<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 December 31, 1997
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.)
1000 FORE Drive, Warrendale, Pennsylvania 15086-7502
-----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (724) 742-4444
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, 1998
- ---------------------------- -------------------------------
Common Stock, $.01 par value 99,867,294 Shares
<PAGE> 2
FORM 10-Q
FORE SYSTEMS, INC.
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORE Systems, Inc. Consolidated Balance
Sheet as of December 31, 1997 and
March 31, 1997 3
FORE Systems, Inc. Consolidated Statement
of Income for the three months and
nine months ended December 31, 1997 and 1996 4
FORE Systems, Inc. Consolidated Statement
of Cash Flows for the three months and
nine months ended December 31, 1997 and 1996 5
Notes to Unaudited Consolidated Financial
Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
FORE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
December 31, March 31,
1997 1997
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 129,157 $ 129,424
Short-term investments 176,616 170,258
Accounts receivable, net of allowance for doubtful
accounts of $7,498 at December 31, 1997 and
$4,090 at March 31, 1997 97,613 84,997
Inventories 62,920 50,769
Deferred income taxes 31,006 29,296
Prepaid income taxes 8,641 19,153
Prepaid expenses and other current assets 12,873 6,774
--------- ---------
Total current assets 518,826 490,671
Fixed assets, net 66,884 47,906
--------- ---------
Total assets $ 585,710 $ 538,577
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,098 $ 36,919
Accrued payroll and related costs 15,966 13,909
Other current liabilities 16,992 10,230
Accrued merger costs 2,274 4,869
Deferred revenue 25,333 18,471
--------- ---------
Total current liabilities 95,663 84,398
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; 300,000,000
shares authorized; shares issued:
99,864,873 at December 31, 1997 and 97,792,458
at March 31, 1997 419,958 405,768
Retained earnings 75,132 53,130
Treasury stock, at cost: 120,000 shares (3,248) (3,248)
Cumulative translation adjustment (215) 53
Valuation allowance for short-term investments (1,580) (1,524)
--------- ---------
Total stockholders' equity 490,047 454,179
--------- ---------
Total liabilities and stockholders' equity $ 585,710 $ 538,577
========= =========
</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 share and per-share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31 December 31
---------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $122,083 $112,645 $327,161 $294,021
Cost of sales 53,944 48,486 144,322 125,044
-------- -------- -------- --------
Gross profit 68,139 64,159 182,839 168,977
-------- -------- -------- --------
Operating expenses:
Research and development 17,765 14,846 50,802 38,655
Sales and marketing 32,577 25,417 92,016 65,638
General and administrative 6,182 4,790 16,686 13,071
Merger-related -- 1,747 -- 1,747
-------- -------- -------- --------
Total operating expenses 56,524 46,800 159,504 119,111
-------- -------- -------- --------
Income from operations 11,615 17,359 23,335 49,866
Interest income, net 3,413 3,262 9,706 9,449
Other income, net 199 136 296 104
-------- -------- -------- --------
Income before provision for income taxes 15,227 20,757 33,337 59,419
Provision for income taxes 5,177 7,918 11,335 21,836
-------- -------- -------- --------
Net income $ 10,050 $ 12,839 $ 22,002 $ 37,583
======== ======== ======== ========
Net income per share - basic $ 0.10 $ 0.14 $ 0.22 $ 0.42
======== ======== ======== ========
Net income per share - diluted $ 0.10 $ 0.13 $ 0.22 $ 0.38
======== ======== ======== ========
</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
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income $ 10,050 $ 12,839 $ 22,002 $ 37,583
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 6,915 4,418 18,570 12,201
Deferred income tax benefit (739) (700) (1,710) (2,351)
Income tax benefit related to stock options -- 2,484 1,376 18,670
Cumulative translation adjustment (423) -- (268) --
Change in operating assets and liabilities:
Accounts receivable 4,108 (7,522) (12,616) (38,160)
Inventories (1,694) (2,723) (12,151) (14,673)
Prepaid expenses and other current assets 935 (1,130) (5,434) (1,715)
Accounts payable (10,523) (5,693) (1,821) (5,380)
Accrued liabilities 1,565 3,282 8,840 5,056
Prepaid income taxes and income taxes payable 5,504 1,105 10,512 (11,324)
Accrued merger costs (471) (389) (2,595) (13,644)
Deferred revenue 3,860 4,741 6,862 5,074
--------- --------- --------- ---------
Net cash provided by (used in) operating activities 19,087 10,712 31,567 (8,663)
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments (53,775) (75,164) (152,710) (220,508)
Redemption and sale of short-term investments 21,133 55,129 146,296 151,841
Capitalization of software development costs (527) (93) (1,112) (517)
Net cash from merger-related activity -- 28 -- 28
Purchases of fixed assets (13,954) (7,740) (37,101) (27,890)
--------- --------- --------- ---------
Net cash used in investing activities (47,123) (27,840) (44,627) (97,046)
--------- --------- --------- ---------
Cash flows from financing activities:
Principal payments on notes payable and capital lease
obligations -- (19) (21) (90)
Purchase of treasury stock -- -- -- (3,248)
Proceeds from issuance of common stock 3,484 11,917 12,814 29,241
--------- --------- --------- ---------
Net cash provided by financing activities 3,484 11,898 12,793 25,903
--------- --------- --------- ---------
Decrease in cash and cash equivalents (24,552) (5,230) (267) (79,806)
Cash and cash equivalents at beginning of period 153,709 129,437 129,424 204,013
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 129,157 $ 124,207 $ 129,157 $ 124,207
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
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, 1997 are not necessarily
indicative of results which may be achieved for the entire fiscal year ending
March 31, 1998. 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,
1997 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, 1997 March 31, 1997
----------------- --------------
<S> <C> <C>
Raw Materials $13,848 16,054
Work in Process 9,275 5,097
Finished Goods 39,797 29,618
------- -------
Total Inventories $62,920 $50,769
======= =======
</TABLE>
NOTE 3. Lease Commitments
In December 1995, the Company entered into an agreement to lease
headquarters and operating facilities constructed on land which was purchased by
the Company. The Company is now occupying the facilities. In October 1997, the
lessor finalized permanent financing arrangements for the facilities with a
group of lenders. The total amount financed was $41 million. The Company is
leasing the facilities under a ten-year operating lease and has options, subject
to the lenders' and lessor's consent, to renew the lease for two additional
five-year terms. Annual minimum rental payments under the lease are
approximately $3.3 million and will commence on April 30, 1998. The Company has
guaranteed repayment of up to approximately $32 million of the lenders'
financing of the facilities.
As part of the above lease transaction, the Company pledged $28.7
million, as of December 31, 1997, of securities it holds as collateral for
specified obligations of the lessor. 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.
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
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<PAGE> 7
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.
NOTE 4. Legal Proceedings
In July and August 1997, the Company was notified that it was a party
to seven nearly identical class action lawsuits alleging certain violations of
federal securities laws by the Company and certain of its officers, who were
named as defendants in the suits, arising from alleged misstatements or
omissions by the Company. Plaintiffs seek compensatory damages for injuries
allegedly incurred by purchasers of the Company's stock during the period from
October 17, 1996 through April 1, 1997, inclusive. Pursuant to court order, the
lawsuits were consolidated and a consolidated amended complaint was filed by the
lead plaintiffs on December 31, 1997. The Company believes the allegations in
the consolidated amended complaint are completely without merit and intends to
defend these actions vigorously. The Company must file a responsive pleading to
the consolidated amended complaint no later than February 17, 1998. Management
believes that the ultimate outcome of these claims will not have a material
adverse effect on the results of operations or financial position of the
Company.
NOTE 5. New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). The Company will implement
SFAS No. 130 and SFAS No. 131, which require the Company to report and display
certain information related to comprehensive income and operating segments, as
required in fiscal 1999.
NOTE 6. Earnings Per Share
In February 1997, Statement of Financial Accounting Standards No. 128
"Earnings per share"("SFAS 128") was issued by the Financial Accounting
Standards Board ("FASB"). SFAS 128 specifies modifications to the calculation of
earnings per share from that currently used by the Company. Under SFAS 128,
"basic earnings per share" is calculated based upon the weighted average
number of common shares actually outstanding, and "diluted earnings per share"
is calculated based upon the weighted average number of common shares
outstanding and other potential common shares if they are dilutive. Common
share equivalents consisting of common shares issuable on exercise of
outstanding options are computed using the treasury method.
<TABLE>
<CAPTION>
(In thousands except per THREE MONTHS ENDED THREE MONTHS ENDED
share data) DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE
------ ------ ----- ------ ------ -----
BASIC EARNINGS PER SHARE
<S> <C> <C> <C> <C> <C> <C>
Income available to common
Stockholders $10,050 99,564 $.10 $12,839 92,278 $.14
======= ==== ======= ====
EFFECT OF DILUTIVE SECURITIES
Stock options 2,969 10,256
----- ------
DILUTED EARNINGS PER SHARE
Income available to common
Stockholders $10,050 102,533 $.10 $12,839 102,534 $.13
======= ======= ==== ======= ======= ====
</TABLE>
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<TABLE>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE
====== ====== ===== ====== ====== =====
BASIC EARNINGS PER SHARE
<S> <C> <C> <C> <C> <C> <C>
Income available to common
Stockholders $22,002 99,000 $ .22 $37,583 90,323 $ .42
======= ===== ======= =====
EFFECT OF DILUTIVE SECURITIES
Stock options
2,850 8,088
----- -----
DILUTED EARNINGS PER SHARE
Income available to common
Stockholders $22,002 101,850 $ .22 $37,583 98,411 $ .38
======= ======= ===== ======= ====== =====
</TABLE>
-8-
<PAGE> 9
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 significantly
greater scalability 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
for enterprise applications, TNX(TM) ATM switches for service provider
applications, PowerHub(R) local area network ("LAN") switches and ES-3810
Ethernet switches for ATM connectivity, ForeRunner(R) ATM adapter cards,
CellPath(TM) wide area network ("WAN") multiplexing products for WAN access,
ForeThought(TM) internetworking software, ForeView(R) network management
software and the StreamRunner(TM) ATM video product line.
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 certain cautionary statements set forth herein and the list of factors set
forth in the Company's Annual Report on Form 10-K for the year ended March 31,
1997 (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, 1997 COMPARED WITH QUARTER
AND NINE MONTHS ENDED DECEMBER 31, 1996
REVENUE. Revenue increased by 8% to $122.1 million in the quarter ended
December 31, 1997, from $112.6 million in the quarter ended December 31, 1996.
The distribution of revenue from sales to domestic and foreign customers was 68%
and 32%, respectively, in the quarter ended December 31, 1997. This compares
with 54% and 46%, respectively, in the corresponding quarter in 1996. In the
quarter ended December 31, 1997, the distribution of revenue from sales to
foreign customers by geographic region was 20%, 9% and 3% for Europe, Pacific
Rim and other, respectively. Geographic mix for the corresponding quarter in
1996 was 21%, 17% and 8%, respectively. Revenue increased by 11% to $327.2
million for the nine month period ended December 31, 1997, as compared to $294.0
million in the corresponding nine month period in 1996. The distribution of
revenue from sales to domestic and foreign customers was 70% and 30%,
respectively, in the nine month period ended December 31, 1997. This compares
with 60% and 40%, respectively, in the corresponding period in 1996. The
distribution of revenue from sales to foreign customers by geographic region for
the nine month period ended December 31, 1997 was 18%, 7% and 5% for Europe,
Pacific Rim and other, respectively. Geographic mix for the corresponding nine
month period in 1996 was 16%, 18% and 6%, respectively. The increase in total
revenue dollars was attributable to the increased market acceptance of ATM and
LAN switching products in certain geographic areas. The decrease in foreign
revenue in
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<PAGE> 10
dollars and as a percentage of revenue, for the three and nine month period
ended December 31, 1997, was largely attributable to a decrease in sales in
Japan which were adversely affected by a decrease in sales to the Japanese
government, increased competition in Japan and slower overall acceptance of ATM
technology in Japan. There can be no assurance that the Company's revenue from
international sales will not continue to decline. There can be no assurance that
revenue from sales of the Company's products will continue to grow, 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 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. There can be no assurance that the
Company can continue to develop and introduce new products. The Company
announced in January 1997 that it planned to introduce a complete line of
products based on multi-service WAN adaptation and concentration technology for
the service provider market, including high density carrier-class access
technology, but such introduction has now been delayed until the first half of
calendar 1999, at the earliest. There can be no assurance that such products
will be introduced or, if they are introduced, that they will be successful in
the marketplace. 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, 1997 was over 45,000, as
compared with over 30,000 in the previous year's corresponding period. The total
installed base of ATM ports as of December 31, 1997 was over 263,000, as
compared with over 134,000 at December 31, 1996. The total number of LAN
switching ports shipped in the quarter ended December 31, 1997 was approximately
135,000, as compared with over 87,000 in the previous year's corresponding
period. The total number of adapter cards shipped in the quarter ended December
31, 1997 was over 12,700, as compared with almost 9,300 in the previous year's
corresponding period. The total installed base of adapter cards as of December
31, 1997 was over 93,000 as compared with over 53,000 at December 31, 1996. In
the quarter ended December 31, 1997, 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 59%, 28%, 4%
and 9%, respectively. Revenue mix for the corresponding quarter in 1996 was 51%,
35%, 5% and 9%, respectively. Average selling price per ATM port during the
quarter ended December 31, 1997 was $1,600, as compared to $1,900 in the
corresponding quarter in 1996. Average selling price per LAN switching port was
$300 in the quarter ended December 31, 1997 as compared to $500 in the
corresponding quarter in 1996. Average selling price for adapter cards shipped
during the quarter ended December 31, 1997 was $400, as compared to $600 in the
previous year's quarter ended December 31, 1996. In May of 1996, the Company
reduced the price of certain of its ATM switches by up to 40%. The Company
reduced the price of certain of its LAN switching products by up to 15% in
September 1996. In January of 1998, the Company reduced the price of certain of
its ATM workgroup products by up to 40%. The Company believes that reductions in
price per port on ATM and LAN switching products will help stimulate demand for
those 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 $68.1 million or 55.8% as a
percentage of revenue in the quarter ended December 31, 1997, as compared to
gross profit of $64.2 million or 57.0% as a percentage of revenue in the
corresponding quarter in 1996. Gross profit of $182.8 million or 55.9% as a
percentage of revenue for the nine month period ended December 31, 1997,
compares to gross profit of $169.0 million or 57.5% as a percentage of revenue
during the same period in the previous year. The dollar increase in gross profit
was largely attributable to the increase in revenue. The gross margin
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<PAGE> 11
percentage decline primarily resulted from an increased contribution in product
mix from workgroup and desktop products for both ATM and Ethernet. The Company
intends to price its products competitively in order to continue to increase
revenue 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 $17.8
million or 14.5% of revenue in the quarter ended December 31, 1997, as compared
to $14.8 million or 13.2% of revenue in the corresponding quarter in 1996.
Research and development expense for the nine month period ended December 31,
1997 was $50.8 million or 15.6% of revenue, as compared to $38.7 million or
13.2% of revenue in the year ago nine month period. The increase in research and
development expense in dollars and as a percentage of revenue was largely
attributable to increased purchases of research and development materials,
additional engineering costs associated with the development of products and
technologies of companies acquired by the Company in 1996, in particular, access
concentrator products the release of which has been delayed until the first half
of calendar 1999 at the earliest, and increases in depreciation. The number of
employees of the Company engaged in research and development decreased to 415 at
December 31, 1997, from 455 at December 31, 1996.
SALES AND MARKETING. Sales and marketing expense was $32.6 million or 26.7%
of revenue for the quarter ended December 31, 1997, as compared to $25.4 million
or 22.6% of revenue in the corresponding quarter in 1996. Sales and marketing
expense for the nine month period ended December 31, 1997 was $92.0 million or
28.1% of revenue, as compared to $65.6 million or 22.3% 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 salary costs. The number of
employees of the Company engaged in sales and marketing activities increased to
725 at December 31, 1997, from 576 at December 31, 1996. The Company expects to
increase sales and marketing expenses in dollars 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,
including competition in the networking industry, the timing and nature of any
new product introductions by the Company or its competitors, the level of
customer demand, the possibility that ATM-based networking products will not
achieve continuing market acceptance as competing technologies are introduced by
competitors, and other risks, and there can be no assurance that such efforts
will be successful.
GENERAL AND ADMINISTRATIVE. General and administrative expense was $6.2
million or 5.1% of revenue in the quarter ended December 31, 1997, as compared
to $4.8 million or 4.2% of revenue in the corresponding quarter in 1996. General
and administrative expense for the nine month period ended December 31, 1997 was
$16.7 million or 5.1% of revenue, as compared to $13.1 million or 4.4% of
revenue in the year ago nine month period. The increase in general and
administrative expense was largely due to increased salary costs, increased
hiring of administrative staff, including those engaged in systems
administration, accounting and human resources, and increased costs for
professional services and depreciation. The number of employees of the Company
engaged in general and administrative activities increased to 167 at December
31, 1997, from 152 at December 31, 1996. The Company plans to make appropriate
expenditures in the general and administrative organization as necessary.
INTEREST INCOME. Interest income, net of interest expense, was $3.4 million
and $9.7 million, respectively, in the quarter and nine months ended December
31, 1997, as compared to $3.3 million and $9.4 million in the corresponding
quarter and nine month period in 1996.
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<PAGE> 12
INCOME TAXES. The provision for income taxes was $5.2 million, or an
effective rate of 34%, in the quarter ended December 31, 1997, as compared to
$7.9 million, or an effective rate of 38%, in the previous year's quarter ended
December 31, 1996. The provision for income taxes recorded in the nine month
period ended December 31, 1997 was $11.3 million, or an effective rate of 34%,
as compared to $21.8 million, or an effective rate of 37%, in the corresponding
nine month period in 1996. The decrease in the effective tax rate is primarily
the result of certain tax advantages associated with the May 1997 opening of the
Company's manufacturing facility in Dublin, Ireland.
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.
Net cash provided by operations was $31.6 million for the nine month period
ended December 31, 1997. Net cash provided by operations was the result of net
income and increases in income taxes payable, net of prepaid income taxes and
accrued liabilities offset by increases in accounts receivable, inventories and
prepaid expenses and other current assets. The increases in accounts receivable
and inventories were due to increased revenue. Cash used by operations was $8.7
million for the nine months ended December 31, 1996, which resulted from
increased accounts receivable and inventories and a decrease in accrued merger
costs, offset by net income and increased current liabilities. The Company's
long-term investing activities to date have been primarily for the purchase of
fixed assets to support the Company's growth.
At December 31, 1997, the Company had cash and cash equivalents of
approximately $129.2 million, short-term investments of $176.6 million and an
unused line of credit of $20 million.
In December 1995, the Company entered into an agreement to lease
headquarters and operating facilities constructed on land which was purchased by
the Company. The Company is now occupying the facilities. In October 1997, the
lessor finalized permanent financing arrangements for the facilities with a
group of lenders. Total amount financed was $41 million. The Company is leasing
the facilities under a ten-year operating lease and has options, subject to the
lenders' and lessor's consent, to renew the lease for two additional five-year
terms. Annual minimum rental payments under the lease are approximately $3.3
million and will commence on April 30, 1998. The Company has guaranteed
repayment of up to approximately $32 million of the lenders' financing of the
facilities.
As part of the above lease transaction, the Company pledged $28.7 million,
as of December 31, 1997, of securities it holds as collateral for specified
obligations of the lessor. 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.
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 July and August 1997, the Company was notified that it was a party to
seven nearly identical class action lawsuits alleging certain violations of
federal securities laws by the Company and certain of its officers, who were
named as defendants in the suits, arising from alleged misstatements or
omissions by the Company. Plaintiffs seek compensatory damages for injuries
allegedly incurred by purchasers of the Company's stock during the period from
October 17, 1996 through April 1, 1997, inclusive.
-12-
<PAGE> 13
Pursuant to court order, the lawsuits were consolidated and a
consolidated amended complaint was filed by the lead plaintiffs on December 31,
1997. The Company believes the allegations in the consolidated amended complaint
are completely without merit and intends to defend these actions vigorously. The
Company must file a responsive pleading to the consolidated amended complaint no
later than February 17, 1998. Management believes that the ultimate outcome of
these claims will not have a material adverse effect on the results of
operations or financial position of the Company.
To date, inflation has not had a material impact on the Company's financial
results.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). The Company will implement SFAS No. 130 and
SFAS No. 131, which require the Company to report and display certain
information related to comprehensive income and operating segments, as required
in fiscal 1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
-13-
<PAGE> 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In July and August of 1997, the Company was notified that seven
separate complaints (Robert K. Bell, et al. v. FORE Systems, Inc., et al.,
Alexander Haff v. FORE Systems, Inc., et al., Neil Lazzaro v. FORE Systems,
Inc., et al., Oscar Federbusch v. FORE Systems, Inc., et al., Meridian Capital
Funding, Inc. v. FORE Systems, Inc., et al., Ray Chiostri v. FORE Systems, Inc.,
et al., and Rita M. Davidson v. FORE Systems, Inc., et al.) were filed in the
United States District Court for the Western District of Pennsylvania alleging
certain violations of federal securities laws by the Company and certain of its
officers, who are named as defendants in the suits, arising from alleged
misstatements or omissions by the Company. Each suit, each of which is identical
in nature to the others, was filed as a class action on behalf of the named
plaintiffs and others who are purportedly similarly situated. Plaintiffs seek
compensatory damages for injuries allegedly incurred by purchasers of the
Company's stock during the period from October 17, 1996 through April 1, 1997,
inclusive. Pursuant to court order, the lawsuits were consolidated and a
consolidated amended complaint was filed by the lead plaintiffs on December 31,
1997. The Company must file a responsive pleading to the consolidated amended
complaint no later than February 17, 1998. The Company believes the allegations
in the consolidated amended complaint are completely without merit and intends
to defend these actions vigorously.
-14-
<PAGE> 15
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).
3.2 Second Amended and Restated Bylaws of FORE Systems, Inc.
(as amended through March 5, 1997) (incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1997).
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 December 31, 1997.
-15-
<PAGE> 16
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, 1998 /s/ Thomas J. Gill
--------------------
Thomas J. Gill
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 13, 1998 /s/ Gary J. Brunner
---------------------
Gary J. Brunner
Vice President, Controller and Treasurer
(Chief Accounting Officer)
-16-
<PAGE> 17
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11.1 Statement Re Computation of per Share Earnings
27.1 Financial Data Schedule
-17-
<PAGE> 1
Exhibit 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
BASIC EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
December 31, December 31,
----------------------------- ----------------------------
1997 1996 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted Average Common Stock
Outstanding During the Period 99,564,457 92,277,859 99,000,087 90,322,603
============ ============ ============ ===========
Net income $ 10,050,000 $ 12,839,000 $ 22,002,000 $37,583,000
============ ============ ============ ===========
Net income per common share $ 0.10 $ 0.14 $ 0.22 $ 0.42
============ ============ ============ ===========
DILUTED EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
December 31, December 31,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ -----------
Weighted Average Common and Common
Equivalent Shares:
Weighted Average Common Stock
Outstanding During the Period 99,564,457 92,277,859 99,000,087 90,322,603
Weighted Average Common Equivalent
Shares 2,969,001 10,256,543 2,850,210 8,088,666
------------ ------------ ------------ -----------
102,533,458 102,534,402 101,850,297 98,411,269
============ ============ ============ ===========
Net income $ 10,050,000 $ 12,839,000 $ 22,002,000 $37,583,000
============ ============ ============ ===========
Net income per common share $ 0.10 $ 0.13 $ 0.22 $ 0.38
============ ============ ============ ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 129,157
<SECURITIES> 176,616
<RECEIVABLES> 105,111
<ALLOWANCES> 7,498
<INVENTORY> 62,920
<CURRENT-ASSETS> 518,826
<PP&E> 112,935
<DEPRECIATION> 46,051
<TOTAL-ASSETS> 585,710
<CURRENT-LIABILITIES> 95,663
<BONDS> 0
0
0
<COMMON> 419,958
<OTHER-SE> 70,089
<TOTAL-LIABILITY-AND-EQUITY> 585,710
<SALES> 327,161
<TOTAL-REVENUES> 327,161
<CGS> 144,322
<TOTAL-COSTS> 144,322
<OTHER-EXPENSES> 159,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 33,337
<INCOME-TAX> 11,335
<INCOME-CONTINUING> 22,002
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,002
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
