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

FORM 10-Q

[X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2001
 
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 0-26339

JUNIPER NETWORKS, INC.

(Exact name of Registrant as specified in its charter)

Delaware	77-0422528
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
1194 N. Mathilda Avenue, Sunnyvale, CA	94089
(Address of principal executive offices)	(Zip Code)

(408) 745-2000
(Registrant’s telephone number including area code)

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 [   ]

There were 323,200,961 shares of the Company’s Common Stock, par value $.00001, outstanding on October 30, 2001.

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Factors That May Affect Future Results
	Item 3. Quantitative and Qualitative Disclosure About Market Risk
PART II OTHER INFORMATION
	Item 1. LEGAL PROCEEDINGS
	Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
		Page No
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000		3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000		4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
	Factors That May Affect Future Results		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		18
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		19
Item 6.	Exhibits and Reports on Form 8-K		19
SIGNATURES			20

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

			September 30,			December 31,
			2001			2000
Assets			(unaudited)			(1)
Current assets:
	Cash and cash equivalents		$	666,472		$	563,005
	Short-term investments			411,450			581,738
	Accounts receivable, net			111,905			176,535
	Prepaid expenses and other current assets			25,776			27,269
		Total current assets		1,215,603			1,348,547
Property and equipment, net				252,715			36,440
Long-term investments				610,760			450,568
Other long-term assets				187,698			267,574
Total assets			$	2,266,776		$	2,103,129
Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable		$	56,484		$	72,347
	Income tax payable			45,779			12,725
	Other accrued liabilities			158,802			96,711
	Deferred revenue			32,064			34,625
		Total current liabilities		293,129			216,408
Convertible subordinated notes and other long-term liabilities				1,150,000			1,156,719
Common stock and additional paid-in capital				772,827			735,103
Deferred stock compensation				(52,904	)		(111,813	)
Accumulated other comprehensive income				16,266			10,963
Retained earnings				87,458			95,749
Total stockholders’ equity				823,647			730,002
Total liabilities and stockholders’ equity			$	2,266,776		$	2,103,129

(1) The balance sheet at December 31, 2000 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying notes.

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

					Three months ended						Nine months ended
					September 30,						September 30,
					2001			2000			2001			2000
Net revenues					$	201,703		$	201,201		$	735,989		$	378,115
Cost of revenues						119,767			70,291			313,988			136,144
Gross profit						81,936			130,910			422,001			241,971
Operating expenses:
	Research and development					37,897			23,600			122,965			57,590
	Sales and marketing					33,591			23,385			110,876			52,137
	General and administrative					9,185			5,446			29,092			12,631
	Amortization of goodwill, purchased intangibles and deferred stock compensation(1)					27,966			2,272			95,666			6,977
	Restructuring costs					—			—			12,340			—
	Charitable contribution					—			—			—			10,000
				Total operating expenses		108,639			54,703			370,939			139,335
Operating income/(loss)						(26,703	)		76,207			51,062			102,636
Interest income						23,278			26,253			75,703			61,418
Interest expense						(15,090	)		(14,608	)		(45,607	)		(33,262	)
Loss on investments						(11,000	)		—			(53,620	)		—
Equity in net loss of joint venture						(1,476	)		—			(2,561	)		—
Income/(loss) before income taxes						(30,991	)		87,852			24,977			130,792
Provision (benefit) for income taxes						(1,265	)		29,781			33,268			45,033
Net income/(loss)					$	(29,726	)	$	58,071		$	(8,291	)	$	85,759
Net income/(loss) per share:
		Basic			$	(0.09	)	$	0.19		$	(0.03	)	$	0.28
		Diluted			$	(0.09	)	$	0.17		$	(0.03	)	$	0.25
Shares used in computing net income/(loss) per share:
		Basic				320,178			307,679			317,981			301,701
		Diluted				320,178			349,721			317,981			347,309
(1)	Deferred stock compensation relates to the following cost and expense categories by period:
		Cost of revenues			$	43		$	79		$	148		$	268
		Research and development				15,730			147			58,424			498
		Sales and marketing				67			134			231			456
		General and administrative				30			55			105			185
			Total		$	15,870		$	415		$	58,908		$	1,407

See accompanying notes.

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

				Nine months ended September 30,
				2001			2000
Cash flows from operating activities:
Net income/(loss)				$	(8,291	)	$	85,759
	Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
		Depreciation			16,769			7,041
		Amortization of goodwill, purchased intangibles, deferred stock compensation and other non-cash transactions			98,524			9,199
		Loss on investments			53,620			—
		Charitable contribution charge			—			10,000
		Changes in operating assets and liabilities:
			Accounts receivable		64,630			(92,369	)
			Other assets		6,157			(14,767	)
			Accounts payable and other accrued liabilities		79,282			120,143
			Deferred revenue		(2,561	)		15,500
Net cash provided by operating activities					308,130			140,506
Cash flows from investing activities:
Purchase of property and equipment					(233,044	)		(27,664	)
Purchases of available-for-sale investments					(1,370,988	)		(1,206,354	)
Maturities of available-for-sale investments					1,376,845			418,573
Purchase of equity investments					(15,200	)		(48,045	)
Net cash used in investing activities					(242,387	)		(863,490	)
Cash flows from financing activities:
Proceeds from issuance of convertible subordinated notes					—			1,123,325
Proceeds from issuance of common stock					37,724			12,817
Net cash provided by financing activities					37,724			1,136,142
Net increase in cash and cash equivalents					103,467			413,158
Cash and cash equivalents at beginning of period					563,005			158,043
Cash and cash equivalents at end of period				$	666,472		$	571,201
Supplemental disclosures of cash flow information
Cash paid for interest				$	54,625		$	28,375
Supplemental schedule of noncash investing and financing activities
Common stock issued in connection with the acquisition of goodwill and purchased intangibles				$	—		$	3,800

See accompanying notes.

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

Note 1. Basis of Presentation

     The condensed consolidated financial statements have been prepared by Juniper Networks, Inc., pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and include the accounts of Juniper Networks, Inc. and its wholly-owned subsidiaries (“Juniper Networks” or collectively 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. While in the opinion of the Company, the unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position at September 30, 2001 and the operating results and cash flows for the three and nine months ended September 30, 2001 and 2000, these 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, 2000 included in the Company’s Annual Report on Form 10-K filed March 27, 2001 with the SEC. The condensed consolidated balance sheet at December 31, 2000 has been derived from audited financial statements as of that date.

     The results of operations for the three and nine months ended September 30, 2001 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2001.

Note 2. Summary of Significant Accounting Policies

Cash and Cash Equivalents

     Juniper Networks considers all highly liquid investments with original maturity dates of 90 days or less at the date of acquisition to be cash equivalents. Cash equivalents consist of money market funds, commercial paper, government securities, certificates of deposit, and corporate securities.

Investments

     The Company’s marketable securities are classified as available-for-sale as of the balance sheet dates and are reported at fair value, with 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 will be reported in other income or expensed as incurred. During the nine months ended September 30, 2001, Juniper Networks wrote-down an available for sale investment by $2.8 million as a result of a decline in value determined to be other than temporary. No write-downs were made during the three months ended September 30, 2001.

     Juniper Networks also has certain other minority equity investments in privately held companies. These investments are included in other long-term assets on the balance sheet 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, 2001 and December 31, 2000, $55.3 million and $88.9 million of these investments are included in other long-term assets. As of September 30, 2001, one

6

investment makes up a significant portion of the total. 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. Juniper Networks could lose its entire investment in certain or all of these companies. Juniper Networks monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. Juniper Networks considers financial, operational and economic data when assessing possible impairment issues. During the three and nine months ended September 30, 2001, Juniper Networks wrote-down these investments by $11.0 million and $50.8 million, respectively. Write-downs recorded in the fiscal year ended December 31, 2000 totaled $4.6 million.

Property and equipment, net

     Property and equipment consist of the following (in thousands):

		September 30,			December 31,
		2001			2000
		(unaudited)
Computers and equipment		$	54,454		$	34,511
Purchased software			13,528			9,688
Leasehold improvements			27,737			9,010
Furniture and fixtures			4,200			2,379
Land			188,714			—
	Total		288,633			55,588
Less accumulated depreciation			(35,918	)		(19,148	)
	Property and equipment, net	$	252,715		$	36,440

Revenue Recognition

     Juniper Networks generally recognizes product revenue when evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable, unless Juniper Networks has future obligations for network interoperability or has to obtain customer acceptance, in which case revenue and related costs are deferred until those obligations are met. Revenue from service obligations is deferred and generally recognized ratably over the period of the obligation. Amounts billed in excess of revenue recognized are included as deferred revenue and accounts receivable in the accompanying consolidated balance sheets.

Customer Concentration

     In the quarter ended September 30, 2001, three customers individually accounted for more than 10% of net revenues, compared with four customers individually accounting for more than 10% in the same period a year ago. During the nine months ended September 30, 2001, three customers individually accounted for more than 10% of net revenues, compared with two customers individually accounting for more than 10% in the same period a year ago.

Warranty Reserves

     Juniper Networks’ products generally carry a one-year warranty that includes factory repair services as needed for replacement of parts. Warranty obligations are accrued as revenue is recognized based on the Company’s best estimate of costs that will be incurred on delivered product.

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Net Income Per Share

     Basic net income per share and diluted net income per share are presented in conformity with the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (FAS 128), for all periods presented. In accordance with FAS 128, basic net income per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less the weighted-average number of shares of common stock that are subject to repurchase. Diluted net income per share additionally includes common stock equivalent shares outstanding during the period, if dilutive. Dilutive common stock equivalent shares primarily consist of employee stock options, using the treasury stock method. The 4.75% Convertible Subordinated Notes, which were issued in March 2000, are anti-dilutive in all periods and therefore not included in the calculation below.

     The following table presents the calculation of basic and diluted net income per share (in thousands, except per share data):

		Three months ended						Nine months ended
		September 30,						September 30,
		2001			2000			2001			2000
		(unaudited)						(unaudited)
Numerator:
	Net income (loss)	$	(29,726	)	$	58,071		$	(8,291	)	$	85,759
Denominator:
	Weighted-average shares of common stock outstanding		322,043			316,131			320,661			314,417
	Weighted-average shares subject to repurchase		(1,865	)		(8,452	)		(2,680	)		(12,716	)
	Denominator for basic net income (loss) per share		320,178			307,679			317,981			301,701
	Common stock equivalents		—			42,042			—			45,608
	Denominator for diluted net income (loss) per share		320,178			349,721			317,981			347,309
Net income (loss) per share:
	Basic	$	(0.09	)	$	0.19		$	(0.03	)	$	0.28
	Diluted	$	(0.09	)	$	0.17		$	(0.03	)	$	0.25

     For the three months and nine months ended September 30, 2001, 16,928 and 23,430 common stock equivalents, respectively, were excluded from the determination of diluted net loss per share, as their effect is anti-dilutive.

Note 3. Restructuring Charges

     On June 8, 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.

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     A summary of the restructuring charges is outlined as follows (in thousands):

									Remaining Reserve
			Non-cash						as of September 30,
	Total Charge		Charges			Cash Payments			2001
Workforce reduction	$	3,171	$	(761	)	$	(2,302	)	$	108
Lease termination charges and other		5,465		—			(544	)		4,921
Impairment of property and equipment		1,437		(1,437	)		—			—
Impairment of intangible assets		2,267		(2,267	)		—			—
Total	$	12,340	$	(4,465	)	$	(2,846	)	$	5,029

     Remaining expenditures relating to workforce reductions and payments to suppliers and vendors in connection with restructuring activities are expected to be paid in the fourth quarter of fiscal 2001. Amounts related to the net lease expense due to the consolidation of facilities will be paid over the respective lease terms through fiscal 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 exceed the Company’s estimates.

Note 4. Accrued Contract Manufacturing Charge

     During the quarter ended September 30, 2001, Juniper Networks recorded a contract manufacturing charge of $39.9 million to cost of goods sold which is included in accrued liabilities. The charge is the result of commitments of Juniper Networks with its contract manufacturers combined with a sudden and significant decrease in forecasted revenue. The charge accrues for the pre-tax loss that Juniper Networks expects to realize resulting from the commitments to the contract manufacturers. The resulting payments to the contact manufacturers are expected to be made within the next six months.

Note 5. Joint Venture

     During the quarter ended June 30, 2001, Juniper Networks and Ericsson AB, through their subsidiaries, entered into a joint venture agreement to develop and market products for the wireless mobile Internet infrastructure market, and Juniper Networks began recording its share of the joint venture’s loss. Through September 30, 2001, the Company’s share of the joint venture’s loss totals approximately $2.6 million, and is recorded as a single line item in the other income section of the income statement.

Note 6. Stock Option Exchange Program

     On September 24, 2001, the Company announced a voluntary stock option exchange program, or Offer, for its employees. Under the program, Company employees have the opportunity to cancel certain outstanding stock options previously granted to them that have an exercise price at or above $10.00 in exchange for an equal number of new options to be granted at a future date. The Offer will remain outstanding until 10:00 p.m., Pacific Daylight Time, on November 26, 2001, or such later date if the offer is extended (the “Expiration Date”). The exercise price of these new options will be equal to the fair market value of the Company’s common stock on the date of grant, which is expected to be no earlier than May 28, 2002 or a later date if the Offer is extended. Participants electing to exchange any options must also exchange any other options granted to him or her during the six months before or after the Expiration Date. In addition, certain options granted to employees in April and July 2001 must

9

be surrendered by any employee who elects to participate in the Offer and will not be exchanged. The exchange program has been designed to comply with FASB Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation” and is not expected to result in any additional compensation charges or variable plan accounting.

Note 7. Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141, “Business Combinations” (“SFAS 141”) and Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), (collectively referred to as “Statements”), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.

     The Company will apply the new rules in accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statements is expected to result in an increase in net income of $46.9 million for the year ended December 31, 2002. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangibles assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company, however, the Company has noted no instances of impairment to date.

     In October 2001, the FASB issued the Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”). FAS 144 addresses financial accounting and reporting for the disposal of long-lived assets. FAS 144 becomes effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Juniper Networks is currently evaluating the potential impact, if any, the adoption of FAS 144 will have its financial position and results of operation.

Note 8. Subsequent Events

     In October 2001, Juniper Networks announced that its board of directors approved a stock repurchase program of up to $200 million. The program allows for stock repurchases to be made from time to time, over the next two years, at the Company’s discretion in open market transactions.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This report for Juniper Networks contains forward-looking statements made within the meaning of the securities laws. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or forecasted. Readers should not rely on forward-looking statements, which reflect only the opinion of Juniper Networks as of the date hereof.

     The following information should be read in conjunction with the Company’s Annual Report on Form 10-K filed on March 27, 2001 with the Securities and Exchange Commission and “Factors That May Affect Future Results” herein.

Overview

     Juniper Networks is a leading provider of Internet infrastructure solutions that enable Internet service providers and other telecommunications service providers (“Service Providers”), to meet the demands resulting from the rapid growth of the Internet. The Company’s Internet backbone routers are specifically designed and purpose-built for Service Provider networks and offer customers increased reliability, performance, scalability, interoperability and flexibility, and reduced complexity and cost compared to current alternatives.

     In September 1998, Juniper Networks began shipping its first product and subsequently introduced additional products. The Company currently sells its products to major Service Providers primarily through its direct sales force in North America, and primarily through value added resellers internationally.

Results of Operations

Net Revenues

     Net revenues were $201.7 million for the three months ended September 30, 2001, and $201.2 million for the three months ended September 30, 2000. In the quarter ended September 30, 2001, three customers individually accounted for more than 10% of net revenues, compared with four customers in the same period a year ago. Net revenues for the nine months ended September 30, 2001 were $736.0 million, compared with $378.1 million for the same period of 2000. The increase in net revenue over the nine months ended September 30, 2001 as compared to the same period a year ago was primarily due to the expanded product offerings, increased market penetration of the Company’s products and the overall growth in the marketplace. The decrease in deferred revenue from December 31, 2000 to September 30, 2001 of $2.6 million reflects a shortening of the product acceptance cycle as products have become more mature. The introduction of new products or the timing of sales within a quarter will directly impact the deferred revenue balance in future periods.

Cost of Revenues

     Cost of revenues for the three months ended September 30, 2001 were $119.8 million with a gross margin of 40.6%, compared with cost of revenues for the three months ended September 30, 2000 of $70.3 million and a gross margin of 65.1%. The primary reason for the increase in cost of revenues and the decrease in gross margin over the three months ended September 30, 2001 as compared to the same period a year ago is the contract manufacturing

11

charge of $39.9 million. The contract manufacturing charge is the result of commitments of Juniper Networks with its contract manufacturers combined with a sudden and significant decrease in forecasted revenue. The charge accrues for the pre-tax loss that Juniper Networks expects to realize resulting from the commitments to the contract manufacturers. In addition to the contract manufacturing charge, head count increases in the Company’s customer service and support organizations and contractual financing charges owed to the contract manufacturers also contributed to the increase in cost of revenues and decrease in gross margin over the three months ended September 30, 2001 as compared to the same period a year ago. Cost of revenues for the nine months ended September 30, 2001 were $314.0 million, compared with $136.1 million for the same period of 2000. The increase in cost of revenues is primarily related to the increase in net revenues, as well as headcount increases in the Company’s customer service and support organizations and contract manufacturing charges. Gross margins are highly variable and dependent on many factors, some of which are outside the Company’s control, such as the demand for the Company’s products and mix of products sold.

Research And Development Expenses

     Research and development expenses were $37.9 million for the three months ended September 30, 2001, an increase of $14.3 million over the comparable quarter of 2000, and were $123.0 million for the nine months ended September 30, 2001, an increase of $65.4 million over the comparable period of 2000. The increase in both periods was due primarily to significant increases in product development expenses, such as prototype expenses as well as significant increases in headcount to support the Company’s product development efforts. Research and development continues to be essential to the Company’s success; accordingly, research and development expense is not expected to change significantly in the near term.

Sales and Marketing Expenses

     Sales and marketing expenses were $33.6 million for the three months ended September 30, 2001, an increase of $10.2 million over the comparable quarter of 2000, and were $110.9 million for the nine months ended September 30, 2001, an increase of $58.7 million over the comparable period of 2000. The increase in both periods was due primarily to a significant increase in headcount and costs associated with promotional and other marketing expenses. The Company does not expect that sales and marketing headcount and expenses will change significantly in the near term.

General and Administrative Expenses

     General and administrative expenses totaled $9.2 million for the three months ended September 30, 2001, an increase of $3.7 million over the comparable quarter of 2000, and were $29.1 million for the nine months ended September 30, 2001, an increase of $16.5 million over the comparable period of 2000. The increase in both periods was due primarily to increases in headcount to support increasing levels of business activity and increases in the allowance for bad debts reserve. The Company expects that general and administrative expenses will decrease slightly in the near term, primarily as a result of its restructuring program.

Amortization of Goodwill, Purchased Intangibles and Deferred Stock Compensation

     On December 8, 2000, the Company acquired Micro Magic, Inc. and accounted for the transaction under the purchase method of accounting. Accordingly, the Company recorded goodwill and other intangible assets of $125.7 million representing the excess of the purchase price paid over the fair value of net tangible assets acquired. In November 1999, the Company acquired certain other intellectual property and intangible assets resulting in the recording of

12

$18.4 million of goodwill and other intangibles. In each of these cases the goodwill and other intangibles is being amortized over their respective useful lives, which the Company has determined to be three years.

     As part of the acquisition of Micro Magic, Inc., the Company recorded $121.7 million of deferred compensation relating to the unvested stock options and restricted stock assumed in the acquisition. Also, in connection with the grant of certain stock options to employees during 1998 and the three months ended March 31, 1999, the Company recorded deferred compensation of $6.4 million in 1998 and $1.1 million in 1999 representing the difference between the deemed value of the common stock for accounting purposes and the exercise price of these options at the date of grant. Deferred compensation is presented as a reduction of stockholders’ equity and is amortized over the vesting period of the applicable options or restricted stock using the graded vesting method.

     The Company expensed $28.0 million and $95.7 million of goodwill, purchased intangibles and deferred stock compensation during the three months and nine months ended September 30, 2001, respectively, as compared to $2.3 million and $7.0 million in the comparable periods of 2000. The Company is required under generally accepted accounting principles to review its intangible assets, which approximate $97.0 million at September 30, 2001, for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. This review could result in a significant charge to earnings in the period any impairment is determined.

Restructuring Charges

     On June 8, 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.

Interest Income

     Interest income primarily consists of income on available-for-sale investments. Interest income was $23.3 million in the three months ended September 30, 2001 and $75.7 million in the nine months ended September 30, 2001. This compares with interest income of $26.3 in the three months ended September 30, 2000 and $61.4 in the nine months ended September 30, 2000. The increase in interest income for the nine months ended September 30, 2001 as compared to the nine months ended September 30, 2000 was a direct result of increased cash and investment balances, resulting from the Company’s convertible debt offering in March 2000.

Interest Expense

     Interest expense for the three months ended and nine months ended September 30, 2001 was $15.1 million and $45.6 million, respectively. Interest expense for the three months ended and nine months ended September 30, 2000 was $14.6 million and $33.3 million, respectively. Interest expense in all periods consists entirely of accrued interest and amortization of debt issuance costs, both attributable to the 4.75% Convertible Subordinated Notes (the “Notes”) which were issued in March 2000.

Loss on Investments

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     Juniper Networks monitors its minority equity investments for impairment and makes appropriate reductions in carrying values when necessary. For the three months and nine months ended September 30, 2001, the Company recorded impairment write-downs of its equity investments of $11.0 million and $53.6 million, respectively. No impairment write-downs were made during the nine months ended September 30, 2000.

Equity in Net Loss of Joint Venture

     Equity in net loss of joint venture reflects Juniper Networks’ share of the net losses of its joint venture formed in June 2001, which is accounted for under the equity method of accounting. Equity in net loss of joint venture was $1.5 million and $2.6 million for the three and nine months ended September 30, 2001, respectively.

Provision for Income Taxes

     The Company recorded tax provisions / (benefits) of $(1.3) million and $33.3 million for the three and nine months ended September 30, 2001 or an effective tax rate of 4.1% and 133.2%, respectively. These rates differ from the federal statutory rate of 35% primarily due to the inability to benefit certain restructuring charges and write-downs in equity investments. For the same periods in the prior year, the Company recorded tax provisions of $29.8 million and $45 million, respectively, or effective rates of 33.9% and 34.4% for each period.

Liquidity and Capital Resources

     In June 1999, the Company completed the initial public offering of its common stock and realized net proceeds from the offering of approximately $65.2 million. In October 1999, the Company completed a secondary public offering of its common stock and realized net proceeds from the offering of approximately $324.3 million. In March 2000, the Company completed an offering of the Notes and realized net proceeds from that offering of approximately $1.1 billion. In accordance with the terms of the Notes, the Company made interest payments of $27.3 million in March and September of 2001 and is required to make a similar interest payment each March and September through March 15, 2007.

     At September 30, 2001, the Company had cash and cash equivalents of approximately $666.5 million, short-term investments of $411.5 million and long-term investments of $610.8 million. The Company regularly invests excess funds in money market funds, commercial paper and government and non-government debt securities.

     Net cash provided by operating activities for the nine months ended September 30, 2001 and September 30, 2000 was $308.1 million and $140.5 million, respectively. Cash provided by operating activities for the nine months ended September 30, 2001 was primarily the result of adjustments for certain non-cash charges, increases in accounts payable and other accrued liabilities and decreases in accounts receivable. Cash provided by operating activities for the nine months ended September 30, 2000 was primarily the result of net income, increases in accounts payable and other accrued liabilities and adjustments for certain non-cash charges, partially offset by increases in accounts receivable and other assets.

     Net cash used in investing activities for the nine months ended September 30, 2001 and September 30, 2000 was $242.4 million and $863.5 million, respectively. Cash used in investing activities in the nine months ended September 30, 2001 was due primarily to the purchase of available-for-sale investments and the purchase of fixed assets, partially offset by cash received from maturities of available-for-sale investments. The increase in fixed assets includes the purchase of approximately 80 acres of land in Sunnyvale, California. Cash used in investing activities in the nine months ended September 30, 2000 was primarily due to the

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purchase of available-for-sale investments and minority equity investments, partially offset by maturities of available-for-sale investments.

     Net cash provided by financing activities for the nine months ended September 30, 2001 and September 30, 2000 was $37.7 million and $1.1 billion, respectively. Cash provided by financing activities in the nine months ended September 30, 2001 was due to proceeds from employee stock option exercises and the employee stock purchase plan. Cash provided by financing activities in the nine months ended September 30, 2000 was due primarily to the proceeds from the offering of the Notes of $1.1 billion.

     In October 2001, Juniper Networks announced that its board of directors approved a stock repurchase program of up to $200 million. The program allows for stock repurchases to be made from time to time, over the next two years, at the Company’s discretion in open market transactions.

     Although the Company believes that current cash balances will be sufficient to fund operations for at least the next 12 months, there can be no assurance that the Company will not require additional financing within this time frame or that such additional funding, if needed, will be available on acceptable terms.

Factors That May Affect Future Results

The Company faces intense competition that could reduce its market share. Competition in the Internet infrastructure market is intense. This market has historically been dominated by Cisco with other companies such as Nortel Networks and Lucent Technologies providing products to a smaller segment of the market. In addition, a number of other small public or private companies have announced plans for new products to address the same problems which the Company’s products address.

If the Company is unable to compete successfully against existing and future competitors from a product offering standpoint or from potential price competition resulting from excess inventory held by some of such competitors, the Company could be required to reduce prices, resulting in reduced gross margins and loss of market share, either of which could materially and adversely affect its business, operating results and financial condition.

The Company’s success depends on its ability to develop products and product enhancements that will achieve market acceptance. The Company cannot ensure that it will be able to develop new products or product enhancements in a timely manner or at all. Any failure to develop new products or product enhancements could substantially decrease market acceptance and sales of the Company’s present and future products which would significantly harm the business and financial results. Even if the Company is able to develop and commercially introduce new products and enhancements, there can be no assurance that new products or enhancements will achieve widespread market acceptance. Any failure of the Company’s future products to achieve market acceptance could adversely affect the business and financial results.

Limited operating history makes forecasting difficult. As a result of the Company’s limited operating history, it is difficult to accurately forecast revenues and there is limited meaningful historical financial data upon which to base planned operating expenses. In addition, the Company’s operating expenses are largely based on anticipated revenue trends and a high percentage of its expenses are, and will continue to be, fixed in the short-term. If the Company does not achieve its expected revenues, its operating results will be below its expectations and

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those of investors and market analysts, which could cause the price of the common stock to decline.

In addition, timing of deployment of the Company’s products can vary widely and depends on various factors. Customers with large networks usually expand their networks in large increments on a periodic basis. The Company expects to receive significant orders on an irregular basis. Because of the Company’s limited operating history, it cannot predict these sales and development cycles. These long cycles, as well as the Company’s expectation that customers will tend to sporadically place large orders with short lead times, may cause its revenues and operating results to vary significantly and unexpectedly from quarter to quarter.

Further, the Company has experienced and expects in the foreseeable future to continue to experience limited visibility as to customers’ spending plans and capital budgets. This limited visibility complicates the forecasting process further. Additionally, many customers funded their network infrastructure purchases through a variety of debt and similar instruments and now many of these customers face significant debt loads, which may reduce their ability to make future purchases and in some cases to pay for the purchases made to date. This has contributed, and the Company expects that it will continue to contribute, to the uncertainty of the amounts and timing of capital expenditures further limiting visibility and complicating the forecasting process.

The Company’s failure to increase its revenues may prevent the Company from being profitable in future periods. The Company has large fixed expenses and there can be no assurances that net revenues will grow or that the Company will be profitable in future periods.

If the Company fails to accurately predict its manufacturing requirements, the Company could incur additional costs or experience manufacturing delays. The Company’s contract manufacturers are not obligated to supply products for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order because the Company does not have long-term supply contracts with its contract manufacturers. In addition, lead times for required materials and components vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. The Company provides to its contract manufacturers a demand forecast. If the Company overestimates its requirements, the contract manufacturers may assess charges that could negatively impact the Company’s gross margins (as was the case in the quarter ended September 30, 2001). If the Company underestimates its requirements, the contract manufacturers may have inadequate inventory, which could interrupt manufacturing of the Company’s products and result in delays in shipments and revenues.

The Company’s customer base has increased substantially, however there is still a limited number of customers which comprise a significant portion of the Company’s revenues and any decrease in revenue from these customers could have an adverse effect. The Company expects that a large portion of its net revenues will continue to depend on sales to a limited number of customers. Any downturn in the business of these customers or potential new customers could significantly decrease sales to such customers which could adversely affect the Company’s net revenues and results of operations.

The Company’s failure to adapt to changing market conditions effectively could seriously harm its business, financial condition and prospects. The Company’s ability to successfully implement its business plan, develop and offer its products and manage expansion under rapidly changing market conditions requires a comprehensive and effective planning and management process. The Company continues to increase the scope of its operations domestically and internationally and has grown headcount substantially over the last

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year. The growth in business, headcount and relationships with customers and other third parties has placed and will continue to place a significant strain on the Company’s management systems and resources. The Company will need to continue to improve its operational, managerial and financial controls, reporting systems and procedures, and will need to continue to expand, train and manage its work force worldwide.

The unpredictability of the Company’s quarterly results may adversely affect the trading price of its common stock. The Company’s revenues and operating results will vary significantly from quarter to quarter due to a number of factors, including many of which are outside of the Company’s control and any of which may cause its stock price to fluctuate.

The factors that may impact the unpredictability of the Company’s quarterly results include the long sales and implementation cycle and the reduced visibility into customers’ spending plans and associated revenues. As a result, the Company believes that quarter-to-quarter comparisons of operating results are not a good indication of future performance. It is likely that in some future quarters, operating results may be below the expectations of public market analysts and investors in which case the price of the Company’s common stock may fall.

The Company depends on key personnel to manage its business effectively in a rapidly changing market and if it is unable to hire additional personnel, its ability to sell products could be harmed. The Company’s future success depends upon the continued services of its executive officers and other key engineering, sales, marketing and support personnel. None of the officers or key employees is bound by an employment agreement for any specific term.

The loss of the services of any of its key employees, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly engineers, could delay the development and introduction of and negatively impact the Company’s ability to sell its products.

In addition, the Company believes that its future success is dependent upon establishing successful relationships with a variety of distribution partners. The Company has entered into agreements with several value added resellers, some of whom also sell products that compete with the Company’s products. The Company cannot be certain that it will be able to reach agreement with additional resellers on a timely basis or at all, or that they will devote adequate resources to selling the Company’s products.

The Company is dependent on sole source and limited source suppliers for several key components. With the current demand for electronic products, component shortages are possible and the predictability of the availability of such components may be limited. The Company currently purchases several key components, including ASICs, from single or limited sources. The Company may not be able to develop an alternate or second source in a timely manner, which could hurt its ability to deliver product to customers. If the Company is unable to buy these components on a timely basis, it will not be able to deliver product to its customers, which would seriously impact present and future sales which would, in turn, adversely affect its business.

The Company currently depends on contract manufacturers with whom it does not have long-term supply contracts, and if the Company unexpectedly has to qualify a new contract manufacturer it may lose revenue and damage its customer relationships. The Company depends on third party contract manufacturers (each of whom is a third party manufacturer for numerous companies) to manufacture its products. The Company does not have a long-term supply contract with such manufacturers and if the Company should fail to effectively manage its contract manufacturer relationships or if one or more of them should

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experiences delays, disruptions or quality control problems in its manufacturing operations, the Company’s ability to ship products to its customers could be delayed which could adversely affect the Company’s business and financial results.

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

     The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investments and long-term debt obligations. The Company maintains investment portfolio holdings of various issuers, types, and maturities. These securities are classified as available-for-sale, and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of shareholders’ equity, net of tax. To reduce its risk the Company places its investments with high credit quality issuers and, by policy, limits the amount invested in any one issuer.

Foreign Currency Risk

     The Company markets and sells its products throughout the world. However, to date, all sales have all been made in US dollars and the Company’s operations are primarily located in the United States. Accordingly, the Company has had no material exposure to foreign currency rate fluctuations.

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PART II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

     None

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  List of Exhibits : None

     (b)  Reports on Form 8-K : None

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

JUNIPER NETWORKS, INC.
 
 
 
 
/s/ Marcel Gani
Marcel Gani
Chief Financial Officer
(Duly Authorized Officer and Principal Financial and
Accounting Officer)

Dated: November 1, 2001

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