<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 0-24156
FORE SYSTEMS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 25-1628117
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
174 Thorn Hill Road, Warrendale, Pennsylvania 15086-7586
----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 772-6600
--------------
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 _____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1996
- ---------------------------- ----------------------------
Common Stock, $.01 par value 89,707,463 Shares
<PAGE> 2
FORM 10-Q
FORE SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORE Systems, Inc. Consolidated Balance Sheet as of June 30,
1996 and March 31, 1996 3
FORE Systems, Inc. Consolidated Statement of Income for the
three months ended June 30, 1996 and 1995 4
FORE Systems, Inc. Consolidated Statement of Cash Flows for the
three months ended June 30, 1996 and 1995 5
Notes to Unaudited Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12-13
Signatures 14
Exhibit Index 15
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
FORE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE, 30 MARCH 31,
1996 1996
---------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $147,282 $204,013
Short-term investments 125,108 92,142
Accounts receivable, net of allowance for
doubtful accounts of $1,481 at June 30, 1996
and $1,087 at March 31, 1996 64,974 49,990
Inventories 35,596 27,495
Deferred income taxes 20,323 19,574
Prepaid expenses and other current assets 11,415 6,382
-------- --------
Total current assets 404,698 399,596
Fixed assets, net 31,667 24,766
-------- --------
Total assets $436,365 $424,362
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,242 $ 32,430
Accrued payroll and related costs 10,680 10,723
Other current liabilities 7,099 13,120
Accrued merger costs 10,197 20,045
Deferred revenue 13,012 12,054
-------- --------
Total current liabilities 73,230 88,372
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; 300,000,000
shares authorized; shares issued and outstanding:
89,370,358 at June 30, 1996 and 87,982,594 at
March 31, 1996 339,057 323,134
Retained earnings 24,777 13,384
Valuation allowance for short-term investments (699) (528)
-------- --------
Total stockholders' equity 363,135 335,990
-------- --------
Total liabilities and stockholders' equity $436,365 $424,362
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 4
FORE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
Revenue $ 83,357 $ 43,882
Cost of sales 34,912 18,496
----------- -----------
Gross profit 48,445 25,386
----------- -----------
Operating expenses:
Research and development 11,190 5,682
Sales and marketing 18,761 10,277
General and administrative 3,851 2,288
Merger-related -- 1,587
----------- -----------
Total operating expenses 33,802 19,834
----------- -----------
Income from operations 14,643 5,552
Interest income, net 3,158 1,531
----------- -----------
Income before provision for income taxes 17,801 7,083
Provision for income taxes 6,408 3,021
----------- -----------
Net income $ 11,393 $ 4,062
=========== ===========
Net income per common share $ 0.12 $ 0.05
=========== ===========
Weighted average common and common
equivalent shares outstanding 96,768,218 82,015,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 5
FORE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,393 $ 4,062
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation and amortization 3,438 1,465
Deferred income tax benefit (749) (716)
Change in operating assets and liabilities:
Accounts receivable (14,984) (3,069)
Inventories (8,101) (2,882)
Prepaid assets and other current assets (5,134) (565)
Accounts payable (188) 3,131
Accrued liabilities 1,556 3,464
Accrued merger costs (9,848) --
Deferred revenue 958 122
-------- --------
Net cash provided (used) by operating activities (21,659) 5,012
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (54,233) (31,023)
Redemption and sale of short-term investments 21,096 8,507
Capitalization of software development costs (182) (249)
Net cash from merger-related activity -- 184
Purchases of fixed assets (10,056) (3,481)
-------- --------
Net cash used in investing activities (43,375) (26,062)
-------- --------
Cash flows from financing activities:
Principal payments on notes payable and capital
lease obligations (43) (70)
Proceeds from issuance of common stock 8,346 80,473
-------- --------
Net cash provided by financing activities 8,303 80,403
-------- --------
Increase (decrease) in cash and cash equivalents (56,731) 59,353
Cash and cash equivalents at beginning of period 204,013 38,983
-------- --------
Cash and cash equivalents at end of period $147,282 $ 98,336
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
NOTE 1. Interim Financial Statements
The accompanying unaudited interim consolidated financial statements of
FORE Systems, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, these statements include all adjustments,
consisting of normal and recurring adjustments, considered necessary for a fair
presentation of these results for such periods. The results of operations for
the three month period ending June 30, 1996 are not necessarily indicative of
results which may be achieved for the entire fiscal year ending March 31, 1997.
The unaudited consolidated interim financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996
as filed with the Securities and Exchange Commission.
NOTE 2. Inventories (in thousands)
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method, and include raw material
components, processing costs and manufacturing overhead costs. Inventories are
summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996 March 31, 1996
------------- --------------
<S> <C> <C>
Raw Materials $12,263 $ 9,408
Work in Process 12,791 10,939
Finished Goods 10,542 7,148
------- -------
Total Inventories $35,596 $27,495
======= =======
</TABLE>
NOTE 3. Lease Commitments
In December 1995, the Company entered into agreements to lease
headquarters and operating facilities to be constructed on land which was
purchased by the Company. The lessor and an additional lender have committed
to fund up to a maximum of $41 million for the construction of the buildings.
The Company will lease the facilities under a ten-year operating lease and has
options to renew the lease for two additional five-year terms. Future annual
minimum rental payments under the lease are approximately $3.5 million and are
expected to commence in the current fiscal year. During the construction
period, the Company has guaranteed the repayment of approximately $37 million
of the lessor's construction financing for the facilities.
The Company may, at its option, purchase the facilities during or at the
expiration of the term of the lease at an amount equal to the remaining balance
of any debt of the lessor related to the construction of the facilities plus any
applicable prepayment penalties. If the Company does not exercise the purchase
option at the end of the lease, the Company will guarantee the residual value of
the facilities of approximately $24 million, an amount which was determined at
the lease inception date.
As part of the above lease transaction, the Company pledged $7.9 million of
marketable securities (valued at June 30, 1996) as collateral for specified
obligations of the lessor. These securities will be pledged until construction
of the facilities is completed and will be managed by the Company under its
investment policy. In addition, under the terms of the lease, the Company is
required to comply with certain financial covenants including the maintenance of
a minimum tangible net worth. Other restrictive covenants limit indebtedness
and the payment of dividends.
-6-
<PAGE> 7
NOTE 4. Stock Option Plan
On June 17, 1996, the Board of Directors adopted and approved the FORE
Systems, Inc. 1996 Stock Option Plan (the "Plan"), under which awards of
options to acquire shares of Common Stock may be made to employees, directors,
consultants and advisors of the Company or any of its subsidiaries
("Discretionary Awards") and awards of options will automatically be made to
Directors of the Company. The maximum number of shares of Common Stock as to
which awards may be granted under the Plan is 5,500,000 shares.
The Compensation Committee of the Board of Directors will determine the
terms and conditions of each Discretionary Award, provided that (i)
Discretionary Awards will be granted at an exercise price of not less than 100%
of the fair market value of the Common Stock on the date of grant (or less
than 110% of the fair market value in the case of an optionee holding more than
10% of the voting stock of the Company), and (ii) the period within which a
Discretionary Award may be exercised will not exceed ten years from the date of
grant (five years in the case of a grant of Incentive Stock Options to a 10%
Holder).
On July 25, 1996, the Company's stockholders approved the Plan.
-7-
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
RESULTS OF OPERATIONS
GENERAL
FORE Systems, Inc. (the "Company") is a leader in the design, development,
manufacture and sale of high-performance networking products based on
Asynchronous Transfer Mode ("ATM") technology. ATM provides dramatically
greater speed and total capacity than conventional networking technologies.
ATM improves the performance of today's network applications, and also enables
new applications, including integrated video, audio and data communications.
The Company believes that it currently offers the most comprehensive ATM
product line available, including ForeRunner(R) ATM switches and adapter cards,
PowerHub(R) LAN switches for ATM connectivity, CellPath(TM) WAN multiplexing
products for WAN access, ForeThought(TM) Internetworking Software and
ForeView(TM) Network Management Software.
In view of the Company's growth, the Company believes that period-to-period
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance. In addition, the
Company's results of operations may fluctuate from period to period in the
future.
QUARTER ENDED JUNE 30, 1996 COMPARED WITH QUARTER ENDED JUNE 30, 1995
REVENUE. Revenue increased by 90% to $83.4 million in the quarter ended
June 30, 1996 from $43.9 million in the quarter ended June 30, 1995. The
distribution of revenue from sales to domestic and foreign customers was 59% and
41%, respectively, in the quarter ended June 30, 1996. This compares with 71%
and 29%, respectively, in the corresponding period in 1995. The increase in
revenue dollars was attributable to the increased market acceptance of ATM and
LAN switching products. The increase in foreign revenue as a percentage of
revenue resulted from the Company's expansion of its international distribution
channels.
The Company measures overall unit volume for its switching products based
on the number of ATM ports or network connections shipped. The total number of
ATM ports shipped in the quarter ended June 30, 1996 was 16,749 as compared with
7,276 in the previous year's corresponding period. The total installed base of
ATM ports as of June 30, 1996 was 81,470. The total number of LAN switching
products shipped in the quarter ended June 30, 1996 was 1,576, as compared with
569 in the previous year's corresponding period. The total number of adapter
cards shipped in the quarter ended June 30, 1996 was 7,489 as compared with
2,986 in the previous year's corresponding period. The total installed base of
adapter cards as of June 30, 1996 was 35,477. In the period ended June 30,
1996, revenue mix, as a percentage of revenue, among ATM switching products, LAN
switching products, adapter cards and other revenue (principally service support
and development contracts) was 49%, 37%, 7% and 7%, respectively. Revenue mix
for the corresponding quarter in 1995 was 46%, 37%, 9% and 8%. Average selling
price per port during the quarter ended June 30, 1996 was $2,422 as compared to
$2,752 in the corresponding quarter in 1995. Average selling price for adapter
cards shipped during the quarter ended June 30, 1996 was $725, as compared to
$1,280 in the previous year's quarter ended June 30, 1995. In May of 1996, the
Company reduced the price of its ATM LAN switches by up to 40%. At the same
time, prices of the Company's adapter cards were reduced by 50%. The Company
believes that reductions in price per port on switching products and price
reductions on adapter cards will help stimulate demand for its products.
-8-
<PAGE> 9
GROSS PROFIT. Gross profit increased to $48.4 million or 58.1% as a
percentage of revenue in the quarter ended June 30, 1996 as compared to gross
profit of $25.4 million or 57.9% as a percentage of revenue in the corresponding
quarter in 1995. The dollar increase in gross profit was largely attributable
to the increase in revenue. The improvement in gross profit as a percentage of
revenue was the result of reduced product costs in addition to improved
product price mix for the Company's switching products. The Company intends to
price its products competitively, to continue to capture market share and to
stimulate demand for its products. In future periods, gross margins may be
adversely affected by price competition or changes in sales channels, increases
in the costs of goods or changes in the mix of products sold.
RESEARCH AND DEVELOPMENT. Research and development expense was $11.2
million or 13.4% of revenue in the quarter ended June 30, 1996 as compared to
$5.7 million or 13.0% of revenue in the corresponding quarter in 1995. The
increase in research and development expense in dollars and as a percentage of
revenue was largely attributable to increased hiring of engineering employees,
including recruiting expenses, along with increased purchases of research and
development materials. The number of employees of the Company engaged in
research and development increased from 192 at June 30, 1995 to 371 at June 30,
1996
SALES AND MARKETING. Sales and marketing expense was $18.8 million or
22.5% of revenue for the quarter ended June 30, 1996 as compared to $10.3
million or 23.4% of revenue in the corresponding quarter in 1995. The increase
in sales and marketing expense was largely the result of hiring additional
sales, marketing and support personnel (including training and documentation)
and increased promotion costs. The reduction in sales and marketing expense as
a percentage of revenue in the quarter ended June 30, 1996 was the result of
further implementation of the Company's indirect channel sales strategy which
has allowed the Company to reduce fixed overhead. The number of employees of
the Company engaged in sales and marketing activities increased from 256 at June
30, 1995 to 486 at June 30, 1996. The Company expects to increase sales and
marketing expenses both domestically and internationally as part of its
continuing effort to expand its markets, introduce new products, build marketing
staff and programs and expand its international presence.
GENERAL AND ADMINISTRATIVE. General and administrative expense was $3.9
million or 4.6% of revenue in the quarter ended June 30, 1996 as compared to
$2.3 million or 5.2% of revenue in the corresponding quarter in 1995. The
dollar increase was largely due to increased hiring of administrative staff,
including those engaged in systems administration, accounting and human
resources. The percentage decrease resulted from increased revenue absorbing a
larger portion of the Company's fixed overhead expenses. The number of
employees of the Company engaged in general and administrative activities
increased from 68 at June 30, 1995 to 137 at June 30, 1996. The Company plans
to make appropriate expenditures in the general and administrative organization
as necessary and does not expect the overall cost as a percentage of revenue to
decline in the next twelve months.
MERGER-RELATED EXPENSES. The Company had no merger-related expenses
during the quarter ended June 30, 1996. Total merger-related expenditures of
$1.6 million were expensed in the quarter ended June 30, 1995 upon completion of
the Applied Network Technology, Inc. and RainbowBridge Communciations, Inc.
acquisitions. These expenses included fees to financial advisors, legal and
accounting fees and other related expenses.
INTEREST INCOME. Interest income, net of interest expense, was $3.2
million in the quarter ended June 30, 1996 as compared to $1.5 million in the
corresponding quarter in 1995. The increase in interest income resulted largely
from interest earned on the net proceeds received from common stock offerings in
April and October of 1995.
-9-
<PAGE> 10
INCOME TAXES. The provision for income taxes was $6.4 million, or an
effective rate of 36%, in the quarter ended June 30, 1996 as compared to $3.0
million, or 43%, in the previous year's quarter ended June 30, 1995. The
decrease in the effective tax rate is the result of certain merger-related
expenses that were not deductible for tax purposes in 1995. Excluding the
effect of these merger-related expenses, the effective tax rate in the quarter
ended June 30, 1995 would have been 35%.
NET INCOME. Net income for the quarter ended June 30, 1996 was $11.4
million, or $.12 per share, compared to $4.1 million, or $.05 per share, for the
quarter ended June 30, 1995. Net income for the quarter ended June 30, 1995
included the aforementioned $1.6 million in merger-related expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital and capital expenditure
requirements to date primarily through cash received from public offerings, cash
generated from operations, private placements of preferred stock, development
contracts and grants and borrowings consisting of capital leases and bank
borrowings.
The Company used $21.7 million in operations for the quarter ended June 30,
1996. Net cash used by operations was the result of increased accounts
receivable and inventories, offset by net income and increased current
liabilities. The increase in accounts receivable and inventories was due to
increased revenue. Cash provided by operations was $5.0 million for the
quarter ended June 30, 1995 which resulted from net income and increased current
liabilities, offset by increased accounts receivable and inventories. The
Company's investing activities to date have been for the purchase of fixed
assets to support the Company's growth.
At June 30, 1996, the Company had cash and cash equivalents of
approximately $147.3 million, short-term investments of $125.1 million and an
unused line of credit of $20 million. The Company believes that the proceeds
from its public offerings, together with its existing sources of liquidity and
internally generated cash, will satisfy the Company's projected cash needs
through at least the next twelve months. The Company may require additional
sources of liquidity to fund future growth, including additional equity
offerings or debt financing.
In April and October of 1995, public stock offerings were completed, with
aggregate net proceeds to the Company of approximately $208 million.
In addition, during fiscal 1996, the Company entered into arrangements to
lease headquarters and operating facilities to be constructed on land purchased
by the Company. These arrangements include an operating lease pursuant to which
the Company has committed to make annual minimum rental payments of
approximately $3.5 million commencing in the current fiscal year, and a
guarantee by the Company of the repayment of approximately $37 million of the
lessor's construction financing for the facilities.
As part of the lease transaction, the Company, at June 30, 1996, pledged
$7.9 million of marketable securities (valued at June 30, 1996) as collateral
for specified obligations of the lessor. The Company is also required to comply
with certain financial covenants including the maintenance of a minimum taxable
net worth and limitations on the incurrence of debt and the payment of
dividends.
To date, inflation has not had a material impact on the Company's financial
results.
-10-
<PAGE> 11
In December 1995, Congress enacted the Private Securities Litigation Reform
Act of 1995 (the "Act"). Subject to certain conditions, the Act provides a
"safe harbor" from liability in any private action that is based on an alleged
untrue statement of a material fact or alleged omission of a material fact
necessary to make the statement not misleading. The Company wishes to take
advantage of the "safe harbor" provided by the Act. To the extent that any of
the statements made herein, including, without limitation, statements regarding
the Company's pricing strategies and resulting effects on revenue and gross
margins and statements regarding the Company's sales and marketing strategies,
may be deemed to be forward-looking statements, reference is made to the list of
factors set forth in the Company's Annual Report on Form 10-K for the year ended
March 31, 1996, for important factors that could cause actual results to differ
materially from those expressed in any such forward-looking statements.
-11-
<PAGE> 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In April 1994, ALANTEC Corporation ("ALANTEC"), a wholly owned subsidiary
of the Company acquired in February 1996, was notified that, in March 1994, a
suit had been filed in the Santa Clara County, California Superior Court by two
founders and one former employee of ALANTEC against certain former directors, a
former officer and several stockholders of ALANTEC ("Defendants"), seeking
damages for alleged breaches of fiduciary duties by the Defendants in the
course of various transactions in which ALANTEC obtained additional financing
in exchange for the issuance of convertible preferred stock. While ALANTEC was
not named as a defendant in the suit, ALANTEC's former bylaws and
indemnification agreements between ALANTEC and certain of the Defendants
require ALANTEC to fund certain ongoing legal fees associated with defending
the suit on behalf of the Defendants. For the year ended March 31, 1996, the
Company incurred $360,000 for litigation expenses related to these matters.
While the Company expects to continue to incur legal expenses with respect to
the litigation, the Company believes that the ultimate resolution of the
litigation will not have a material adverse effect on the Company's financial
position or results of operations. The lawsuit is in the discovery stage and a
trial has been scheduled for September 1996.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) A Special Meeting of Stockholders of the Company was held
on Monday, May 6, 1996.
(b) Not applicable.
(c) A description of the matter voted upon at the meeting along
with an indication of the results of the vote on such
matter are set forth below:
Approval of a proposal to amend Article FOURTH of the
Company's Amended and Restated Certificate of Incorporation
to increase the number of authorized shares of Common
Stock, par value $.01 per share, from 100,000,000 shares to
300,000,000 shares: For: 25,724,479; Against:
12,490,651; Abstentions: 109,198; Broker non-votes: 0.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
The exhibits listed below are filed or incorporated by
reference as part of this quarterly report on Form 10-Q:
3.1 Amended and Restated Certificate of Incorporation of FORE
Systems, Inc. (as amended by Certificate of Amendment dated
May 6, 1996) (incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10- K for the fiscal year ended
March 31, 1996).
-12-
<PAGE> 13
3.2 Amended and Restated Bylaws of FORE Systems, Inc.
(incorporated by reference to exhibit 4.1 of the Company's
Registration Statement on Form S-8, File No. 333-1728).
10.1. FORE Systems, Inc. 1996 Stock Option Plan.
11.1. Statement regarding Computation of Per Share Earnings.
27.1. Financial Data Schedule.
b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1996.
-13-
<PAGE> 14
SIGNATURES
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.
FORE SYSTEMS, INC.
(Registrant)
Date: August 12, 1996 /s/ Eric C. Cooper
---------------------
Eric C. Cooper Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1996 /s/ Thomas J. Gill
----------------------
Thomas J. Gill
Vice President, Finance,
Chief Financial Officer and Treasurer
(Principal Financial and
Chief Accounting Officer)
-14-
<PAGE> 15
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 FORE System, Inc. 1996 Stock Option Plan
11.1 Statement Regarding Computation of per Share
Earnings
27.1 Financial Data Schedule
-15-
<PAGE> 1
EXHIBIT 10.1
FORE SYSTEMS, INC.
1996 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of the FORE Systems, Inc. 1996 Stock Option Plan (the "Plan")
is to promote the interests of FORE Systems, Inc. (the "Company") and its
stockholders by (i) attracting and retaining employees, directors, consultants
and advisors of outstanding ability, (ii) motivating such persons, by means of
performance-related incentives, to achieve longer-range performance goals, and
(iii) enabling such persons to participate in the long-term growth and financial
success of the Company.
2. ADMINISTRATION
Except as set forth in Section 6, the Plan shall be administered by a
committee (the "Committee") of the Board of Directors of the Company (the
"Board"). The Committee shall at all times consist of two or more persons, each
of whom qualifies as an "outside director" within the meaning of Section 162(m)
or any successor provision of the Internal Revenue Code of 1986, as amended (the
"Code") and applicable Treasury regulations thereunder, if such qualification is
deemed necessary in order for the grant or the exercise of awards made under the
Plan to qualify for any tax or other material benefit to participants or the
Company under applicable law. The Committee is authorized to interpret the Plan,
to prescribe, amend and rescind rules and regulations to further the purposes of
the Plan, and to make all other determinations necessary for the administration
of the Plan. All such actions by the Committee shall be final and binding.
3. SHARES
(A) SHARES AVAILABLE. Subject to adjustment as provided in Section 7,
awards in respect of an aggregate of up to 5,500,000 shares of the Common Stock
of the Company, par value $.01 per share (the "Common Stock"), may be made under
the Plan. During the term of the Plan, no participant shall be granted awards in
respect of more than 400,000 shares of Common Stock in any calendar year. The
Common Stock to be offered under the Plan shall be authorized and unissued
Common Stock, or issued Common Stock which shall have been reacquired by the
Company and held in its treasury.
(B) SHARES SUBJECT TO TERMINATED AWARDS. The Common Stock covered by any
unexercised portion of terminated stock options granted under the Plan may again
be subject to new awards under the Plan. In the event the purchase price of a
stock option is paid in whole or in part through the delivery of Common Stock,
only the net number of shares of Common Stock issuable in connection with the
exercise of the option shall be counted against the number of shares remaining
available for the grant of awards under the Plan.
4. FAIR MARKET VALUE
For all purposes under the Plan, the term "Fair Market Value" shall mean,
as of any applicable date: (i) if the principal securities market on which the
Common Stock is traded is a national securities exchange or The Nasdaq National
Market ("NNM"), the closing price of the Common Stock on such exchange or NNM,
as the case may be, or if no sale of the Common Stock shall have occurred on
such date, on the next preceding date on which there was a reported sale; or
(ii) if the Common Stock is not traded on a national securities exchange or NNM,
the closing price on such date as reported by The Nasdaq SmallCap Market, or if
no sale of the Common Stock shall have occurred on such date, on the next
preceding date on which there was a reported sale; or (iii) if the principal
securities market on which the Common Stock is traded is not a national
securities exchange, NNM or The Nasdaq SmallCap Market, the average of the bid
and asked prices reported by the National Quotation Bureau, Inc.; or (iv) if the
price of the Common Stock is not so reported, the Fair Market Value of the
Common Stock as determined in good faith by the Committee.
5. DISCRETIONARY AWARDS OF STOCK OPTIONS
(A) DISCRETIONARY AWARDS. The Committee shall have the discretion to grant
awards of stock options under the Plan to employees, directors, consultants and
advisors of the Company or any of its subsidiaries ("Discretionary Awards"),
provided that such consultants or advisors render bona fide services which are
not
A-1
<PAGE> 2
in connection with the offer or sale of securities in a capital-raising
transaction. The Committee shall determine and designate from time to time those
individuals who shall receive Discretionary Awards and the number of shares of
Common Stock to be covered by, and the other terms and conditions of, each
Discretionary Award. In making its determinations, the Committee shall take into
account the present and potential contributions of the respective individuals to
the success of the Company, and such other factors as the Committee shall deem
relevant in connection with accomplishing the purposes of the Plan. Each
Discretionary Award shall be evidenced by a written stock option agreement in
such form as the Committee shall approve from time to time.
(B) DESIGNATION OF DISCRETIONARY AWARDS. Discretionary Awards may be in the
form of stock options which qualify as "incentive stock options" ("Incentive
Stock Options") within the meaning of Section 422 or any successor provision of
the Code, or stock options which do not so qualify ("Nonqualified Options").
Each Discretionary Award shall be designated in the applicable stock option
agreement as an Incentive Stock Option or a Nonqualified Option, as appropriate.
(C) EXERCISE PRICE. Discretionary Awards shall be granted at an exercise
price of not less than 100% of the Fair Market Value on the date of grant.
Incentive Stock Options granted to a participant who at the time of such grant
owns (within the meaning of Section 424(d) of the Code) more than ten percent of
the voting power of all classes of stock of the Company (a "10% Holder") shall
be granted at an exercise price of not less than 110% of the Fair Market Value
on the date of grant.
(D) TERM AND TERMINATION. The Committee shall determine the term within
which each Discretionary Award may be exercised, in whole or in part, provided
that (i) such term shall not exceed ten years from the date of grant; (ii) the
term of an Incentive Stock Option granted to a 10% Holder shall not exceed five
years from the date of grant; and (iii) the aggregate Fair Market Value
(determined on the date of grant) of Common Stock with respect to which
Incentive Stock Options granted to a participant under the Plan or any other
plan of the Company and its subsidiaries become exercisable for the first time
in any single calendar year shall not exceed $100,000. Unless otherwise
determined by the Committee, all rights to exercise Discretionary Awards shall
terminate on the first to occur of (i) the scheduled expiration date as set
forth in the applicable stock option agreement, or (ii) thirty (30) days
following the date of termination of employment for any reason other than the
death or permanent disability (as defined in the Code) of the participant, or
(iii) one (1) year following the date of termination of employment by reason of
the participant's death or permanent disability.
(E) OTHER TERMS AND CONDITIONS. The Committee shall have the discretion to
determine terms and conditions, consistent with the Plan, that will be
applicable to Discretionary Awards. Awards granted to the same or different
participants, or at the same or different times, need not contain similar
provisions.
6. AUTOMATIC AWARDS OF STOCK OPTIONS TO MEMBERS OF THE BOARD
(A) INITIAL AWARD. Each person who first becomes a member of the Board
after August 15, 1996 shall receive a Nonqualified Option to purchase 10,000
shares of the Common Stock (an "Initial Award") on the date such person first
becomes a member of the Board. Unless otherwise determined by the Board, each
Initial Award shall become exercisable in three annual installments of 3,334,
3,333 and 3,333 shares, respectively, beginning on the first anniversary of the
date of grant, provided that the optionee continues to serve as a member of the
Board on each such anniversary date.
(B) ANNUAL AWARDS. Each person who is a member of the Board immediately
preceding the annual meeting of the stockholders of the Company in each year
beginning in 1996 (the "Annual Meeting Date") shall receive a Nonqualified
Option to purchase 2,000 shares of the Common Stock (an "Annual Award") on the
Annual Meeting Date, provided that in 1996, the Annual Award shall be made on
August 15, 1996 to each person who is then a member of the Board and who was a
member of the Board on the Annual Meeting Date in 1996. Each Annual Award shall
be immediately exercisable in full.
(C) EXERCISE PRICE. The exercise price of each Initial Award and each
Annual Award shall be the Fair Market Value on the date of grant.
A-2
<PAGE> 3
(D) TERM AND TERMINATION. The term of each Initial Award and each Annual
Award shall be ten years, provided that all rights to exercise options granted
thereunder shall terminate on the first to occur of (i) the scheduled expiration
date of such option, or (ii) one year following the date of termination of
service as a director.
7. ADJUSTMENTS TO REFLECT CAPITAL CHANGES
The number and kind of shares subject to outstanding Discretionary Awards,
Initial Awards and Annual Awards, the exercise price applicable thereto, and the
number and kind of shares available for Discretionary Awards, Initial Awards and
Annual Awards subsequently granted under the Plan shall be appropriately
adjusted to reflect any stock dividend, stock split, combination or exchange of
shares, merger, consolidation or other change in capitalization with a similar
substantive effect upon the Plan or the awards granted under the Plan. The
Committee shall have the power and sole discretion to determine the nature and
amount of the adjustment to be made in each case. The adjustment so made shall
be final and binding on all participants.
8. PAYMENT FOR STOCK
Full payment for shares purchased upon exercise of awards granted under the
Plan shall be made at the time the award is exercised in whole or in part.
Payment of the purchase price shall be made in cash or in such other form as the
Committee may approve, including, without limitation, (i) by the delivery to the
Company by the participant of a promissory note containing such terms as the
Committee may determine, or (ii) by the delivery to the Company by the
participant of shares of Common Stock that have been held by the participant for
at least six months prior to exercise of the award, valued at the Fair Market
Value of such shares on the date of exercise or (iii) pursuant to a cashless
exercise arrangement with a broker on such terms as the Committee may determine;
provided, however, that if payment is made pursuant to clause (i), the par value
of the purchased shares shall be paid in cash. No shares of Common Stock shall
be issued to the participant until such payment has been made, and a participant
shall have none of the rights of a stockholder with respect to options held by
such participant.
9. TRANSFERABILITY
Unless otherwise determined by the Committee with respect to Nonqualified
Options, options granted under the Plan shall not be transferable other than by
will or the laws of descent and distribution and are exercisable during a
participant's lifetime only by the participant.
10. WITHHOLDING
The Company shall have the right to deduct from all amounts paid to a
participant in cash as salary, bonus or other compensation any taxes required by
law to be withheld in respect of awards granted under the Plan. In the
Committee's discretion, a participant may be permitted to elect to have withheld
from the shares otherwise issuable to the participant, or to tender to the
Company, the number of shares of Common Stock whose Fair Market Value equals the
amount required to be withheld.
11. CONSTRUCTION OF THE PLAN
The validity, construction, interpretation, administration and effect of
the Plan and of its rules and regulations, and rights relating to the Plan,
shall be determined solely in accordance with the laws of the Commonwealth of
Pennsylvania, without regard to the conflict of law provisions of such laws.
12. NO RIGHT TO AWARD; NO RIGHT TO EMPLOYMENT
Except as set forth in Section 6, no person shall have any claim of right
to be granted an award under the Plan. Neither the Plan nor any action taken
hereunder shall be construed as giving any employee any right to be retained in
the employ of the Company or any of its subsidiaries or as giving any
consultant, advisor or director any right to continue to serve in such capacity.
A-3
<PAGE> 4
13. AWARDS NOT INCLUDABLE FOR BENEFIT PURPOSES
Income recognized by a participant pursuant to the provisions of the Plan
shall not be included in the determination of benefits under any employee
pension benefit plan (as such term is defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974) or group insurance or other benefit
plans applicable to the participant which are maintained by the Company or any
of its subsidiaries, except as may be provided under the terms of such plans or
determined by resolution of the Board.
14. NO STRICT CONSTRUCTION
No rule of strict construction shall be implied against the Company, the
Committee, or any other person in the interpretation of any of the terms of the
Plan, any award granted under the Plan or any rule or procedure established by
the Committee.
15. CAPTIONS
All Section headings used in the Plan are for convenience only, do not
constitute a part of the Plan, and shall not be deemed to limit, characterize or
affect in any way any provisions of the Plan, and all provisions of the Plan
shall be construed as if no captions have been used in the Plan.
16. SEVERABILITY
Whenever possible, each provision in the Plan and every award at any time
granted under the Plan shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of the Plan or any award at
any time granted under the Plan shall be held to be prohibited by or invalid
under applicable law, then such provision shall be deemed amended to accomplish
the objectives of the provision as originally written to the fullest extent
permitted by law, and all other provisions of the Plan and every other award at
any time granted under the Plan shall remain in full force and effect.
17. LEGENDS
All certificates for Common Stock delivered under the Plan shall be subject
to such transfer and other restrictions as the Committee may deem advisable
under the rules, regulations and other requirements of the Securities and
Exchange Commission, any stock exchange or quotation system upon which the
Common Stock is then listed or quoted and any applicable federal or state
securities law, and the Committee may cause a legend or legends to be put on any
such certificates to make appropriate references to such restrictions.
18. AMENDMENT
The Board may, by resolution, amend or revise the Plan, except that such
action shall not be effective without stockholder approval if such stockholder
approval is required to maintain the compliance of the Plan and/or awards
granted to directors, executive officers or other persons with Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended, or any
successor rule. The Board may not modify any options previously granted under
the Plan in a manner adverse to the holders thereof without the consent of such
holders, except in accordance with the provisions of Section 7.
19. EFFECTIVE DATE; TERMINATION OF PLAN
The Plan shall become effective on August 15, 1996, provided it has been
approved by the stockholders of the Company. The Plan shall terminate on August
14, 2006, unless it is earlier terminated by the Board. Termination of the Plan
shall not affect awards previously granted under the Plan.
A-4
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
PRIMARY EARNINGS PER SHARE THREE MONTHS ENDED
JUNE 30,
----------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
Weighted Average Common and Common
Equivalent Shares:
Weighted Average Common Stock
Outstanding During the Period 88,769,034 71,585,874
Weighted Average Common Equivalent
Shares 7,999,184 10,429,126
----------- -----------
96,768,218 82,015,000
=========== ===========
Net income $11,393,000 $ 4,062,000
=========== ===========
Net income per common share $0.12 $0.05
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
FULLY DILUTED EARNINGS PER SHARE THREE MONTHS ENDED
JUNE 30,
----------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
Weighted Average Common and
Common Equivalent Shares:
Weighted Average Common Stock
Outstanding During the Period 88,769,034 71,585,874
Weighted Average Common
Equivalent Shares 7,800,924 10,472,792
----------- -----------
96,569,958 82,058,666
=========== ===========
Net income $11,393,000 $ 4,062,000
=========== ===========
Net income per common share $0.12 $0.05
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000920000
<NAME> FORE SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 147,282
<SECURITIES> 125,108
<RECEIVABLES> 66,455
<ALLOWANCES> 1,481
<INVENTORY> 35,596
<CURRENT-ASSETS> 404,698
<PP&E> 46,187
<DEPRECIATION> 14,520
<TOTAL-ASSETS> 436,365
<CURRENT-LIABILITIES> 73,230
<BONDS> 0
<COMMON> 339,057
0
0
<OTHER-SE> 24,078
<TOTAL-LIABILITY-AND-EQUITY> 436,365
<SALES> 83,357
<TOTAL-REVENUES> 83,357
<CGS> 34,912
<TOTAL-COSTS> 34,912
<OTHER-EXPENSES> 33,802
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,801
<INCOME-TAX> 6,408
<INCOME-CONTINUING> 11,393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,393
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
