<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 December 31, 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.
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(Exact name of registrant as specified in its charter)
Delaware 25-1628117
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
1000 FORE Drive, Warrendale, Pennsylvania 15086
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 742-4444
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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 January 31, 1997
- ---------------------------- -------------------------------
Common Stock, $.01 par value 97,179,309 Shares
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FORM 10-Q
FORE SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORE Systems, Inc. Consolidated Balance
Sheet as of December 31, 1996 and
March 31, 1996 3
FORE Systems, Inc. Consolidated Statement
of Income for the three months and
nine months ended December 31, 1996 and 1995 4
FORE Systems, Inc. Consolidated Statement
of Cash Flows for the three months and
nine months ended December 31, 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 2. Changes in Securities 12
Item 6. Exhibits and Reports on Form 8-K 12-13
Signatures 14
Exhibit Index 15
</TABLE>
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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)
DECEMBER 31, MARCH 31,
1996 1996
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $124,207 $204,013
Short-term investments 165,001 92,142
Accounts receivable, net of allowance for doubtful
accounts of $4,495 at December 31, 1996 and
$1,087 at March 31, 1996 88,460 49,990
Inventories 42,262 27,495
Deferred income taxes 21,925 19,574
Prepaid expenses and other current assets 8,171 6,382
-------- --------
Total current assets 450,026 399,596
Fixed assets, net 41,759 24,766
-------- --------
Total assets $491,785 $424,362
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,538 $ 32,430
Accrued payroll and related costs 12,430 10,723
Other current liabilities 5,344 13,120
Accrued merger costs 6,401 20,045
Deferred revenue 17,128 12,054
-------- --------
Total current liabilities 68,841 88,372
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; 300,000,000
shares authorized; shares issued:
96,946,456 at December 31, 1996 and 87,982,594
at March 31, 1996 377,873 323,134
Retained earnings 49,243 13,384
Treasury stock, at cost: 120,000 shares (3,248) --
Valuation allowance for short-term investments (924) (528)
-------- --------
Total stockholders' equity 422,944 335,990
-------- --------
Total liabilities and stockholders' equity $491,785 $424,362
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FORE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT INCOME PER SHARE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ----------------------
1996 1995 1996 1995
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue $112,645 $63,974 $294,021 $159,918
Cost of sales 48,486 26,816 125,044 67,206
-------- ------- -------- --------
Gross profit 64,159 37,158 168,977 92,712
-------- ------- -------- --------
Operating expenses:
Research and development 14,846 8,512 38,655 21,060
Sales and marketing 25,417 14,663 65,638 37,142
General and administrative 4,654 2,950 12,967 7,715
Merger-related 1,747 690 1,747 2,277
-------- ------- -------- --------
Total operating expenses 46,664 26,815 119,007 68,194
-------- ------- -------- --------
Income from operations 17,495 10,343 49,970 24,518
Interest income, net 3,262 3,120 9,449 6,459
-------- ------- -------- --------
Income before provision for income taxes 20,757 13,463 59,419 30,977
Provision for income taxes 7,918 4,947 21,836 11,665
-------- ------- -------- --------
Net income $ 12,839 $ 8,516 $ 37,583 $ 19,312
======== ======= ======== ========
Net income per common share $ 0.13 $ 0.09 $ 0.38 $ 0.22
======== ======= ======== ========
Weighted average common and common
equivalent shares outstanding 102,534 92,724 98,411 86,074
======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FORE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ----------------------
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,839 $ 8,516 $ 37,583 $ 19,312
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation and amortization 4,418 2,243 12,201 5,612
Deferred income tax benefit (700) (4,829) (2,351) (4,131)
Change in operating assets and liabilities:
Accounts receivable (7,522) (11,390) (38,160) (20,194)
Inventories (2,723) (4,523) (14,673) (6,226)
Prepaid assets and other current assets (1,130) (2,737) (1,715) (3,415)
Accounts payable (5,693) 5,854 (5,380) 8,255
Accrued liabilities 6,871 10,293 12,402 15,050
Accrued merger costs (389) 1,009 (13,644) 1,009
Deferred revenue 4,741 2,658 5,074 3,602
-------- -------- -------- --------
Net cash provided (used) by operating activities 10,712 7,094 (8,663) 18,874
-------- -------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments (75,164) (74,356) (220,508) (129,867)
Redemption and sale of short-term investments 55,129 18,710 151,841 44,739
Capitalization of software development costs (93) (493) (517) (1,015)
Net cash from merger-related activity 28 1,089 28 1,273
Purchases of fixed assets (7,740) (6,931) (27,890) (15,078)
-------- -------- -------- --------
Net cash used in investing activities (27,840) (61,981) (97,046) (99,948)
-------- -------- -------- --------
Cash flows from financing activities:
Principal payments on notes payable and capital lease
obligations (19) (46) (90) (192)
Purchase of treasury stock -- -- (3,248) --
Proceeds from issuance of common stock 11,917 131,444 29,241 214,029
-------- -------- -------- --------
Net cash provided by financing activities 11,898 131,398 25,903 213,837
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents (5,230) 76,511 (79,806) 132,763
Cash and cash equivalents at beginning of period 129,437 95,235 204,013 38,983
-------- -------- -------- --------
Cash and cash equivalents at end of period $124,207 $171,746 $124,207 $171,746
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 and nine month periods ending December 31, 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>
December 31, 1996 March 31, 1996
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<S> <C> <C>
Raw Materials $ 11,728 $ 9,408
Work in Process 6,283 10,939
Finished Goods 24,251 7,148
-------- -------
Total Inventories $ 42,262 $27,495
======== =======
</TABLE>
NOTE 3. Lease Commitments
In December 1995, the Company entered into agreements to lease
headquarters and operating facilities which are being 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 next 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.
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As part of the above lease transaction, the Company pledged $23.7 million
of marketable securities (valued at December 31, 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.
NOTE 4. Business Combinations
In November 1996, the Company acquired Nemesys Research Limited, based in
Cambridge, England, ("Nemesys") a worldwide supplier of ATM video distribution
and video conferencing products, including a range of ATM video encoders and
decoders. The Company issued 413,635 shares of its Common Stock, par value $.01
per share ("Common Stock") (resulting in an increase to Common Stock of
$349,000) in exchange for all of the outstanding ordinary shares of Nemesys.
The transaction was accounted for as a pooling of interests. In addition, the
Company reserved 36,360 shares of Common Stock for issuance upon the exercise
of options granted in substitution of options to purchase ordinary shares of
Nemesys.
Also, in November 1996, the Company acquired Scalable Networks, Inc.
("Scalable"), a developer of high-performance, cost-effective switched Fast
Ethernet desktop and Gigabit Ethernet server access technology to ATM
backbones. The Company issued 900,870 shares of its Common Stock (resulting in
an increase to Common Stock of $2,140,000) in exchange for all of the
outstanding shares of Scalable. The transaction was accounted for as a pooling
of interests. The Company also reserved 46,381 shares of Common Stock for
issuance upon the exercise of options granted in substitution of options to
purchase shares of Scalable Common Stock.
In December 1996, the Company acquired Cadia Networks, Inc. ("Cadia"), a
developer of multiservice WAN adaptation and concentration technology for the
service provider market. The Company issued 3,940,728 shares of its Common
Stock (resulting in an increase to Common Stock of $4,361,000) in exchange for
all of the outstanding shares of Cadia. The transaction was accounted for as a
pooling of interests. The Company also reserved 73,893 shares of Common Stock
for issuance upon the exercise of options granted in substitution of options to
purchase shares of Cadia Common Stock.
In connection with these business combinations, the Company incurred
merger-related expenses of approximately $1.7 million which consist of fees to
financial advisors, legal and accounting fees and other related expenses.
The aggregated historical results of operations and financial position of
Nemesys, Scalable and Cadia are not material to the Company's consolidated
financial statements and prior period amounts have, therefore, not been
restated. Accordingly, retained earnings have been adjusted as of October
1, 1996, to reflect the aggregate accumulated deficits of $176,000, $470,000
and $1,078,000 for Nemesys, Scalable and Cadia, respectively. The aggregate
revenue and earnings of Nemesys, Scalable and Cadia for fiscal years 1996 and
1995 are immaterial in comparison to the revenue and earnings reported by the
Company for those periods.
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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 November 1996, the Company acquired Nemesys Research Limited
("Nemesys"), a worldwide supplier of ATM video distribution and video
conferencing products, including a range of ATM video encoders and decoders.
Also, in November 1996, the Company acquired Scalable Networks, Inc.
("Scalable"), a developer of high-performance, cost-effective switched Fast
Ethernet desktop and Gigabit Ethernet server access technology to ATM
backbones. In December 1996, the Company acquired Cadia Networks, Inc.
("Cadia"), a developer of multiservice WAN adaptation and concentration
technology for the service provider market. Each of these business combinations
has been accounted for as a pooling of interests. The aggregated historical
results of operations and financial position of Nemesys, Scalable and Cadia are
not material to the Company's consolidated financial statements and prior
period amounts have, therefore, not been restated.
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.
Certain statements made herein, including, without limitation, statements
regarding increased market acceptance of ATM and LAN switching products,
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 that
involve risks and uncertainties. Such statements should be read in conjunction
with the list of factors set forth in the Company's Annual Report on Form 10-K
for the year ended March 31, 1996 (the "Form 10-K"). Such factors could cause
actual results to differ materially from those expressed in any forward-looking
statements contained herein.
QUARTER AND NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH QUARTER AND NINE
MONTHS ENDED DECEMBER 31, 1995
REVENUE. Revenue increased by 76% to $112.6 million in the quarter ended
December 31, 1996, from $64.0 million in the quarter ended December 31, 1995.
The distribution of revenue from sales to domestic and foreign customers was
54% and 46%, respectively, in the quarter ended December 31, 1996. This
compares with 53% and 47%, respectively, in the corresponding period in 1995.
Revenue increased by 84% to $294.0 million for the nine month period ended
December 31, 1996, as compared to $159.9 million in the corresponding nine
month period in 1995. The increase in revenue dollars was attributable to the
increased market acceptance of ATM and LAN switching products. There can be no
assurance that revenue from sales of the Company's products will continue to
grow at its historical growth rate, given the competitive nature of the market
for networking products, the fact that such market is characterized by evolving
industry standards, frequent new product introductions and rapid technological
development
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which could render the Company's products noncompetitive or obsolete and the
fact that many of the Company's competitors have significantly greater
financial, technological and personnel resources than does the Company. For
these and other risk factors affecting the Company, see the list of risk
factors set forth in the Form 10-K.
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 December 31, 1996 was approximately
30,000, as compared with approximately 12,000 in the previous year's
corresponding period. The total installed base of ATM ports as of December 31,
1996 was over 134,000. The total number of LAN switching products shipped in the
quarter ended December 31, 1996 was approximately 2,700, as compared with over
900 in the previous year's corresponding period. The total number of adapter
cards shipped in the quarter ended December 31, 1996 was approximately 9,300, as
compared with approximately 5,300 in the previous year's corresponding period.
The total installed base of adapter cards as of December 31, 1996 was over
53,000. In the quarter ended December 31, 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 51%,
35%, 5% and 9%, respectively. Revenue mix for the corresponding quarter in 1995
was 57%, 29%, 6% and 8%, respectively. Average selling price per port during the
quarter ended December 31, 1996 was $1,900, as compared to $3,100 in the
corresponding quarter in 1995. Average selling price for adapter cards shipped
during the quarter ended December 31, 1996 was $600, as compared to $800 in the
previous year's quarter ended December 31, 1995. In May of 1996, the Company
reduced the price of certain of its ATM 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. However, many risk
factors, including the risk that networking products based on ATM may not
achieve broad commercial acceptance, the risk of competition from larger and
better financed competitors and the risk that new technologies may render the
Company's products obsolete or noncompetitive, may cause actual results to
differ.
GROSS PROFIT. Gross profit increased to $64.2 million or 57.0% as a
percentage of revenue in the quarter ended December 31, 1996, as compared to
gross profit of $37.2 million or 58.1% 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 gross margin percentage decline
primarily resulted from continued pricing pressure, product mix of low-end LAN
switching products and to a greater mix of ATM desktop port shipments which are
priced at lower margins. Gross profit of $169.0 million or 57.5% as a
percentage of revenue for the nine month period ended December 31, 1996,
compares to gross profit of $92.7 million or 58.0% as a percentage of revenue
during the same period in the previous year. The Company intends to price its
products competitively in order 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 $14.8
million or 13.2% of revenue in the quarter ended December 31, 1996, as compared
to $8.5 million or 13.3% of revenue in the corresponding quarter in 1995.
Research and development expense for the nine month period ended December 31,
1996 was $38.7 million or 13.1% of revenue, as compared to $21.1 million or
13.2% of revenue in the year ago nine month period. The increase in research
and development expense in dollars was largely attributable to additional
engineering costs associated with Nemesys, Scalable and Cadia which were
acquired during the quarter ended December 31, 1996, increased hiring of
engineering employees, including recruiting expenses, along with increased
purchases of research and development materials.
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The number of employees of the Company engaged in research and development
increased from 289 at December 31, 1995, to 455 at December 31, 1996.
SALES AND MARKETING. Sales and marketing expense was $25.4 million or
22.6% of revenue for the quarter ended December 31, 1996, as compared to $14.7
million or 22.9% of revenue in the corresponding quarter in 1995. Sales and
marketing expense for the nine month period ended December 31, 1996 was $65.6
million or 22.3% of revenue, as compared to $37.1 million or 23.2% of revenue
in the year ago nine month period. 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 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 362 at December 31, 1995, to 576 at December 31, 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. Such
efforts are subject to a number of risk factors and there can be no assurance
that such efforts will be successful.
GENERAL AND ADMINISTRATIVE. General and administrative expense was $4.7
million or 4.1% of revenue in the quarter ended December 31, 1996, as compared
to $3.0 million or 4.6% of revenue in the corresponding quarter in 1995.
General and administrative expense for the nine month period ended December 31,
1996 was $13.0 million or 4.4% of revenue, as compared to $7.7 million or 4.8%
of revenue in the year ago nine month period. The dollar increase was largely
due to increased hiring of administrative staff, including those engaged in
systems administration, accounting and human resources. The reduction in
general and administrative expense as a percentage of revenue was the result of
increased revenue volume absorbing a greater portion of fixed overhead
associated with general and administrative activities. The number of employees
of the Company engaged in general and administrative activities increased from
89 at December 31, 1995, to 152 at December 31, 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 $1.7 million of merger-related
expenses during the quarter and nine month period ended December 31, 1996.
These expenditures were incurred in connection with the acquisitions of
Nemesys, Scalable and Cadia and included fees to financial advisors, legal and
accounting fees and other related expenses. Total merger-related expenses were
$690,000 during the quarter ended December 31, 1995. These expenses were
incurred in connection with the acquisition of CellAccess Technology, Inc.
Total merger-related expenses of $2.3 million were expensed in the nine month
period ended December 31, 1995, including expenses incurred upon completion of
the Applied Network Technology, Inc. and RainbowBridge Communications, 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 $3.3
million and $9.4 million, respectively, in the quarter and nine months ended
December 31, 1996, as compared to $3.0 million and $6.5 million in the
corresponding quarter and nine month period 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.
INCOME TAXES. The provision for income taxes was $7.9 million, or an
effective rate of 38%, in the quarter ended December 31, 1996 as compared to
$4.9 million, or an effective rate of 37%, in the previous year's quarter ended
December 31, 1995. The provision for income taxes recorded in the nine month
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period ended December 31, 1996 was $21.8 million, or an effective rate of 37%,
as compared to $11.7 million, or an effective rate of 38%, in the corresponding
nine month period in 1995. Excluding the effect of the aforementioned
merger-related expenses, the effective tax rate for the three and nine months
ended December 31, 1996 would have been 36%. The effective tax rate, excluding
the effect of the merger-related expenses, for the three and nine months ended
December 31, 1995 would have been 36% and 35%, respectively.
NET INCOME. Net income for the quarter ended December 31, 1996 was $12.8
million, or $.13 per share, compared to $8.5 million, or $.09 per share, for
the quarter ended December 31, 1995. Net income for the nine month period ended
December 31, 1996 was $37.6 million, or $.38 per share, as compared to $19.3
million, or $.22 per share, for the first nine months of fiscal year 1995. Net
income for the quarter and nine month period ended December 31, 1996 included
the aforementioned $1.7 million in merger-related expenses. Excluding these
merger-related expenses and their tax effect, but including the operating
results of Nemesys, Scalable and Cadia, the Company would have realized net
income of $14.4 million, or $.14 per share, for the quarter ended December 31,
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed most of its working capital and capital
expenditure requirements to date primarily through cash proceeds from public
offerings and cash generated from operations.
The Company used $8.7 million in cash in operations for the nine months
ended December 31, 1996. Net cash used by operations was the result of
increased accounts receivable and inventories and a decrease in accrued merger
costs, 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 $18.9 million for the nine months ended December 31, 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 primarily for the purchase of fixed assets to
support the Company's growth.
At December 31, 1996, the Company had cash and cash equivalents of
approximately $124.2 million, short-term investments of $165.0 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 next 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, as of December 31, 1996,
has pledged $23.7 million of marketable securities (valued at December 31,
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 tangible 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In April 1994, ALANTEC Corporation ("ALANTEC"), a
wholly owned subsidiary of the Company which was
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. The lawsuit is currently in
the trial stage. While the Company expects to
continue to incur legal expenses with respect to the
litigation and believes that the litigation will not
have a material adverse effect on the Company's
financial position, the ultimate resolution of the
litigation is uncertain.
Item 2. Changes in Securities
On November 21, 1996, the Company issued an
aggregate of 413,635 shares of Common Stock to the
former shareholders of Nemesys in exchange for all
the outstanding shares of Nemesys.
On November 26, 1996, the Company issued an
aggregate of 900,870 shares of Common Stock
to the former stockholders of Scalable for all the
outstanding shares of Scalable.
On December 23, 1996, the Company issued an
aggregate of 3,940,728 shares of Common Stock to the
former stockholders of Cadia for all the outstanding
shares of Cadia.
The issuance and sale of all of such shares was
intended to be exempt from registration under the
Securities Act of 1933, as amended (the "Securities
Act") by virtue of Section 4(2) thereof due to,
among other things, (i) the limited number of
persons to whom the shares were issued, (ii) the
preexisting relationship of such persons with the
company acquired, (iii) the fact that each such
person represented and warranted to the Company,
among other things, that such person was acquiring
the shares for investment only and not with a view
to the resale or distribution thereof, and (iv) the
fact that certificates representing the shares were
issued with legend to the effect that such shares
had not been registered under the Securities Act or
any state securities laws and could not be sold or
transferred in the absence of such registration or
an exemption therefrom.
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:
-12-
<PAGE> 13
2.1 Agreement and Plan of Merger, dated as of
December 20, 1996, by and among FORE Systems, Inc.,
Alpha Acquisition Corporation, Cadia Networks, Inc.,
Bing Yang, Gregor N. Ferguson, Peter J. Nesbeda,
Jeffrey P. McCarthy, Raymond W. DeZenzo, Jr.,
Caralyn A. Brown and David E. Schantz (the "Cadia
Merger Agreement")(incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K, dated
December 23, 1996, filed on January 7, 1997).
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).
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).
11.1. Statement regarding Computation of Per Share
Earnings.
27.1. Financial Data Schedule.
b) Reports on Form 8-K.
On January 7, 1997, the Company filed a report
under Item 5 of Form 8-K, dated December 23, 1996,
regarding the execution of the Cadia Merger
Agreement.
-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: February 13, 1997 /s/ ONAT MENZILCIOGLU
-----------------------------
Onat Menzilcioglu
President
(Authorized Officer)
Date: February 13, 1997 /s/ THOMAS J. GILL
-----------------------------
Thomas J. Gill
Chief Operating Officer, Chief
Financial Officer and Treasurer
(Principal Financial and Chief
Accounting Officer)
-14-
<PAGE> 15
EXHIBIT INDEX
Exhibit No. Description
11.1 Statement Re Computation of per Share Earnings
27.1 Financial Data Schedule
<PAGE> 1
Exhibit 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
PRIMARY EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
1996 1995 1996 1995
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Weighted Average Common and Common
Equivalent Shares:
Weighted Average Common Stock
Outstanding During the Period 96,573,580 82,067,672 91,730,526 75,653,499
Weighted Average Common Equivalent
Shares 5,960,822 10,656,440 6,680,743 10,420,773
------------ ----------- ----------- -----------
102,534,402 92,724,112 98,411,269 86,074,272
============ =========== =========== ===========
Net income $ 12,839,000 $ 8,516,000 $37,583,000 $19,312,000
============ =========== =========== ===========
Net income per common share $ 0.13 $ 0.09 $ 0.38 $ 0.22
============ =========== =========== ===========
FULLY DILUTED EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
1996 1995 1996 1995
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Weighted Average Common and Common
Equivalent Shares:
Weighted Average Common Stock
Outstanding During the Period 96,573,580 82,067,672 91,730,526 75,653,540
Weighted Average Common Equivalent
Shares 4,994,290 11,238,780 6,841,757 10,668,605
------------ ----------- ----------- -----------
101,567,870 93,306,452 98,572,284 86,322,145
============ =========== =========== ===========
Net income $ 12,839,000 $ 8,516,000 $37,583,000 $19,312,000
============ =========== =========== ===========
Net income per common share $ 0.13 $ 0.09 $ 0.38 $ 0.22
============ =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 124,207
<SECURITIES> 165,001
<RECEIVABLES> 92,955
<ALLOWANCES> 4,495
<INVENTORY> 42,262
<CURRENT-ASSETS> 450,026
<PP&E> 64,848
<DEPRECIATION> 23,089
<TOTAL-ASSETS> 491,785
<CURRENT-LIABILITIES> 68,841
<BONDS> 0
0
0
<COMMON> 377,873
<OTHER-SE> 45,071
<TOTAL-LIABILITY-AND-EQUITY> 491,785
<SALES> 294,021
<TOTAL-REVENUES> 294,021
<CGS> 125,044
<TOTAL-COSTS> 125,044
<OTHER-EXPENSES> 119,007
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 59,419
<INCOME-TAX> 21,836
<INCOME-CONTINUING> 37,583
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,583
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
