<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 September 30, 1998
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 October 31, 1998
- --------------------------- -------------------------------
Common Stock, $.01 par value 110,509,138 Shares
<PAGE> 2
FORM 10-Q
FORE SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORE Systems, Inc. Consolidated Balance
Sheet as of September 30, 1998 and
March 31, 1998 3
FORE Systems, Inc. Consolidated Statement
of Operations for the three months and
six months ended September 30, 1998 and 1997 4
FORE Systems, Inc. Consolidated Statement
of Cash Flows for the three months and
six months ended September 30, 1998 and 1997 5
Notes to Unaudited Consolidated Financial
Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Change in Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Exhibit Index 22
</TABLE>
<PAGE> 3
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
FORE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, MARCH 31,
1998 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 163,894 $ 127,231
Short-term investments 176,612 186,999
Accounts receivable, net of allowance for doubtful
accounts of $6,544 at September 30, 1998 and
$7,194 at March 31, 1998 112,371 111,347
Inventories 73,469 70,388
Deferred income taxes 40,974 36,620
Prepaid expenses and other current assets 18,371 12,127
--------- ---------
Total current assets 585,691 544,712
Fixed assets, net 72,910 71,495
Other non-current assets 6,787 5,000
--------- ---------
Total assets $ 665,388 $ 621,207
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,356 $ 37,240
Accrued payroll and related costs 16,527 18,560
Income taxes payable 14,285 13,789
Deferred revenue 36,914 28,719
Other current liabilities 20,576 15,881
--------- ---------
Total current liabilities 124,658 114,189
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; 300,000,000
shares authorized; shares issued:
110,631,232 at September 30, 1998 and 100,302,143
at March 31, 1998 636,077 423,782
Retained earnings (accumulated deficit) (90,866) 88,285
Treasury stock, at cost:
163,982 shares at September 30, 1998 and 137,310
shares at March 31, 1998 (3,253) (3,252)
Cumulative translation adjustment (348) (101)
Valuation allowance for short-term investments (880) (1,696)
--------- ---------
Total stockholders' equity 540,730 507,018
--------- ---------
Total liabilities and stockholders' equity $ 665,388 $ 621,207
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
FORE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ --------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 141,753 $ 109,719 $ 285,484 $ 205,078
Cost of sales 63,676 48,194 127,172 90,378
--------- --------- --------- ---------
Gross profit 78,077 61,525 158,312 114,700
--------- --------- --------- ---------
Operating expenses:
Research and development 19,197 17,132 37,612 33,037
Sales and marketing 41,738 31,501 80,135 59,439
General and administrative 7,348 5,723 14,261 10,504
Purchased research and development 199,316 - 199,316 -
Restructuring charges 5,100 - 5,100 -
--------- --------- --------- ---------
Total operating expenses 272,699 54,356 336,424 102,980
--------- --------- --------- ---------
Income (loss) from operations (194,622) 7,169 (178,112) 11,720
Interest income, net 3,238 3,264 7,061 6,293
Other income (expense) 72 127 (258) 97
--------- --------- --------- ---------
Income (loss) before provision for income taxes (191,312) 10,560 (171,309) 18,110
Provision for income taxes 2,241 3,591 7,842 6,158
--------- --------- --------- ---------
Net income (loss) $(193,553) $ 6,969 $(179,151) $ 11,952
========= ========= ========= =========
Net income (loss) per share - basic $ (1.88) $ 0.07 $ (1.76) $ 0.12
========= ========= ========= =========
Net income (loss) per share - diluted $ (1.88) $ 0.07 $ (1.76) $ 0.12
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
FORE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(193,553) $ 6,969 $(179,151) $ 11,952
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 8,906 6,141 17,155 11,655
Deferred income tax benefit -- (716) 1,001 (971)
Purchased research and development 199,316 -- 199,316 --
Income tax benefit related to stock options 4,656 1,376 4,656 1,376
Cumulative translation adjustment (110) 115 (247) 155
Change in operating assets and liabilities:
Accounts receivable (1,954) (17,068) (1,022) (16,724)
Inventories 3,874 (7,058) (2,702) (10,457)
Prepaid expenses and other current assets (7,764) 344 (10,280) (6,369)
Accounts payable (11,967) 12,170 (12,475) 8,702
Accrued liabilities 6,999 6,864 (2,736) 5,151
Prepaid income taxes and income taxes payable (4,025) 3,360 496 5,008
Deferred revenue 9,044 3,038 8,183 3,002
--------- --------- --------- ---------
Net cash provided by operating activities 13,422 15,535 22,194 12,480
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments (25,967) (50,290) (75,668) (98,935)
Redemption and sale of short-term investments 51,861 79,851 86,871 125,163
Investment in other non-current assets (1,787) -- (1,787) --
Capitalization of software development costs (1,379) (575) (1,642) (585)
Acquisition of businesses, net of cash acquired 844 -- 844 --
Purchases of fixed assets (3,641) (10,330) (15,589) (23,147)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities 19,931 18,656 (6,971) 2,496
--------- --------- --------- ---------
Cash flows from financing activities:
Principal payments on notes payable and capital lease
obligations -- -- -- (21)
Purchase of treasury stock (1) -- (1) --
Proceeds from issuance of Common stock 9,050 5,664 21,441 9,330
--------- --------- --------- ---------
Net cash provided by financing activities 9,049 5,664 21,440 9,309
--------- --------- --------- ---------
Increase in cash and cash equivalents 42,402 39,855 36,663 24,285
Cash and cash equivalents at beginning of period 121,492 113,854 127,231 129,424
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 163,894 $ 153,709 $ 163,894 $ 153,709
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
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 the results for such periods. The results of operations for the
three and six month periods ending September 30, 1998 are not necessarily
indicative of results which may be achieved for the entire fiscal year ending
March 31, 1999. 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,
1998 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>
September 30, 1998 March 31, 1998
------------------ --------------
<S> <C> <C>
Raw Materials $ 19,658 $15,120
Work in Process 10,642 11,512
Finished Goods 43,169 43,756
-------- -------
Total Inventories $ 73,469 $70,388
======== ========
</TABLE>
NOTE 3. Lease Commitments
In December 1995, the Company entered into an agreement to lease
headquarters and operating facilities constructed on land that 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 commenced in calendar 1998. The Company has
guaranteed repayment of up to approximately $32 million of the lenders'
financing of the facilities, which includes a pledged amount of approximately
$29.1 million, as of September 30, 1998, 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 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 that was
determined at the lease inception date.
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<PAGE> 7
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, 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 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. The Company and the individual defendants
subsequently filed their answer to the consolidated amended complaint. The
Company believes the allegations in the consolidated amended complaint are
completely without merit and intends to defend this action vigorously.
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.
The Company was served, in October 1998, with a complaint filed by Bell
Communications Research, Inc. in the United States District Court for the
District of Delaware. The complaint alleges that the Company infringes four
patents owned by the plaintiff and seeks compensatory and injunctive relief. The
Company believes the allegations in the complaint are completely without merit
and intends to defend this action vigorously. 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.
From time to time, the Company receives notifications alleging that it
is or may be infringing the intellectual property rights of third parties. At
the present time, the Company is in separate discussions with several such third
parties regarding the alleged infringement by the Company of certain patents
owned by such third parties. Management believes that the ultimate outcome of
these matters is not likely to have a material adverse effect on the results of
operations or financial position of the Company.
NOTE 5. Business Combination
On September 11, 1998, the Company acquired Berkeley Networks, Inc., a
California corporation ("Berkeley"), by means of a merger (the "Merger") of a
wholly-owned subsidiary of the Company, Fastwire Acquisition Corporation, a
Delaware corporation ("Fastwire"), with and into Berkeley. Berkeley, which
designs and develops multi-gigabit routing switch platforms based on Windows NT
and advanced stateful inspection switching ASICs, was a development stage
enterprise that had generated no significant revenues and has not shipped a
completed product.
The Company issued a total of approximately 8.6 million shares of
Common stock and granted to former holders of options to purchase Berkeley
Common stock a total of approximately 0.6 million substitute stock options to
purchase the Company's Common stock. Pursuant to the terms of the Merger,
additional consideration of up to a total of $30,000,000 in cash (the Earn-Out
Payments") was to be paid by the Company based on Berkeley achieving certain
technological advances and/or attaining certain revenue goals in the period
commencing on September 11, 1998 and ending on the second anniversary thereof.
During October 1998, the Company made Earn-Out Payments of approximately $8.0
million, based on the payment schedule established by the terms of the Merger,
to the former equity holders of Berkeley.
The transaction was accounted for under the purchase method of
accounting and, accordingly, the acquired assets and liabilities were recorded
based upon their fair values at the date of the acquisition. The Company has
obtained an independent third-party appraisal of the value of intangible assets
and
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<PAGE> 8
purchased research and development acquired. The results of operations of
Berkeley are included in the financial statements of the Company from the date
of the acquisition.
As of September 30, 1998, the total purchase price aggregates to
approximately $200 million and the Company may be required to record up to an
additional $20 million based on Berkeley achieving certain technological
advances and/or attaining certain revenue goals over the next 2 years. Depending
on the amount and nature of any additional consideration paid, the amount of
intangible assets and corresponding periodic amortization would be increased.
The table below summarizes the preliminary purchase price allocation excluding
any of the additional $20 million that may be recorded based on Berkeley
achieving certain technological advances and/or attaining certain revenue goals
over the next 2 years:
<TABLE>
<CAPTION>
Value
--------
<S> <C>
Current assets $ 1,311
Property, plant and equipment 2,168
Assembled work force 1,700
Purchased research and development 199,316
Liabilities (4,671)
---------
Total purchase price $199,824
---------
</TABLE>
It has been determined that technological feasibility of the in-process
technology has not been established and the technology has no alternative future
use. Therefore, in accordance with generally accepted accounting principles, the
Company has expensed the amount of purchase price allocated to purchased
research and development of approximately $199 million. If these projects are
not successfully developed, future revenue and profitability of the Company may
be adversely affected. Additionally, the value of other intangible assets
acquired may become impaired.
The value assigned to purchased research and development was determined
by identifying research projects in areas for which technological feasibility
has not been established. The value was determined by estimating the costs to
develop the purchased research and development into commercially viable
products; estimating the resulting net cash flows from such projects; and
discounting the net cash flows back to their present value. The nature of the
efforts to develop the purchased research and development into commercially
viable products principally relate to the completion of all planning, designing,
prototyping, high-volume manufacturing, verification and testing activities that
are necessary to establish that the products can be produced to meet their
design specifications including functions, features and technical performance
requirements.
The resulting net cash flows from such projects are based on the
Company management's estimates of revenues, cost of sales, research and
development costs, selling, general and administrative costs, and income taxes
from such projects. Estimated revenues for the purchased in-process products
commence in fiscal year 1999 and increase through fiscal year 2002, at which
time they are assumed to decrease through fiscal year 2004, as newer products
are released. The discount rate used in discounting the net cash flows from
purchased research and development averaged 30%.
To date, Berkeley has generated no significant revenue and has not
shipped a completed product. The products currently under development by
Berkeley will need to be further developed by the Company prior to shipment to
customers. Accordingly, no value has been assigned to existing technology.
Intangible assets of $1.7 million represent the value of Berkeley's assembled
work force and have an estimated useful life of 3 years. The Company may be
required to record up to an additional $20 million
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<PAGE> 9
based on Berkeley achieving certain technological advances and/or attaining
certain revenue goals over the next 2 years. Depending on the amount and nature
of any additional consideration paid, the amount of intangible assets and
corresponding periodic amortization would be increased.
In connection with this acquisition, the Company allocated the fair
values of the net assets acquired, including purchased research and
development, based upon an independent appraisal. Recently the method for
determining fair values has been under considerable discussion within the
accounting profession and with the U.S. Securities and Exchange Commission
("Commission"). Specifically, the Commission has identified circumstances where
many of the facts associated with certain acquisitions appear to be at odds with
the fair value assigned to purchased research and development as part of the
purchase price allocation. The Company believes it has appropriately assigned
fair values in connection with its acquisition of Berkeley, including purchased
research and development, in accordance with generally accepted accounting
principles. However, should the Commission take exception to the valuation
methodology used or the values assigned, the Company could be required to
restate its reported results. Such restatement could materially adversely affect
the Company's results of operations in future periods.
In connection with the acquisition of Berkeley, the Company recorded
restructuring charges of $5.1 million related primarily to the closing of
duplicate facilities and certain employee termination costs.
The following unaudited pro forma information has been prepared
assuming that the acquisition of Berkeley had taken place at the beginning of
the respective periods presented. The amount of the aggregate purchase price
allocated to purchased research and development and the restructuring charges
has been excluded from the pro forma information as they are non-recurring
items. The pro forma financial information is not necessarily indicative of the
combined results that would have occurred had the acquisition taken place at the
beginning of the period, nor is it necessarily indicative of the results that
may occur in the future.
<TABLE>
<CAPTION>
Pro Forma for the Six Months
Ended September 30,
1998 1997
<S> <C> <C>
Revenue $285,589 $205,078
Income (loss) from operations 18,311 8,911
Net income (loss) 15,901 9,207
Earnings (loss) per share basic $ .15 $ .09
Earnings (loss) per share - diluted $ .14 $ .09
</TABLE>
NOTE 6. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
and Similar Financial Instruments and for Hedging Activities" ("SFAS 133"). This
new standard requires recognition of all derivatives as either assets or
liabilities at fair value. Based upon the hedging strategies currently used and
the level of activity related to derivative instruments, the Company does not
anticipate the effect of adoption to have a material impact on either financial
position or results of operations. The Company will implement SFAS 133 in fiscal
year 2000, as required.
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 does not believe
SFAS 131 is applicable to the Company's business. During the first quarter of
fiscal year 1999, the company adopted SFAS 130. This statement establishes
standards
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<PAGE> 10
for reporting and the display of comprehensive income and its components in a
primary financial statement. At September 30, 1998 and September 30, 1997, the
components of comprehensive income were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998 1997
<S> <C> <C>
Net Income (Loss) $(193,553) $ 6,969
Change in currency translation
adjustment $ (110) $ 115
Change in unrealized gain (loss)
on available-for-sale investments $ 765 $ 437
--------- -------
Comprehensive income (loss) $(192,898) $ 7,521
========= =======
SIX MONTHS ENDED SEPTEMBER 30, 1998 1997
Net Income (Loss) $(179,151) $11,952
Change in currency translation
adjustment $ (247) $ 155
Change in unrealized gain (loss)
on available-for-sale investments $ 816 $ 250
--------- -------
Comprehensive income (loss) $(178,582) $12,357
========= =======
</TABLE>
NOTE 7. Earnings Per Share (in thousands except per-share data)
In February 1997, Statement of Financial Accounting Standards No. 128
"Earnings per share"("SFAS 128") was issued by the FASB. 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. Since the Company had a
net loss for the three and six month period ended September 30, 1998, the
dilutive effect of other potential common shares has been excluded from the
calculation. Common share equivalents consisting of common shares issuable on
exercise of outstanding options are computed using the treasury method.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998 1997
<S> <C> <C>
Net income (loss) available to common stockholders $(193,553) $ 6,969
--------- --------
Shares used for basic per share computation
weighted average shares outstanding 103,207 99,112
Effect of dilutive securities:
Stock options 0 3,408
--------- --------
Shares used for diluted per share computation 103,207 102,520
========= ========
</TABLE>
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<PAGE> 11
<TABLE>
<S> <C> <C>
Net income (loss) per share:
Basic $ (1.88) $ .07
======== =======
Diluted $ (1.88) $ .07
======== =======
SIX MONTHS ENDED SEPTEMBER 30, 1998 1997
Net income (loss) available to common stockholders $(179,151) $11,952
--------- -------
Shares used for basic per share computation
weighted average shares outstanding 101,963 98,718
Effect of dilutive securities:
Stock options 0 2,791
--------- -------
Shares used for diluted per share computation 101,963 101,509
========= ========
Net income (loss) per share:
Basic $ (1.76) $ .12
======== =======
Diluted $ (1.76) $ .12
======== =======
</TABLE>
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<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS
GENERAL
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. In addition, statements containing the words
"believes", "estimates", "expects" and words of similar import may be deemed to
be forward-looking statements. Such forward-looking statements should be read in
conjunction with certain cautionary statements set forth herein and the list of
risk factors set forth in the Company's Annual Report on Form 10-K for the year
ended March 31, 1998 (the "Form 10-K") and the Company's Current Report on Form
8-K dated September 11, 1998 in connection with the acquisition of Berkeley
Networks, Inc. ("Berkeley"). Such factors could cause actual results to differ
materially from those expressed in any forward-looking statements contained
herein.
On September 11, 1998, the Company acquired Berkeley by means of a merger
(the "Merger") of Fastwire Acquisition Corporation, a wholly-owned subsidiary of
the Company ("Fastwire"), with and into Berkeley pursuant to an Agreement and
Plan of Reorganization, dated as of August 25, 1998, by and among the Company,
Berkeley and Fastwire (the "Reorganization Agreement"). Based in Milipitas,
California, Berkeley designs and develops multi-gigabit routing switch platforms
based on Windows NT and advanced stateful inspection switching ASICs.
The Company issued a total of approximately 8.6 million shares of Common
stock and granted to former holders of options to purchase Berkeley Common stock
a total of approximately 0.6 million substitute stock options to purchase the
Company's Common stock. Pursuant to the Reorganization Agreement, additional
consideration of up to a total of $30,000,000 in cash (the "Earn-Out Payments")
was to be paid by the Company based on Berkeley achieving certain technological
advances and/or attaining certain revenue goals in the period commencing on
September 11, 1998 and ending on the second anniversary thereof. During October
1998, the Company made Earn-Out Payments of approximately $8.0 million, based on
the payment schedule established by the Reorganization Agreement, to the former
equity holders of Berkeley. The Company accounted for the acquisition under the
purchase method of accounting.
QUARTER AND SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH QUARTER AND SIX
MONTHS ENDED SEPTEMBER 30, 1997
REVENUE. Revenue increased by 29% to $141.8 million in the quarter ended
September 30, 1998, from $109.7 million in the quarter ended September 30, 1997.
The distribution of revenue from sales to domestic and foreign customers was 72%
and 28%, respectively, in the quarter ended September 30, 1998. This compares
with 71% and 29%, respectively, in the corresponding quarter in 1997. In the
quarter ended September 30, 1998, the distribution of revenue from sales to
foreign customers by geographic region was 20%, 6% and 2% for Europe (which
includes Middle East and Africa), Pacific Rim and other, respectively.
Geographic mix for the corresponding quarter in 1997 was 17%, 7% and 5%,
respectively. Revenue increased by 39% to $285.5 million for the six month
period ended September 30, 1998, as compared to $205.1 million in the
corresponding six month period in 1997. The distribution of revenue from sales
to domestic and foreign customers was 71% and 29%, respectively, in the six
month period ended September 30, 1998. This compares with 71% and 29%,
respectively, in the corresponding period in 1997. The distribution of revenue
from sales to foreign customers by geographic region for the six month period
ended September 30, 1998 was 20%, 5% and 4% for Europe (which
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<PAGE> 13
includes Middle East and Africa), Pacific Rim and other, respectively.
Geographic mix for the corresponding six month period in 1997 was 16%, 6% and
7%, respectively. The increase in revenue dollars was attributable to the
increased market acceptance of ATM and, to a lesser extent, LAN switching
products.
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 September 30, 1998 was 60,500, as
compared with 33,000 in the previous year's corresponding period. The total
installed base of ATM ports as of September 30, 1998 was 411,000, as compared
with 218,000 at September 30, 1997. The total number of LAN switching ports
shipped in the quarter ended September 30, 1998 was 150,000, as compared with
106,000 in the previous year's corresponding period. The total number of adapter
cards shipped in the quarter ended September 30, 1998 was 23,000, as compared
with 11,400 in the previous year's corresponding period. The total installed
base of adapter cards as of September 30, 1998 was 147,000 as compared with
80,000 at September 30, 1997. In the quarter ended September 30, 1998, 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 61%, 24%, 5% and 10%, respectively. Revenue mix for
the corresponding quarter in 1997 was 57%, 30%, 5% and 8%, respectively. Average
selling price per ATM port during the quarter ended September 30, 1998 was
$1,400, as compared to $1,900 in the corresponding quarter in 1997. Average
selling price per LAN switching port was $225 in the quarter ended September 30,
1998 as compared to $300 in the corresponding quarter in 1997. Average selling
price for adapter cards shipped during the quarter ended September 30, 1998 was
$325, as compared to $500 in the previous year's quarter ended September 30,
1997. In January of 1998, the Company reduced the price of certain of its ATM
workgroup products by up to 40%.
GROSS PROFIT. Gross profit increased to $78.1 million or 55.1% as a
percentage of revenue in the quarter ended September 30, 1998, as compared to
gross profit of $61.5 million or 56.1% as a percentage of revenue in the
corresponding quarter in 1997. Gross profit of $158.3 million or 55.5% as a
percentage of revenue for the six month period ended September 30, 1998,
compares to gross profit of $114.7 million or 55.9% 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 percentage
decline primarily resulted from a decline in sales of the DC-powered version of
the ASX-1000, compared to prior periods, and continued pricing pressure. The
Company intends to price its products competitively. There can be no assurance
that the gross profit percentage can be maintained at the current level.
RESEARCH AND DEVELOPMENT. Research and development expense was $19.2
million or 13.6% of revenue in the quarter ended September 30, 1998, as compared
to $17.1 million or 15.6% of revenue in the corresponding quarter in 1997.
Research and development expense for the six month period ended September 30,
1998 was $37.6 million or 13.2% of revenue, as compared to $33.0 million or
16.1% of revenue in the year ago six month period. The increase in research and
development expense in dollars was largely attributable to increased purchases
of research and development materials, increased hiring of engineering employees
and increases in depreciation. The decrease in research and development expense
as a percentage of revenue was primarily attributable to increased revenue
absorbing a greater portion of the Company's expenses. The number of employees
of the Company engaged in research and development increased to 446 at September
30, 1998, from 408 at September 30, 1997.
SALES AND MARKETING. Sales and marketing expense was $41.7 million or 29.4%
of revenue for the quarter ended September 30, 1998, as compared to $31.5
million or 28.7% of revenue in the corresponding quarter in 1997. Sales and
marketing expense for the six month period ended September
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<PAGE> 14
30, 1998 was $80.1 million or 28.1% of revenue, as compared to $59.4 million or
29.0% of revenue in the year ago six month period. Comparing the quarter ended
September 30, 1998 versus the corresponding quarter in 1997, the increase in
sales and marketing expense in dollars and as a percentage of revenue for the
quarter ended September 30, 1998 was largely the result of hiring additional
sales, marketing and support personnel (including training and documentation),
increased marketing promotion costs and increases in depreciation. The decrease
in sales and marketing expense as a percentage of revenue for the six month
period was primarily attributable to increased revenue absorbing a greater
portion of the Company's expenses. The number of employees of the Company
engaged in sales and marketing activities increased to 899 at September 30,
1998, from 622 at September 30, 1997. The Company expects to continue to
increase sales and marketing expenses in dollars, but not as a percentage of
revenue, both domestically and internationally as a 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 $7.3
million or 5.2% of revenue in the quarter ended September 30, 1998, as compared
to $5.7 million or 5.2% of revenue in the corresponding quarter in 1997. General
and administrative expense for the six month period ended September 30, 1998 was
$14.3 million or 5.0% of revenue, as compared to $10.5 million or 5.1% of
revenue in the year ago six 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 188 at September
30, 1998, from 153 at September 30, 1997. The Company plans to make appropriate
expenditures in the general and administrative organization as necessary, but
does not expect the overall expenditures to increase materially as a percentage
of revenue.
PURCHASED RESEARCH AND DEVELOPMENT. In connection with the acquisition of
Berkeley, the Company allocated $199.3 million of the purchase price to
purchased research and development that has not yet reached technological
feasibility. The Company expensed such amount as a non-recurring charge in the
fiscal quarter ended September 30, 1998.
RESTRUCTURING CHARGES. In connection with the acquisition of Berkeley, the
Company recorded restructuring charges of $5.1 million related primarily to the
closing of duplicate facilities and certain employee termination costs.
INTEREST INCOME. Interest income, net of interest expense, was $3.2 million
and $7.1 million, respectively, in the quarter and six months ended September
30, 1998, as compared to $3.3 million and $6.3 million in the corresponding
quarter and six month period in 1997.
INCOME TAXES. In the quarter ended September 30, 1998, the provision for
income taxes was $2.2 million, or an effective rate of 28%, exclusive of the
effect of one-time non-deductible purchased research and development expense, as
compared to $3.6 million, or an effective rate 34%, in the previous year's
quarter ended September 30, 1997. The provision for income taxes recorded in the
six month period ended September 30, 1998 was $7.8 million, or an effective rate
of 28%, exclusive of the effect of one-time non-deductible purchased research
and development expense, as compared to $6.2 million, or an effective rate of
34%, in the corresponding six month period in 1997. The decrease in the
effective tax rate is primarily the result of certain tax advantages associated
with the operation of the Dublin, Ireland manufacturing facility.
NET INCOME (LOSS). Net loss for the three and six month periods ended
September 30, 1998 was $193.5 million or $1.88 per diluted share and $179.1
million or $1.76 per diluted share, respectively, compared to net income of $7.0
million or $0.07 per diluted share and $12.0 million or $0.12 per diluted share,
respectively, for the corresponding periods in the previous fiscal year. Net
loss for the three and six month periods ended September 30, 1998 included
purchased research and development expenses of $199.3 million and restructuring
charges of $5.1 million. Excluding these charges and any tax effect, the net
income for the three and six months periods ended September 30, 1998 was $9.4
million or $.09 per diluted share and $23.8 million or $.22 per diluted share,
respectively.
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<PAGE> 15
YEAR 2000
The Company believes that all of its current products are Year 2000
compliant, in that they will be able to distinguish accurately between 20th
century and 21st century dates. However, certain products previously sold by the
Company are not Year 2000 compliant, and the Company is in the process of
preparing an upgrade program for such non-compliant products. The Company plans
to have the program in place during the fiscal quarter ending December 31, 1998.
The Company believes that the costs associated with such program will not have a
material adverse effect on its financial position or results of operations.
The Company believes that most of its internal information technology
systems are Year 2000 compliant. However, the Company continues to evaluate its
internal information technology systems and is in the process of implementing
upgrades to certain systems. In addition, the Company is also assessing other
non-information technology equipment and systems and related business processes
used in its operations. The Company plans to have a full assessment of such
equipment, systems and processes completed early in calendar year 1999 and test
and deploy solutions during the first and second quarters of calendar year 1999.
The Company expects that such non-information technology equipment, systems and
processes will be Year 2000 compliant early in the third quarter of calendar
year 1999. The Company believes that the costs of converting or replacing
non-information technology equipment and systems and related business processes
that are not Year 2000 compliant will not have a material adverse effect on the
Company's financial position or results of operations.
The Company is also assessing the possible effect on its operations of the
Year 2000 readiness of its suppliers of products and services, as well as its
customers. There can be no assurance that the information systems and other
business processes of the Company's suppliers and customers will be Year 2000
compliant, and it is possible that various business functions which require the
interaction of the Company's systems with those of suppliers or customers will
fail or malfunction in the Year 2000.
In addition, it is possible that the Company's revenue may be adversely
affected if current and prospective customers divert their spending resources
away from networking equipment over the next two years in order to correct or
replace information systems which are not Year 2000 compliant.
The Company expects to finalize a preliminary estimate of Year 2000 project
costs related to the Company's products, internal information and
non-information technology equipment and systems during the fiscal quarter
ending March 31, 1999. Year 2000 related project costs incurred to date are
immaterial to the Company's financial position and results of operation.
Although the Company expects its products and systems to be Year 2000 compliant
on or before December 31, 1999, it cannot predict with complete accuracy the
outcome of its Year 2000 program. If its Year 2000 program is not successful or
if the systems of suppliers and customers material to the Company fail or
malfunction in the Year 2000, the Company's business, financial condition or
results of operations may be materially adversely affected. The Company is
currently preparing a contingency plan to address possible risks to its internal
systems and expects such plan will be complete during calendar year 1999. The
Company has not yet estimated the costs of implementing the contingency plan,
and it is possible that such costs may have a material adverse effect on the
Company's financial position or results of operations.
FUTURE GROWTH SUBJECT TO RISKS
The Company's quarterly and annual operating results are affected by a wide
variety of risks and uncertainties as discussed in the Company's 1998 Annual
Report on Form 10-K and the Company's Current Report on Form 8-K dated September
11, 1998. This Quarterly Report on Form 10-Q should be read in conjunction with
the 1998 Form 10-K, particularly the section entitled "Certain Risk Factors,"
and such Current Report on Form 8-K.
The networking industry is highly competitive and is characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions which could render the Company's products noncompetitive
or obsolete. Because the Company's business strategy is based upon the belief
that ATM will be the technology of choice for the information technology
infrastructure, the Company's business, financial position and results of
operations would be materially adversely affected if ATM fails
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<PAGE> 16
to gain broad commercial acceptance or if other networking technologies gain
competitive advantages over ATM. Even if ATM achieves broad commercial
acceptance, there can be no assurance that the Company can continue to
successfully develop and introduce new products and enhancements given the fact
that many of the Company's competitors have significantly greater financial,
technological and personnel resources than does the Company.
The networking industry has experienced consolidation as industry
participants have sought to expand into new technologies and markets. The
Company has in the past and may in the future make acquisitions of companies and
technologies in order to compete more effectively. The Company completed the
acquisition of Berkeley in September 1998 and in connection therewith, recorded
$199.3 million as purchased research and development expense. Acquisitions are
subject to numerous risks, including the risk that research and development and
other expenses will materially increase without necessarily leading to the
successful introduction of new products or enhancements. The introduction of a
new line of products based on multi-service WAN adaptation and concentration
technology for the service provider market, previously announced by the Company
in connection with an acquisition, has been delayed, and there can be no
assurance that this product will be introduced or, if it is introduced, that it
will be successful in the marketplace. There can be no assurance that the
Company can successfully introduce and market new products resulting from the
acquisition of Berkeley or identify other acquisition opportunities or that any
acquisitions that are completed will be successfully integrated with the
Company's operations.
Although the Company has historically experienced increasing sales on an
annual basis, the rate of revenue growth has slowed in the last two fiscal
years. The Company's rate of revenue growth may continue to decline, and there
can be no assurance that the Company will experience revenue growth in the
future at historic rates or at all.
The Company has experienced fluctuating operating results on a quarterly
and annual basis and may continue to do so. These fluctuations are caused by
many factors, including a disproportionate share of sales occurring late in a
given quarter, the introduction of new products and technologies by competitors,
the pattern and seasonality of customer purchasing cycles, variations in the mix
of products sold and sales channels, price competition, manufacturing lead times
and changes in economic conditions. These factors make it difficult to predict
operating results for any given period, and have led to, and are likely to
continue to lead to, volatility in the market price of the Company's Common
stock.
The Company competes in international markets and is, accordingly, subject
to numerous risks. Sales to foreign customers in fiscal 1998 decreased in
dollars and as a percentage of revenue in comparison with fiscal 1997, and there
can be no assurance that such sales will not continue to decline. In addition,
the Company's international business may be adversely affected by foreign
regulatory requirements, changes in demand resulting from fluctuations in
currency exchange rates and local purchasing practices, difficulties in
distribution, slower payment of invoices, increases in duty rates, foreign
political and economic conditions and constraints upon international trade.
The Company's gross margins have been adversely affected and may continue
to be adversely affected by competitive pricing pressures and a change in the
mix of products sold toward lower-margin workgroup and desktop products for both
ATM and Ethernet. In addition, the Company's operating margins may be adversely
affected by the need to hire additional sales, marketing and other personnel.
The Company plans its operating expense levels based primarily on forecasted
revenue, and a shortfall in revenue would be likely to lead to operating results
being lower than expected. Any such failure to meet expectations could result in
a decrease in the market price of the Company's Common stock.
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<PAGE> 17
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 $22.2 million for the six month period
ended September 30, 1998. Net cash provided by operations was the result of net
income (net of purchased research and development expenses) and an increase to
deferred revenue offset somewhat by decreases in accounts payable and accrued
liabilities and an increase to prepaid expenses and other current assets. Net
cash provided by operations was $12.5 million for the six month period ended
September 30, 1997. Net cash provided by operations was the result of net income
and increases to accounts payable and accrued liabilities offset by increases to
accounts receivable, inventories and prepaid expenses and other current assets.
The increase in accounts receivable and inventories was due to increased
revenue. The Company's investing activities to date have been primarily for the
purchase of fixed assets to support the Company's growth.
At September 30, 1998, the Company had cash and cash equivalents of
approximately $163.9 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 that 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 commenced in calendar year 1998. The Company has
guaranteed repayment of up to approximately $32 million of the lenders'
financing of the facilities, which includes pledged amounts of approximately
$29.1 million, as of September 30, 1998, 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 be required to pay up to $30 million based on
Berkeley achieving certain technological advances and/or attaining certain
revenue goals over the next 2 years.
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, 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 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. The Company and the individual defendants
subsequently filed their answer to the consolidated amended complaint. The
Company believes the allegations in the consolidated amended complaint are
completely without merit and intends to defend this action vigorously.
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.
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<PAGE> 18
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
and Similar Financial Instruments and for Hedging Activities" ("SFAS 133"). This
new standard requires recognition of all derivatives as either assets or
liabilities at fair value. Based upon the hedging strategies currently used and
the level of activity related to derivative instruments, the Company does not
anticipate the effect of adoption to have a material impact on either financial
position or results of operations. The Company will implement SFAS 133 in fiscal
year 2000, as required.
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 does not believe SFAS 131 is
applicable to the Company's business. During the first quarter of fiscal year
1999, the company adopted SFAS 130. This statement establishes standards for
reporting and the display of comprehensive income and its components in a
primary financial statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
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<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In July and August 1997, the Company was notified that it was a party
to seven nearly identical class action lawsuits, 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 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. The Company and the individual defendants
subsequently filed their answer to the consolidated amended complaint. The
Company believes the allegations in the consolidated amended complaint are
completely without merit and intends to defend this action vigorously.
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.
The Company was served, in October 1998, with a complaint filed by Bell
Communications Research, Inc. in the United States District Court for the
District of Delaware. The complaint alleges that the Company infringes four
patents owned by the plaintiff and seeks compensatory and injunctive relief. The
Company believes the allegations in the complaint are completely without merit
and intends to defend this action vigorously. 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.
Although management believes that the ultimate outcome of pending legal
proceedings will not have a material adverse effect on the Company's financial
position or results of operations, litigation is subject to inherent
uncertainties, and an unfavorable ruling may have a material adverse effect on
the results of operations in the period in which it occurs.
Item 2. Changes in Securities and Use of Proceeds.
On September 11, 1998, the Company issued approximately 8.6 million
shares of Common stock to the former shareholders of Berkeley. The issuance of
such shares was intended to be exempt from registration pursuant to the
exemption provided by Rule 506 under the Securities Act of 1933, as amended,
based, on among other things, the limited number and nature of the purchasers,
the fact that each such purchaser 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 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. The shares issued to the former
shareholders of Berkeley were registered on a shelf registration statement on
Form S-3 filed with the Securities and Exchange Commission on September 18,
1998.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The 1998 Annual Meeting of Stockholders of the Company was
held on Thursday, July 30, 1998.
(b) Not applicable, pursuant to Instruction 3 to Item 4 of this
Form 10-Q.
(c) A description of the matters voted upon at the meeting along
with an indication of the results of the votes on such matters
are set forth below:
1. The election of two class II directors to serve for a
term of three years and until their respective
successors are duly elected and qualified:
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<PAGE> 20
Votes Authority
For Withheld
--- --------
Daniel W. McGlaughlin 89,347,097 3,221,565
Robert D. Sansom 91,665,832 902,830
2. The approval of the FORE Systems, Inc. 1998 Stock
Option Plan: For: 64,123,306; Against: 27,820,660;
Abstentions: 198,887; Broker Non-Votes: 425,809.
3. The ratification of the selection of Price Waterhouse
LLP, independent accountants, to audit the books and
accounts of the Company for the year ending March 31,
1999: For: 92,388,910; Against: 84,697; Abstentions:
95,055.
(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:
2.1 Agreement and Plan of Reorganization, dated as of August
25, 1998, by and among FORE Systems, Inc., Fastwire
Acquisition Corporation and Berkeley Networks, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated September 11, 1998.
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).
10.1 FORE Systems, Inc. Change in Control Separation Plan (as
amended and restated effective September 4, 1998).
27.1. Financial Data Schedule.
b) Reports on Form 8-K.
On September 18, 1998 the Company filed a Current Report
including Items 2 and 7 of Form 8-K, dated September 11, 1998,
in connection with the Company's acquisition of Berkeley
Networks, Inc., which included both historical financial
statements of Berkeley and combined pro forma financial
information. The Company amended the September 11, 1998
Current Report on Form 8-K on September 23, 1998.
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<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORE SYSTEMS, INC.
(Registrant)
Date: November 16, 1998 /s/ Bruce E. Haney
------------------
Bruce E. Haney
Senior Vice President and Chief
Financial Officer
(Authorized Officer and Principal Financial
Officer)
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<PAGE> 22
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 FORE Systems, Inc. Change in Control Separation
Plan (as amended and restated effective
September 4, 1998).
27.1 Financial Data Schedule
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<PAGE> 1
EXHIBIT 10.1
FORE SYSTEMS, INC.
CHANGE IN CONTROL SEPARATION PLAN
(as amended and restated effective September 4, 1998)
Introduction
The Board of Directors of FORE Systems, Inc. recognizes that
the Corporation, as a publicly held company, may experience a change in control,
and that the possibility of a change in control may create uncertainty resulting
in the loss or distraction of certain key employees of the Corporation to the
detriment of the Corporation and its stockholders.
The Board considers the avoidance of such loss and
distraction to be essential to protecting and enhancing the best interests of
the Corporation and its stockholders. The Board also believes that when a change
in control is perceived as imminent, or is occurring, the Board should be able
to receive and rely on disinterested service from its key employees regarding
the best interests of the Corporation and its stockholders without concern that
such employees might be distracted or concerned by the personal uncertainties
and risks created by the perception that a change in control might be imminent.
Accordingly, the Board has determined that appropriate steps
should be taken to assure the Corporation of the continued employment and
dedication to duty of certain key employees and to ensure the availability of
their continued service, notwithstanding the possibility, threat or occurrence
of a change in control.
Therefore, in order to fulfill the above purposes, the FORE
Systems, Inc. Change In Control Separation Plan is hereby adopted by the Board.
ARTICLE I
ESTABLISHMENT OF PLAN
As of the Effective Date, the Corporation has established a
compensation plan known as the FORE Systems, Inc. Change In Control Separation
Plan as set forth in this document. The Plan has been amended and restated
effective September 4, 1998.
<PAGE> 2
ARTICLE II
DEFINITIONS
As used herein the following words and phrases shall have the
following respective meanings unless the context clearly indicates otherwise:
(a) Average Bonus. The average annual bonus received by a
Participant for the three most recent fiscal years of the Corporation (or such
lesser number of fiscal years during which the Participant was employed by the
Corporation) completed prior to (i) the occurrence of a Change in Control or
(ii) the Participant's termination of employment, whichever produces the higher
average. For this purpose, if a Participant was employed by the Corporation for
only a portion of an applicable fiscal year, the Participant's bonus for such
fiscal year, if any, shall be annualized.
(b) Base Salary. The highest rate of annual base salary in
effect for a Participant from the Corporation or its Subsidiaries during the
three most recent fiscal years of the Corporation completed prior to (i) the
occurrence of a Change in Control or (ii) the Participant's termination of
employment, whichever produces the higher amount. Base Salary shall not include
bonuses, overtime pay, and incentive compensation.
(c) Board. The Board of Directors of the Corporation.
(d) Cause. "Cause" shall be determined by the Board in the
exercise of good faith and reasonable judgment, and shall mean the occurrence of
any one or more of the following:
(i) The Participant's conviction for committing an act of
fraud, embezzlement, theft, or other act constituting a felony; or
(ii) The willful engaging by the Participant in gross
misconduct materially and demonstrably injurious to the Corporation or
its Subsidiaries; provided, however, that no act or failure to act, on
the Participant's part shall be considered "willful" unless done, or
omitted to be done, by the Participant not in good faith and without
reasonable belief that his action or omission was in the best interest
of the Corporation or its Subsidiaries.
(e) Change in Control. "Change in Control" shall mean:
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<PAGE> 3
(i) The acquisition, other than from the Corporation, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) (a "Person") (other than the Corporation, a Subsidiary
or any of their benefit plans) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or
more of either (i) the then outstanding shares of common stock of the
Corporation (the "Outstanding Corporation Common Stock") or (ii) the
combined voting power of the then outstanding voting securities of the
Corporation entitled to vote generally in the election of directors
(the "Corporation Voting Securities"); or
(ii) Individuals who, as of the Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board, provided that any individual becoming a
director subsequent to the Effective Date whose election or nomination
for election by the Corporation's stockholders was approved by a vote
of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the
Directors of the Corporation (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act); or
(iii) Consummation of a reorganization, merger or
consolidation or similar form of corporate transaction, involving the
Corporation or any of its Subsidiaries (a "Business Combination"), in
each case, with respect to which all or substantially all of the
individuals and entities who were the respective beneficial owners of
the Outstanding Corporation Common Stock and Corporation Voting
Securities immediately prior to such Business Combination do not,
immediately following such Business Combination, beneficially own,
directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination in substantially the same proportion as
their ownership immediately prior to such Business Combination of the
Outstanding Corporation Common Stock and Corporation Voting Securities,
as the case may be; or
-3-
<PAGE> 4
(iv)(A) Consummation of a complete liquidation or dissolution
of the Corporation or (B) sale or other disposition of all or
substantially all of the assets of the Corporation other than to a
corporation with respect to which, following such sale or disposition,
more than 50% of, respectively, the then outstanding shares of common
stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors is
then owned beneficially, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the outstanding Corporation Common
Stock and Corporation Voting Securities immediately prior to such sale
or disposition in substantially the same proportion as their ownership
of the outstanding Corporation Common Stock and Corporation Voting
Securities, as the case may be, immediately prior to such sale or
disposition.
(f) Code. The Internal Revenue Code of 1986, as amended from
time to time.
(g) Committee. The Compensation Committee of the Board.
(h) Corporation. FORE Systems, Inc., a Delaware corporation,
and any Successor.
(i) Date of Termination. The effective date of a Participant's
termination of employment with the Corporation and its Subsidiaries.
(j) Effective Date. April 18, 1996, or such other date as the
Board shall designate in its resolution approving the Plan.
(k) Good Reason. Without the Participant's express written
consent, the occurrence of any one or more of the following:
(i) The Participant's position, management responsibilities or
working conditions are substantially diminished from those in effect
immediately prior to the Change in Control, or the Participant is
assigned duties inconsistent with his or her position;
(ii) The Corporation's requiring the Participant to be based
at a location in excess of thirty-five (35) miles from the location of
the Participant's principal job location or office immediately prior to
the Change in
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<PAGE> 5
Control, except for required travel on the Corporation's business to an
extent substantially consistent with the Participant's business travel
obligations immediately prior to the Change in Control;
(iii) A material reduction by the Corporation of the
Participant's compensation or benefits from those in effect immediately
prior to the Change in Control;
(iv) The failure of the Corporation to obtain a satisfactory
agreement from any Successor to assume and agree to perform the
Corporation's obligations to the Participant under this Plan, as
contemplated in Article V herein.
The Participant's right to terminate employment for Good
Reason shall not be affected by the Participant's (A) incapacity due to physical
or mental illness or (B) continued employment for less than ninety (90) days
following the occurrence of (or, if later, the Participant's gaining knowledge
of) any event constituting Good Reason herein.
(l) Participants. All Schedule A Participants and Schedule B
Participants.
(m) Plan. FORE Systems, Inc. Change in Control Separation
Plan, as the same may be amended from time to time.
(n) Schedule A Participant. A key employee who has been
designated by the Board as a participant in the Plan and whose name is set forth
on Schedule A, attached to the Plan.
(o) Schedule B Participant. A key employee who has been
designated by the Board as a participant in the Plan and whose name is set forth
on Schedule B, attached to the Plan.
(p) Separation Benefits. The benefits payable in accordance
with Section 4.2 of the Plan.
(q) Subsidiary. Any corporation in which the Corporation,
directly or indirectly, holds a majority of the voting power of such
corporation's outstanding shares of capital stock.
(r) Successor. Another corporation or unincorporated entity or
group of corporations or unincorporated entities which acquires ownership,
directly or indirectly, of all or substantially all of the assets of the
Corporation.
-5-
<PAGE> 6
ARTICLE III
ELIGIBILITY
Schedules A and B to this Plan provide lists of the key
employees of the Corporation who shall be Participants as of the Effective Date.
The Board may from time to time designate other key employees as Schedule A
Participants, and the Board or an officer designated by the Board may from time
to time designate other key employees as Schedule B Participants. All
Participants shall be management or highly compensated employees of the
Corporation. A Participant shall cease to be a Participant in the Plan when he
ceases to be an employee of the Corporation or a Subsidiary, unless such
Participant is then entitled to payment of a Separation Benefit as provided in
the Plan. A Participant entitled to payment of a Separation Benefit shall remain
a Participant in the Plan until the full amount of all Separation Benefits has
been paid to him.
ARTICLE IV
SEPARATION BENEFITS
4.1 Right to Separation Benefit. A Participant shall be
entitled to receive from the Corporation Separation Benefits in the amount
provided in Section 4.2 if a Change in Control occurs and if, within two (2)
years thereafter, the Participant's employment with the Corporation and its
Subsidiaries shall terminate either (a) by action of the Corporation without
Cause or (b) by reason of the Participant's resignation from such employment for
Good Reason.
4.2 Separation Benefits. If a Participant's employment
terminates in circumstances entitling him to Separation Benefits as provided in
Section 4.1, the Participant shall be entitled to the following:
(a) The Corporation shall pay each Schedule A Participant,
within ten (10) days of the Date of Termination, a Separation Benefit equal to
three (3) times the sum of (x) such Schedule A Participant's Base Salary and (y)
such Schedule A Participant's Average Bonus.
(b) The Corporation shall pay each Schedule B Participant,
within ten (10) days of the Date of Termination, a Separation Benefit equal to
one and one-half (1-1/2) times the sum of (x) such Schedule B Participant's Base
Salary and (y) such Schedule B Participant's Average Bonus.
-6-
<PAGE> 7
(c) Each Participant shall receive from the Corporation an
amount, paid within ten (10) days of the Date of Termination, equal to (i) the
greater of (A) the Participant's Average Bonus and (B) the Participant's target
bonus for the year in which the Date of Termination occurs, multiplied by (ii) a
fraction, the numerator of which is the number of days from the April 1
preceding the date of termination to the Date of Termination, both inclusive,
and the denominator of which is 365.
(d) All welfare benefits, including medical, life and
disability benefits, pursuant to plans under which the Participant, and/or the
Participant's family is eligible to receive benefits and/or coverage shall be
continued for a period of three years after the Date of Termination. Such
benefits shall be provided to the Participant at no less than the same coverage
level as in effect as of the Date of Termination. The Corporation shall pay the
full cost of such continued benefits, except that the Participant shall bear any
portion of such cost as was required to be borne by key employees of the
Corporation generally at the Date of Termination. Notwithstanding the foregoing:
(i) These welfare benefits may be discontinued prior to the
end of the period provided in this Section to the extent, but only to
the extent, that the Participant receives substantially similar
benefits from a subsequent employer.
(ii) If the Corporation determines that giving the continued
welfare benefit coverage described in this Section would adversely
affect the tax qualification of a benefit plan, the Corporation may pay
the Participant a lump sum cash amount equal to the after-tax present
value to the Participant of such continued coverage, in lieu of giving
such continued coverage. For purposes of the preceding sentence,
present value shall be determined as of the Date of Termination and
shall be calculated based upon a discount rate equal to the Applicable
Federal Rate as provided in Section 1274(b)(2) of the Code.
(e) Any and all stock options and stock-based rights held by
the Participant on the Date of Termination shall be immediately and fully vested
and exercisable as of the Date of Termination. Subject to the foregoing, all
stock options and stock-based rights held by the Participant on the Date of
Termination shall be administered in accordance with the terms of the applicable
plans and agreements.
-7-
<PAGE> 8
4.3 Other Benefits Payable. The Separation Benefits described
in Section 4.2 above shall be payable in addition to, and not in lieu of, all
other accrued or vested or earned but deferred compensation, rights, options or
other benefits which may be owed to a Participant following termination,
including but not limited to accrued vacation or sick pay amounts or benefits
payable under any bonus or other compensation plans, stock option plan, stock
ownership plan, stock purchase plan, life insurance plan, health plan,
disability plan or similar or successor plan.
4.4 Certain Additional Payments By the Corporation.
(a) Anything in this Plan to the contrary notwithstanding, in
the event it shall be determined that any payment, award, benefit or
distribution (or any acceleration of any payment, award, benefit or
distribution) by the Corporation (or any of its Subsidiaries) or any entity
which effectuates a Change in Control (or any of its affiliated entities) to or
for the benefit of any Schedule A Participant (whether pursuant to the terms of
this Plan or otherwise, but determined without regard to any additional payments
required under this Section 4.4) (the "Payments") would be subject to the excise
tax imposed by Section 4999 of the Code, or any interest or penalties are
incurred by any Schedule A Participant with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Corporation shall pay to
such Schedule A Participant an additional payment (a "Gross-Up Payment") in an
amount such that after payment by such Schedule A Participant of all taxes
(including any Excise Tax) imposed upon the Gross-Up Payment, the Schedule A
Participant retains an amount of the Gross-Up Payment equal to the sum of (x)
the Excise Tax imposed upon the Payments and (y) the product of any deductions
disallowed because of the inclusion of the Gross-Up Payment in such Schedule A
Participant's adjusted gross income and the highest applicable marginal rate of
federal income taxation for the calendar year in which the Gross-Up Payment is
to be made. For purposes of determining the amount of the Gross-Up Payment, such
Schedule A Participant shall be deemed to (i) pay federal income taxes at the
highest marginal rates of federal income taxation for the calendar year in which
the Gross-Up Payment is to be made, (ii) pay applicable state and local income
taxes at the highest marginal rate of taxation for the calendar year in which
the Gross-Up Payment is to be made, net of the maximum reduction in federal
income taxes which could be obtained from deduction of such state and local
taxes and (iii) have otherwise allowable deductions for federal income tax
purposes at least equal to those which could be disallowed because of the
inclusion of the Gross-Up Payment in the Schedule A Participant's adjusted
-8-
<PAGE> 9
gross income. Notwithstanding the foregoing provisions of this Section 4.4(a),
if it shall be determined that a Schedule A Participant or Schedule B
Participant is entitled to a Gross-Up Payment, but that the Payments would not
be subject to the Excise Tax if the Payments were reduced by an amount that is
less than 5% of the portion of the Payments that would be treated as "parachute
payments" under Section 280G of the Code, then the amounts payable to such
Schedule A Participant under this Plan shall be reduced (but not below zero) to
the maximum amount that could be paid to such Schedule A Participant without
giving rise to the Excise Tax (the "Safe Harbor Cap"), and no Gross-Up Payment
shall be made to such Schedule A Participant. The reduction of the amounts
payable hereunder, if applicable, shall be made by reducing first the payments
under Section 4.2(a) or Section 4.2(b), as the case may be, unless an
alternative method of reduction is elected by such Schedule A Participant. For
purposes of reducing the Payments to the Safe Harbor Cap, only amounts payable
under this Plan (and no other Payments) shall be reduced. If the reduction of
the amounts payable hereunder would not result in a reduction of the Payments to
the Safe Harbor Cap, no amounts payable under this Plan shall be reduced
pursuant to this provision.
(b) Anything in this Plan to the contrary notwithstanding, in
the event it shall be determined that any payment, award, benefit or
distribution (or any acceleration of any payment, award, benefit or
distribution) by the Corporation (or any of its Subsidiaries) or any entity
which effectuates a Change in Control (or any of its affiliated entities) to or
for the benefit of any Schedule B Participant (whether pursuant to the terms of
this Plan or otherwise) (the "Schedule B Payments") would be subject to the
Excise Tax, then the amounts payable to a Schedule B Participant under this Plan
shall be reduced to the Safe Harbor Cap if the result of subtracting the Excise
Tax from the Schedule B Payment is less than the Safe Harbor Cap. If reductions
are to be made pursuant to the preceding sentence, such reduction shall be made
first from the payments under Section 4.2(b) unless an alternative method of
reduction is elected by the Schedule B Participant. For purposes of reducing the
Schedule B Payments to the Safe Harbor Cap, only amounts payable under this Plan
(and no other Schedule B Payments) shall be reduced, unless consented to by the
Schedule B Participant.
(c) Subject to the provisions of Section 4.4(a) or Section
4.4(b), all determinations required to be made under this Section 4.4, including
whether and when a Gross-Up Payment is required, the amount of such Gross-Up
Payment and the assumptions to be utilized in arriving at such determinations,
shall be made by the public accounting firm that is retained by the Corporation
-9-
<PAGE> 10
as of the date immediately prior to the Change in Control (the "Accounting
Firm") which shall provide detailed supporting calculations both to the
Corporation and any Participant within fifteen (15) business days of the receipt
of notice from the Corporation or the Participant that there has been a Payment
or Schedule B Payment, or such earlier time as is requested by the Corporation
(collectively, the "Determination"). In the event that the Accounting Firm is
serving as accountant or auditor for the individual, entity or group effecting
the Change in Control, any Participant may appoint another nationally recognized
public accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the
Corporation and the Corporation shall enter into any agreement requested by the
Accounting Firm in connection with the performance of the services hereunder.
The Gross-Up Payment under this Section 4.4 with respect to any Payments made to
Schedule A Participants shall be made no later than thirty (30) days following
such Payment. If the Accounting Firm determines that no Excise Tax is payable by
a Participant, it shall furnish such Participant with a written opinion to such
effect, and to the effect that failure to report the Excise Tax, if any, on the
Participant's applicable federal income tax return will not result in the
imposition of a negligence or similar penalty. In the event the Accounting Firm
determines that the Payments or Schedule B Payments shall be reduced to the Safe
Harbor Cap, it shall furnish a Participant with a written opinion to such
effect. The Determination by the Accounting Firm shall be binding upon the
Corporation and any Participant.
(d) As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the Determination, it is possible that
Gross-Up Payments which will not have been made by the Corporation should have
been made ("Underpayment") or Gross-Up Payments are made by the Corporation
which should not have been made ("Overpayment"), consistent with the
calculations required to be made hereunder. In the event that any Schedule A
Participant thereafter is required to make payment of any Excise Tax or
additional Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment (together with interest
at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly
paid by the Corporation to or for the benefit of such Schedule A Participant. In
the event the amount of the Gross-Up Payment exceeds the amount necessary to
reimburse the Schedule A Participant for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment (together with interest at the rate provided in Section 1274(b)(2)
of the
-10-
<PAGE> 11
Code) shall be promptly paid by such Schedule A Participant (to the extent he
has received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Corporation. A Schedule A
Participant shall cooperate, to the extent their expenses are reimbursed by the
Corporation, with any reasonable requests by the Corporation in connection with
any contests or disputes with the Internal Revenue Service in connection with
the Excise Tax.
(e) If Payments or Schedule B Payments are reduced to the Safe
Harbor Cap as provided in Section 4.4(a) or Section 4.4(b) and if it is
established pursuant to a final determination of a court or an Internal Revenue
Service (the "IRS") proceeding which has been finally and conclusively resolved,
that Payments or Schedule B Payments have been made to, or provided for the
benefit of, Participants by the Corporation, which are in excess of the
limitations provided in Section 4.4(a) or Section 4.4(b) (hereinafter referred
to as an "Excess Payment"), such Excess Payment shall be deemed for all purposes
to be a loan to the Participant made on the date such Participant received the
Excess Payment and the Participant shall repay the Excess Payment to the
Corporation on demand, together with interest on the Excess Payment at the
applicable federal rate from the date of the Participant's receipt of such
Excess Payment until the date of such repayment. As a result of the uncertainty
in the application of Section 4999 of the Code at the time of the determination,
it is possible that Payments or Schedule B Payments which will not have been
made by the Corporation should have been made (a "Safe Harbor Underpayment"),
consistent with the calculations required to be made under this Section 4.4. In
the event that it is determined (i) by the Accounting Firm, the Corporation
(which shall include the position taken by the Corporation, or together with its
consolidated group, on its federal income tax return) or the IRS or (ii)
pursuant to a determination by a court, that a Safe Harbor Underpayment has
occurred, the Corporation shall pay an amount equal to such Safe Harbor
Underpayment to the Participant within fifteen (15) days of such determination
together with interest on such amount at the applicable federal rate from the
date such amount would have been paid to the Participant until the date of
payment.
4.5 Payment Obligations Absolute. Upon a Change in Control,
the Corporation's obligations to pay the Separation Benefits described in
Section 4.2 and the additional payments described in Section 4.4 shall be
absolute and unconditional and shall not be affected by any circumstances,
including, without limitation, any set-off, counterclaim, recoupment, defense or
other right which the Corporation or any of its Subsidiaries may have against
any Participant. In no event shall a Participant be
-11-
<PAGE> 12
obligated to seek other employment or take any other action by way of mitigation
of the amounts payable to a Participant under any of the provisions of this Plan
and, except as otherwise provided in Section 4.2(c)(i), in no event shall the
amount of any payment hereunder be reduced by any compensation earned by a
Participant as a result of employment by another employer.
ARTICLE V
SUCCESSOR TO CORPORATION
The Plan shall bind any Successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise), in the same manner and to the
same extent that the Corporation would be obligated under the Plan if no
succession had taken place. In the case of any transaction in which a Successor
would not by the foregoing provision or by operation of law be bound by the
Plan, the Corporation shall require such Successor expressly and unconditionally
to assume and agree to perform the Corporation's obligations under the Plan, in
the same manner and to the same extent that the Corporation would be required to
perform if no such succession had taken place.
ARTICLE VI
DURATION, AMENDMENT AND TERMINATION
6.1 Duration. If a Change in Control has not occurred, the
Plan shall expire five (5) years from the Effective Date, unless sooner
terminated as provided in Section 6.2, or unless extended as described below.
Following the end of the five (5) year term, on each anniversary of the
Effective Date before a Change in Control, the term of the Plan shall be
automatically extended to continue for an additional one (1) year period, unless
the Board determines before the anniversary date that the term will not be
extended. If a Change in Control occurs during the term of this Plan, the Plan
shall continue in full force and effect and shall not terminate or expire until
all Participants who become entitled to Separation Benefits hereunder shall have
received such payments in full.
6.2 Amendment and Termination. The Plan may be terminated or
amended in any respect by resolution adopted by a majority of the Incumbent
Board, unless a Change in Control has previously occurred. If a Change in
Control occurs, the Plan shall no longer be subject to amendment, change,
substitution, deletion, revocation or termination in any respect whatsoever.
-12-
<PAGE> 13
6.3 Form of Amendment. The form of any amendment or
termination of the Plan shall be a written instrument signed by a duly
authorized officer or officers of the Corporation, certifying that the amendment
or termination has been approved by the Incumbent Board. An amendment of the
Plan shall automatically effect a corresponding amendment to all Participants'
rights hereunder. A termination of the Plan shall automatically effect a
termination of all Participants' rights and benefits hereunder.
ARTICLE VII
MISCELLANEOUS
7.1 Withholding Taxes. The Corporation may directly or
indirectly withhold from any payments made under this Plan all Federal, state,
city or other taxes as shall be required pursuant to any law or governmental
regulation or ruling.
7.2 Indemnification. If a Participant institutes any legal
action in seeking to obtain or enforce, or is required to defend any legal
action the validity or enforceability of, any right or benefit provided by the
Plan, the Corporation will, if the Participant substantially prevails in such
action, pay for all reasonable legal fees and expenses incurred by such
Participant.
7.3 Employment Status. The Plan does not constitute a contract
of employment or impose on the Participant or the Corporation or any of its
Subsidiaries any obligation to retain the Participant as an employee, to change
the status of the Participant's employment, or to change the Corporation's
policies or those of its Subsidiaries' regarding termination of employment.
7.4 No Attachment. Except as required by law, no right to
receive payments under this Plan shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to execution, attachment, levy, or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
7.5 Source of Payment. All payments provided for under this
Plan shall be paid in cash from the general funds of the Corporation. The
Corporation shall not be required to establish a special or separate fund or
other segregation of assets to assure such payments, and, if the Corporation
shall make any investments to aid it in meeting its obligations hereunder, the
Participants shall have no right, title or
-13-
<PAGE> 14
interest whatever in or to any such investments except as may otherwise be
expressly provided in a separate written instrument relating to such
investments. Nothing contained in this Plan, and no action taken pursuant to its
provisions, shall create or be construed to create a trust of any kind, or a
fiduciary relationship, between the Corporation and a Participant or any other
person. To the extent that any person acquires a right to receive payments from
the Corporation hereunder, such right shall be no greater than the right of an
unsecured general creditor of the Corporation.
7.6 Validity and Severability. The invalidity or
unenforceability of any provision of the Plan shall not affect the validity or
enforceability of any other provision of the Plan, which shall remain in full
force and effect, and any prohibition or enforceability in any jurisdiction
shall not invalidate or render unenforceable such provision in any other
jurisdiction.
7.7 Governing Law. The validity, interpretation, construction
and performance of the Plan shall in all respects be governed by the laws of the
State of Delaware, other than the conflict of law provisions of such laws.
7.8 Named Fiduciary and Administrator. For the purposes of the
Employee Retirement Income Security Act of 1974, the Corporation shall be the
"named fiduciary" and the "administrator" of the Plan. The Plan Administrator
shall operate, interpret and implement the Plan. The Plan Administrator shall
have all such powers as are necessary to discharge his duties, including, but
not limited to, the interpretation and construction of all provisions of the
Plan, the determination of all questions of eligibility, participation, benefits
and all other related or incidental matters, and such duties and powers of Plan
administration which are not assumed from time to time by any other appropriate
entity, individual, or institution. The Plan Administrator shall decide all such
questions and his decisions and determinations that are not arbitrary and
capricious shall be binding and conclusive on the Corporation, the Participant,
the Participant's designee, the Participant's spouse or other dependent or
beneficiary, employees, and all other interested parties.
The Plan Administrator may require each Participant to submit,
in such form as he shall deem reasonable and acceptable, proof of any
information which the Plan Administrator finds necessary or desirable for the
proper administration of the Plan.
-14-
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