three and nine months ended September 30, 2002 and 2001 and cash flows for the nine months ended September 30, 2002 and 2001. These condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended December 31, 2001 included in the Company’s Annual Report on Form 10-K filed April 1, 2002 with the SEC.

     The results of operations for the three and nine months ended September 30, 2002 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2002.

Derivatives

     The Company has foreign subsidiaries that operate in various countries throughout the world. As a result, the Company is exposed to changes in foreign currency exchange rates. The Company uses foreign exchange forward contracts to attempt to offset its exposure to foreign exchange risk. As of September 30, 2002, the Company had foreign exchange forward contracts outstanding to partially offset the impact of currency fluctuations on intercompany balances or other assets or liabilities denominated in currencies other than the functional currency of the reporting entity, principally for the Euro and the British Pound. These foreign

-5-

Table of Contents

exchange forward contracts have original maturities of one to two months. Gains and losses on these contracts are included in other income (expense) in the Company’s condensed consolidated statements of operations and offset foreign exchange gains or losses from the remeasurement of intercompany balances or other assets or liabilities denominated in currencies other than the functional currency of the reporting entity.

Foreign Currency Translation

     Assets and liabilities of foreign operations are translated to US dollars using exchange rates in effect at the end of the period, and revenues and expenses are translated using average exchange rates for the period. Foreign currency translation gains and losses, which are included as a component of other comprehensive income (loss), were approximately $0.9 million for the nine months ended September 30, 2002 and were not material for the nine months ended September 30, 2001.

Note 3. Acquisitions

     In accordance with SFAS No. 141, Juniper Networks allocates the purchase price of its business acquisitions to the tangible and intangible assets acquired and liabilities assumed, as well as in-process research and development, based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions provided by management, and other information compiled by management, including valuations that utilize established valuation techniques appropriate for the high technology industry. Goodwill recorded as a result of these acquisitions is not expected to be deductible for tax purposes. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and purchased intangibles with indefinite lives acquired after June 30, 2001 are not amortized but will be reviewed at least annually for impairment. Purchased intangibles with finite lives will be amortized on a straight-line basis over their respective estimated useful lives.

Unisphere Networks Business Combination

     In July 2002, Juniper Networks completed its acquisition of 100% of Unisphere Networks, a subsidiary of Siemens. Siemens also is a significant reseller of Juniper Networks, representing greater than 10% of the Company’s revenue for the three-month period ended September 30, 2002. The acquisition of Unisphere Networks will enable Juniper Networks to supply edge applications expertise to the leading service providers, carriers, and postal, telegraph and telephone providers (PTTs) throughout the world. The acquisition resulted in the payment of $375.0 million cash and the issuance of 36.5 million shares of the Company’s common stock with a fair value of approximately $359.9 million to the former stockholders of Unisphere Networks. The common stock issued in the acquisition was valued using the average closing price of the Company’s common stock from two days before to two days after the date the transaction was announced. Juniper Networks also assumed all of the outstanding stock options of Unisphere Networks with a fair value of approximately $151.2 million. The options were valued using the Black-Scholes option pricing model with the inputs of 0.8 for volatility, 2 years for expected life, 4% for the risk-free interest rate and a market value of $9.86 per share as described above. The Company also incurred direct costs associated with the acquisition of approximately $13.6 million and an estimated liability of approximately $14.8 million, consisting primarily of workforce reduction charges, including severance and other employee benefits for 90 individuals, costs of vacating duplicate

-6-

Table of Contents

facilities and the cost of exiting certain contractual obligations. Below is a summary of the total purchase price (in thousands):

     The total purchase price of approximately $914.5 million has been preliminarily allocated as follows (in thousands):

     The purchase price allocation depicted is preliminary and subject to change when the Company obtains additional information concerning the fair values of certain tangible assets and liabilities of Unisphere Networks.

Amortizable Intangible Assets

     Of the total purchase price, approximately $74.0 million has been allocated to amortizable intangible assets, including completed technology, service contract relationships, non-compete agreements and order backlog. Completed technology, which consists of products that have reached technological feasibility, includes products in Unisphere Networks’ product line, principally the ERX product. Service contract relationships represent the potential additional source of revenue from customers with existing service contracts. Both completed technology and the service contract relationships were valued using the discounted cash flow (DCF) method. This method calculates the value of the intangible asset as being the present value of the after tax cash flows potentially attributable to it, net of the return on fair value attributable to tangible and other intangible assets. Juniper Networks is amortizing the fair value of the completed technology and service contract relationships on a straight-line basis over weighted average remaining useful lives of approximately 5 years and 6 years, respectively.

     Non-compete agreements represent the value of the non-compete and non-solicit agreements signed by key executives from Unisphere Networks. The non-compete agreements were valued using the lost profits method, which estimates the value of the future cash flows that would be lost due to customer defections. The non-solicit agreements were valued using the avoided cost method, which estimates the avoided costs of replacing solicited employees. Juniper Networks is amortizing the fair value of these assets on a straight-line basis over a weighted average useful life of approximately 2 years.

-7-

Table of Contents

     Order backlog represents the value of the standing orders for both products and services. The order backlog was valued using the avoided cost method, which estimates the avoided selling expenses due to the fact that Unisphere Networks had firm purchase orders in place at the time of acquisition. Juniper Networks amortized the fair value of these assets over the three-month period ended September 30, 2002 to cost of goods sold.

In-process Research and Development

     Of the total purchase price, approximately $82.7 million has been allocated to in-process research and development (IPR&D) and was expensed in the quarter ended September 30, 2002. Projects that qualify as IPR&D represent those that have not yet reached technological feasibility and which have no alternative future use. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is no remaining risk relating to the development. At the time of acquisition, Unisphere Networks had multiple IPR&D efforts under way for certain current and future product lines. These efforts included developing new cards and modules for different bandwidths and various software developments. The Company utilized the DCF method to value the IPR&D, using rates ranging from 30% to 35%. In applying the DCF method, the value of the acquired technology was estimated by discounting to present value the free cash flows expected to be generated by the products with which the technology is associated, over the remaining economic life of the technology. To distinguish between the cash flows attributable to the underlying technology and the cash flows attributable to other assets available for generating product revenues, adjustments were made to provide for a fair return to fixed assets, working capital, and other assets that provide value to the product lines. At the time of acquisition, it was estimated that these development efforts would be completed over the next six to twelve months.

Deferred Compensation

     Unvested stock options with an intrinsic value of approximately $0.5 million at the time of acquisition have been allocated to deferred compensation in the purchase price allocation and are being amortized to expense using the graded vesting method. Options assumed in conjunction with the acquisition had exercise prices ranging from $5.65 to $14.73 per share, with a weighted average exercise price of $5.81 per share and a weighted average remaining contractual life of approximately 9 years. Juniper Networks assumed approximately 13.5 million vested options and approximately 12.5 million unvested options.

Pro Forma Results

     The following unaudited pro forma financial information presents the combined results of operations of Juniper Networks and Unisphere Networks as if the acquisition had occurred as of the beginning of the periods presented. Since the acquisition was completed on July 1, 2002, the results for the three-month period ended September 30, 2002 match the results included in the condensed consolidated statement of operations for such period found in this Form 10-Q. Adjustments of $5.1 million, $75.9 million and $81.0 million have been made to the combined results of operations for the nine months ended September 30, 2002 and the three and nine months ended September 30, 2001, respectively, reflecting amortization of purchased intangibles, charges to cost of goods sold for inventory write-ups and the valuation of the order backlog, IPR&D and the net tax impact. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of Juniper Networks that would have been reported had the acquisition been

-8-

Table of Contents

completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial condition of the Company.

     The pro forma financial information above includes the following material, non-recurring charges for all periods presented (in thousands):

Pacific Broadband Business Combination

     Under the terms of the Pacific Broadband acquisition, which took place in December 2001, there was an earn-out provision, payable in shares of the Company’s common stock, wherein the former stockholders and employee option holders of Pacific Broadband could receive additional consideration of up to $59.0 million, upon achieving certain product development milestones and revenue targets during 2002. During the quarter ended March 31, 2002, two of the development milestones were achieved and, as a result, the Company issued an additional 399,000 shares of common stock. During the quarter ended June 30, 2002, an additional milestone was achieved and as a result, the Company issued an additional 520,000 shares of common stock. The milestones achieved to date have a value of $10.8 million, all of which was recorded as additional goodwill.

Asset Purchase

     Juniper Networks entered into a Note Purchase Agreement valued at $2.5 million with third party lenders whereby Juniper Networks purchased certain secured indebtedness of a private company (the “debtor”) held by the lenders. The debtor defaulted on the indebtedness and, therefore, Juniper Networks took possession of the underlying collateral, which included approximately $1.7 million of fixed assets and approximately $0.8 million of IPR&D. The Company treated these assets as being acquired in a transaction other than a business combination in accordance with SFAS No. 142. The Company capitalized the fixed assets and is depreciating them over their useful lives and expensed the IPR&D in the three-month period ended September 30, 2002.

-9-

Table of Contents

Note 4. Goodwill and Purchased Intangible Assets

     In accordance with SFAS No. 142, the Company ceased amortizing goodwill totaling $222 million as of January 1, 2002. Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally between two to six years. The following table presents the impact of SFAS No. 142 on net income (loss) and net income (loss) per share had it been in effect for the three and nine months ended September 30, 2001 (in thousands, except per-share amounts):

     The Company is required to perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances. The Company performed an impairment analysis as of January 1, 2002 and determined that there was no impairment of the goodwill as of that time. However future goodwill impairment tests, which include consideration of the Company’s market capitalization in relation to its historical stockholders’ equity, may result in a charge to earnings in periods ending subsequent to September 30, 2002.

     The following table presents details of the Company’s total purchased intangibles assets (in thousands):

     The table does not include intangible assets that were purchased and completely amortized in the three-month period ended September 30, 2002 to cost of goods sold of $3.6 million from the Unisphere Networks acquisition related to the value of backlog orders. Amortization expense of purchased intangible assets of $5.3 million and $0.4 million were included in operating expenses for the three months ended September 30, 2002 and 2001,

-10-

Table of Contents

respectively. Amortization expense of purchased intangible assets of $8.6 million and $1.8 million were included in operating expenses for the nine months ended September 30, 2002 and 2001, respectively.

     The estimated future amortization expense of purchased intangible assets as of September 30, 2002 is as follows (in thousands):

Note 5. Equity Investments

     Juniper Networks has certain minority equity investments in privately held companies. These investments are included in other long-term assets in the condensed consolidated balance sheets and are generally carried at cost as Juniper Networks owns less than 20% of the voting equity and does not have the ability to exercise significant influence over these companies. As of September 30, 2002 and December 31, 2001, the carrying values of the Company’s minority equity investments in privately held companies were $4.9 million and $49.3 million, respectively. These investments are inherently high risk as the market for technologies or products manufactured by these companies are usually early stage at the time of the investment by Juniper Networks and such markets may never be significant. The Company could lose its entire investment in certain or all of these companies. The Company monitors these investments for impairment by considering financial, operational and economic data and makes appropriate reductions in carrying values when necessary.

     In addition to the equity investments in privately held companies, the Company holds certain marketable securities classified as available-for-sale. These securities are reported at fair value as of the balance sheet dates, with any unrealized gains and losses, recorded in stockholders’ equity. Realized gains or losses and declines in value determined to be other than temporary, if any, on available-for-sale securities are reported in other income or expense as incurred.

     The following table summarizes the impairment charges associated with equity investments recognized by the Company (in thousands):

Note 6. Comprehensive Loss

     Comprehensive loss is as follows, (in thousands):

-11-

Table of Contents

Note 7. Significant Customers and International Sales

     In the quarter ended September 30, 2002, two customers each accounted for more than 10% of net revenues, compared to three customers in the quarter ended September 30, 2001. For the nine months ended September 30, 2002, one customer accounted for more than 10% of net revenues, compared to three customers in the nine months ended September 30, 2001.

     The following table shows percent of net revenues by geographical region:

     Included in the Americas region are countries, other than the United States, that represented approximately 6% and 5% of net revenues for the three-month period ended September 30, 2002 and 2001, respectively, and approximately 5% of net revenues for each nine-month period ended September 30, 2002 and 2001.

Note 8. Restructuring and Other Operating Expenses

     During the third quarter of 2002, in connection with the acquisition of Unisphere Networks, Juniper Networks’ management approved and initiated plans to restructure the operations of both pre-acquisition organizations and the post-acquisition organization to eliminate certain duplicative activities, focus on strategic product and customer bases, reduce cost structure and better align product and operating expenses with existing general economic conditions. Consequently, Juniper Networks recorded approximately $17.5 million of expenses associated primarily with workforce related costs, costs of vacating duplicative facilities, contract termination costs, non-inventory asset impairment charges and other associated costs. These costs are accounted for under EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity” and have been included as a charge to the results of operations for the three and nine months ended September 30, 2002. Juniper Networks recorded approximately $14.8 million of similar restructuring costs in connection with restructuring the Unisphere Networks organization. These costs are accounted for under EITF 95-3, “Recognition of Liabilities in Connection with Purchase Business Combinations.” These costs were recognized as a liability assumed in the purchase business combination and

-12-

Table of Contents

included in the allocation of the cost to acquire Unisphere Networks and, accordingly, have been included as an increase to goodwill.

     The restructuring charges recorded in the third quarter of 2002 are based on Juniper Networks’ restructuring plans that have been committed to by management. Changes to the estimates of executing the currently approved plans of restructuring the Unisphere Networks organization will be recorded as an increase or decrease to goodwill, if such changes occur within one year of the acquisition, and any changes thereafter to the estimated costs of restructuring the former Unisphere Networks organization or any similar changes to the costs of restructuring the Juniper Networks organization will be reflected in Juniper Networks’ results of operations.

2002 Plans

     The third quarter of 2002 restructuring charge of $17.5 million primarily consisted of a worldwide workforce reduction, which included severance and other employee benefits, non-inventory asset impairment charges and consolidation of the resulting excess facilities. The worldwide workforce reduction charge of $10.5 million related principally to the termination of 267 employees across many regions, business functions and job classes. The Company expects to pay the majority of the remaining balance of the severance accrual by the end of 2002. Non-inventory asset impairment of $0.9 million was primarily for long-lived assets that were no longer needed as a result of the Unisphere Networks acquisition. Charges of $6.1 million consisted primarily of the cost of vacating duplicate facilities and the impairment cost of certain leasehold improvements.

     As of September 30, 2002, the balance of the accrued restructuring charge recorded in conjunction with the restructuring of the Juniper Networks organization in the third quarter of 2002 consisted of the following (in thousands):

     Amounts related to the net lease expense due to the consolidation of facilities will be paid over the respective lease terms through 2009. The Company’s estimated costs to exit these facilities are based on available commercial rates. The actual loss incurred in exiting these facilities could be different from the Company’s estimates.

Other

     The Company recognized a charge of approximately $5.3 million during the quarter ended September 30, 2002 related to land acquired in January 2001 located in Sunnyvale, California. The charge was primarily for costs of exiting certain contractual obligations associated with the land. The Company has no plans to develop the land, which had a carrying value of approximately $191.8 million as of September 30, 2002, in the foreseeable future.

-13-

Table of Contents

2001 Plans

     In June 2001, Juniper Networks announced a restructuring program in an effort to better align its business operations with the current market and service provider industry conditions. The restructuring program included a worldwide workforce reduction, consolidation of excess facilities and restructuring of certain business functions. The costs associated with the restructuring program totaled $12.3 million and were recorded during the three months ended June 30, 2001 as operating expenses.

     The following table summarizes the activity related to the 2001 restructuring charges (in thousands):