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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
For Annual and Transition Reports Pursuant to
Sections 13 or 15(d) of the Securities Exchange Act of 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE FISCAL YEAR ENDED MARCH 31, 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 (I.R.S. Employer Identification No.)
of Incorporation or Organization)
1000 FORE DRIVE, WARRENDALE, PENNSYLVANIA 15086-7502
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (724) 742-4444
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of May 29, 1998, the aggregate market value of voting common stock
held by non-affiliates of the registrant, based upon the last reported sale
price for the registrant's Common Stock on The Nasdaq National Market on such
date, as reported in The Wall Street Journal, was $1,979,523,766 (calculated by
excluding shares owned beneficially by directors and executive officers as a
group from total outstanding shares solely for the purpose of this response).
The number of shares of the registrant's Common Stock outstanding as of
the close of business on May 29, 1998 was 100,751,928.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement of FORE Systems,
Inc. (the "Company") to be furnished in connection with the solicitation of
proxies by the Company's Board of Directors for use at the 1998 Annual Meeting
of Stockholders (the "Proxy Statement") are incorporated by reference into Part
III of this Annual Report on Form 10-K to the extent provided herein. Except as
specifically incorporated by reference herein, the Proxy Statement is not to be
deemed filed as part of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS.
FORE Systems, Inc. (the "Company" or "FORE Systems") is a leader in the
design, development, manufacture and sale of high-performance networking
products based on Asynchronous Transfer Mode ("ATM") technology. ATM provides
significantly greater scalability, total capacity and resiliency than
conventional networking technologies. ATM improves the performance of today's
network applications, and also enables new applications that integrate video,
audio and data communications. The Company believes that it currently offers the
most comprehensive ATM product line available, including ForeRunner(R) ATM
switches for enterprise applications, TNX(TM) ATM switches for service provider
applications, PowerHub(R) local area network ("LAN") switches, ES-2810/3810 and
4810 Ethernet switches for ATM connectivity, TS-2800 switches for token ring to
ATM connectivity, ForeRunner ATM adapter cards, CellPath(TM) wide area network
("WAN") multiplexing products for WAN access, ForeThought(R) internetworking
software, ForeView(R) network management software and StreamRunner(TM) ATM video
products.
The Company's networking products enable customers to connect computers
to form clusters, workgroups and LANs, to build backbones for enterprise-wide
networks and to provide transparent, end-to-end LAN and WAN connectivity. The
Company's networking products are designed to be both flexible and scalable,
allowing customers to increase the capacity and extend the utility of their
existing networks or to install a new ATM-based network. As of March 31, 1998,
the Company had delivered networking solutions to thousands of customers,
including Fortune 500 companies, telecommunications service providers,
government agencies, research institutions and universities. The Company markets
its products internationally, and sales outside the United States accounted for
approximately 31%, 37% and 39% of FORE Systems' revenue for the years ended
March 31, 1998, 1997 and 1996, respectively.
Certain statements contained in this Annual Report on Form 10-K,
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "expects," "plans," and words of similar import,
constitute forward-looking statements. Readers are referred to the sections of
this Report entitled "Certain Risk Factors," "Competition," "Manufacturing"
and "Intellectual Property." These sections describe risks which could cause
actual results to differ materially from such forward-looking statements.
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PRODUCTS
FORE Systems' products work together to provide a complete ATM
internetworking solution. These products include the ForeRunner ATM switches for
enterprise applications, PowerHub LAN switches and ES-2810/3810 and 4810
Ethernet switches for ATM connectivity, ForeRunner ATM adapter cards, CellPath
WAN multiplexing products for WAN access, ForeThought internetworking software,
ForeView network management software and StreamRunner ATM video products.
FORERUNNER ATM SWITCHES AND ADAPTER CARDS
The Company offers the ForeRunner family of ATM switches for use in
workgroup, LAN backbone and WAN applications. As of March 31, 1998, the
installed base of ForeRunner ATM switches consisted of over 310,000 ports.
ForeRunner ATM switches provide a non-blocking switch capacity that
ranges from 2.5 to 40 gigabits per second (Gbps). In each case, the ATM
connections can be made with a variety of physical media interfaces and speeds.
The supported media include UTP-5 copper wire and multimode and single mode
fiber optic cabling. The supported speeds for ForeRunner ATM switches used in
workgroup and LAN backbone applications are 25 megabits per second (Mbps), OC3
(155 Mbps), OC12 (622 Mbps) and recently introduced OC48 (2.5 Gbps); for those
used in WAN applications, T1, E1, DS3, E3, OC3 and OC12. Any of the switch ports
can be connected to another ATM switch so that a large network can be
constructed from a "mesh" of ATM switches. ForeRunner ATM switches include
integral control processors that run the Company's ForeThought switch control
software. The compact size and low power consumption enable them to be easily
installed in wiring closets.
The Company's modular ATM switches are designed to accept a family of
LAN and WAN network modules that provide high-speed communications from the
desktop to the WAN. Network modules are hot-swappable and can be upgraded in the
field to accommodate different physical media and link speeds.
ForeRunner ATM adapter cards allow computers to communicate over ATM
networks. The Company offers ATM adapter card products for a wide array of
platforms. The Company currently offers ForeRunner ATM cards for all major Unix
and PC platforms, including Windows 95, Windows NT and Apple Macintosh. The
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Company's ForeRunner 200E-Series of high-performance adapter cards are optimized
for network servers and feature advanced cell processing architecture. The
Company's ForeRunner LE(TM) Series adapter cards are optimized for desktop
client machines.
POWERHUB LAN SWITCHES
The PowerHub line of LAN switches combines bandwidth capability,
flexible connectivity and high-performance bridging and routing, enabling
customers to migrate to ATM without sacrificing their investment in their
existing LANs. The PowerHub product line provides flexible, intelligent
switching for Ethernet, Fast Ethernet, FDDI and ATM networks. The PowerHub's
innovative backplane provides cost-effective expansion capabilities in addition
to hot-swappable modules and redundant power supplies for reliability. The
PowerHub's features also include full-featured bridging, multiprotocol routing
and virtual LAN capability.
ES-2810/3810 AND 4810 ETHERNET SWITCHES
The ES-2810/3810 and 4810 Ethernet switches offer flexible solutions
for switched workgroups by providing a wide range of switched Ethernet and ATM
connectivity options. The ES-2810 provides a stackable 10/100 Ethernet expansion
solution designed to integrate into an ATM core backbone. The ES-3810 and 4810
are chassis-based Ethernet switching solutions which provide ATM uplinks and
connectivity for multimode and singlemode fiber and copper media.
ATM VIDEO PRODUCTS
The StreamRunner ATM video products provide ATM video distribution and
video conferencing capabilities and include a range of ATM video encoders and
decoders. These devices transmit high quality video over ATM networks, enabling
low-delay transmission of such image intensive applications as distance
learning, telemedicine, video distribution, videoconferencing and remote site
monitoring.
CELLPATH WAN MULTIPLEXERS
The CellPath line of WAN multiplexers extends the reach of ATM to
non-ATM sites and applications. These products adapt and aggregate traffic from
PBXs, routers and videoconferencing equipment onto wide area transmission lines.
CellPath products are available for low and moderate traffic requirements and
for high-end application support.
FORETHOUGHT INTERNETWORKING SOFTWARE AND FOREVIEW NETWORK MANAGEMENT SOFTWARE
The Company believes that the quality of its ATM software has been, and
will continue to be, a significant factor in differentiating its products from
those of other vendors. The Company's ForeThought internetworking software
products include ATM switch control software and device driver software for the
Company's ATM adapter cards. ForeThought software supports ATM Forum standards
and also offers additional functionality and is at the heart of the Company's
entire product line.
The Company's ForeView network management software offers a graphical,
front-panel interface to monitor and configure virtual channels and paths,
configure port hardware, monitor line errors, set line loopbacks, collect
network usage information and manage virtual LANs. ForeView network management
software can be integrated with HP OpenView, Cabletron Spectrum and SunNet
Manager, or can run standalone on a variety of platforms.
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SERVICE PROVIDER ATM PRODUCTS
The TNX line of ATM switches, introduced in June 1997, enable broadband
based-services such as high speed Internet access, web hosting, video on demand
and distance learning. These products are used by Competitive Access Providers
(CAPs), cable companies, Internet Service Providers (ISPs), Competitive Local
Exchange Carriers (CLECs), Interexchange and Local Exchange Carriers.
The TNX products are NEBS-compliant, non-blocking ATM switches that
scale from 2.5 gigabits per second (Gbps) to 10 Gbps. The products' deployment
can vary from customers that build fault tolerant, multiservice ATM backbone
networks consolidating multiple overlay networks to those customers that have
small central offices and service extensions to customer premises or remote
points of presence.
MARKETS AND CUSTOMERS
The Company's networking solutions address a broad market for switched
networking products. As of March 31, 1998, thousands of customers worldwide had
purchased FORE Systems' products.
Revenue from United States government customers represented 7%, 9% and
7% of the Company's revenue for the years ended March 31, 1998, 1997 and 1996,
respectively. These United States government customers include more than twenty
different agencies, each of which makes its own procurement decisions. During
the years ended March 31, 1998, 1997 and 1996, no single customer accounted for
10% or more of the Company's revenue.
CUSTOMER SERVICE AND SUPPORT
The Company is dedicated to providing comprehensive customer support.
The Company's technical support staff is expert in a wide variety of hardware
and software networking environments and offers support services to customers on
many different computing platforms. The Company's support organization, which is
available at the customer's site, as well as by telephone, facsimile, pager and
electronic mail, assists customers in resolving ATM adoption issues and in
understanding the interaction of the Company's ATM solutions with other
networking products and with a variety of computing platforms. The Company's
support services are available on an ongoing basis to customers who enter into
service agreements, typically for renewable one-year periods. Support engineers
are based at the Company's headquarters facility in suburban Pittsburgh and at
certain of its field offices. In order to provide rapid response to customers'
needs, the Company has enhanced the scope of its technical support services
offerings by entering into agreements with several third party technical support
services and spare parts warehousing management providers. These third party
vendors provide support engineers who are based near customer locations or
manage remote spare parts inventory locations.
MARKETING, SALES AND DISTRIBUTION
The Company believes that the purchasing decisions of customers in
networking markets are based largely upon technological features,
interoperability with other vendors' equipment, vendor reputation and price.
Customers' purchasing decisions are also influenced by different factors
depending upon the functions the network products are expected to perform. For
example, while customers for ATM-based backbone products generally focus upon
technological features and interoperability, customers for ATM WAN products are
influenced by certification by wide area service vendors and purchasers who buy
ATM desktop connectivity products are motivated by the ability of the products
to support specific, high-performance applications.
To reach customers in each of these markets, the Company devotes
significant effort to publicizing the benefits of ATM networking technology. The
Company attends relevant industry trade shows, advertises in trade publications,
mails product information to targeted potential customers, conducts
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telemarketing campaigns and deploys its sales force to market its products
directly to end-users of the Company's products. The Company also participates
in industry associations and standards-setting bodies such as the ATM Forum and
the Gigabit Ethernet Alliance. In addition, the Company conducts training and
educational seminars for customers and distributors.
As of March 31, 1998, the Company maintained a sales force
of approximately 500 sales specialists in its headquarters in suburban
Pittsburgh and in its domestic and foreign offices. These specialists call
directly on current and potential customers to evaluate their networking needs
and to recommend the Company's products. The Company also plans to continue to
expand its North American Channel Partners Program. Initiated in fiscal 1996,
this program includes various types of resellers, including network integrators,
system integrators, telecommunication's service providers, LAN value added
resellers and distributors, each of which expands the Company's access to
specialized markets. Internationally, the Company sells its product primarily
through third-party channel distributors. As of March 31, 1998, the Company had
123 independent distributors in the United States and 85 countries around
the world.
For the years ended March 31, 1998, 1997 and 1996, the Company's sales
outside the United States accounted for approximately 31%, 37% and 39% of
consolidated revenue, respectively. See Note 13 of the Notes to Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K for a
geographic breakdown of the Company's product revenue from sales to customers
outside the United States for the years ended March 31, 1998, 1997 and 1996.
COMPETITION
The networking industry is intensely competitive. Many networking
companies, including 3Com Corporation, Bay Networks, Inc. (which recently
announced a merger with Northern Telecom), Cabletron Systems, Inc., Cisco
Systems, Inc., Ascend Communications, Inc. and Newbridge Networks Corporation,
and certain computer companies, including Digital Equipment Corporation (now
part of Compaq Computer), NEC Corporation and International Business Machines
Corporation, sell, or have announced their intention to develop, networking
products that are, or will be, competitive with the Company's products. In
addition, other companies, such as central-office equipment vendors,
long-distance carriers and cable television operators, are applying their
communications expertise to the markets served by the Company or have announced
plans to do so, or, as in the case of Northern Telecom, are acquiring data
networking companies. Many of these current and prospective competitors have
greater name recognition, a larger installed base of networking products, more
extensive engineering, manufacturing, marketing and distribution capabilities
and greater financial, technological and personnel resources than does the
Company.
The Company expects price competition to persist in the networking
industry. The Company has lowered prices on a regular basis and added new
products and features without increasing prices. There can be no assurance that
the Company will be able to compete in such a price environment. If such pricing
pressures are not mitigated by cost reduction or changes in product mix, the
Company's business, results of operations and financial condition could be
materially adversely affected.
BACKLOG
The Company manufactures its products based upon its forecast of
customers' demand and maintains inventories of finished products in advance of
receiving firm orders from customers. Orders are generally placed by customers
on an as-needed basis and products are shipped within one to four weeks
following receipt of an order. The Company includes in its backlog only orders
confirmed with a purchase order for products and services to be shipped or
performed within six months to customers with approved credit status. The
Company's backlog on May 31, 1998 was approximately $54 million compared with an
approximate backlog of $36 million at May 31, 1997. The backlog as of any
particular date may not be indicative of sales in any succeeding period.
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MANUFACTURING
The Company's manufacturing operations consist primarily of final
assembly, testing and quality control of subassemblies and finished units.
Materials used by the Company in its manufacturing processes include
semiconductors such as microprocessors, memory chips and other integrated
circuits, printed circuit boards, power supplies and enclosures.
The Company opened its first international manufacturing facility in
Dublin, Ireland and began manufacturing and shipping products to international
customers in May 1997. The Company believes that this facility will enable it to
improve international customer support services, reduce costs to customers,
strengthen the Company's manufacturing operations and reduce the Company's
income tax expenses. The costs associated with starting this facility were
recorded during the year ended March 31, 1997.
All of the materials used in the Company's products are purchased under
contracts and purchase orders with third parties. While the Company believes
that many of the materials used in the production of its products are generally
readily available from a variety of sources, certain components are available
from one or a limited number of suppliers. Among these sole- or limited-source
components are microprocessors (obtained from Intel Corporation), memory chips
(obtained from Integrated Device Technologies, Inc., Micron Semiconductor,
Samsung Semiconductor, Inc., Advanced Micro Devices and Cypress Semiconductor
Corporation), ATM framing, segmentation and reassembly chips (obtained from
PMC-Sierra, Inc., LSI Logic Corporation and Integrated Device Technologies,
Inc., respectively), pre-formed enclosures (obtained from Electronic
Manufacturing Systems and Electro Space Fabricators), optical data links
(obtained from Hewlett-Packard Components) and Application Specific Integrated
Circuits ("ASICs") (obtained from Toshiba America Electronic Components, Inc.,
LSI Logic Corporation and Lucent Technologies).
The lead times for delivery of certain of these components, including
ASICs, can be at least twelve weeks. If the Company fails to forecast its
requirements accurately for such long lead-time components, then it may
experience shortages which could result in product shipment delays which would
adversely affect the Company.
RESEARCH AND PRODUCT DEVELOPMENT
In the years ended March 31, 1998, 1997 and 1996, the Company incurred
costs of approximately $66,779,000, $55,217,000 and $31,212,000 (14.6%, 14.0%
and 13.3% of revenue), respectively, for research and development activities. At
March 31, 1998, the Company had an engineering staff of 428, located at its
suburban Pittsburgh headquarters, and in its offices in the Ottawa, Canada, San
Jose, CA, Washington, D.C. and Cambridge, England areas.
INTELLECTUAL PROPERTY
The Company's growth and its ability to compete successfully in the
networking industry depend in part on its ability to protect the proprietary
technology contained in its products. The Company relies on a combination of
patent, trade secret, copyright and trademark laws and contractual restrictions
to establish and protect its proprietary rights. The Company has also entered
into confidentiality and invention assignment agreements with its employees and
enters into non-disclosure agreements with its suppliers, distributors and
certain customers so as to limit access to and disclosure of its proprietary
information. There can be no assurance that these statutory and contractual
arrangements will prove sufficient to deter misappropriation of the Company's
proprietary technologies or independent third-party development of similar
technologies. In addition, the laws of some countries do not provide the same
degree of protection of the Company's proprietary information as do the laws of
the United States, and the Company's adherence to industry-wide technical
standards and specifications may limit the Company's opportunities to provide
proprietary product features capable of protection.
From time to time, the Company receives notification 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 certain third parties
regarding the alleged infringement by the Company of certain patents owned by
such third parties. Although the Company does not believe that the allegations
of such third parties have merit, there can be no assurance that such third
parties or other persons will not institute litigation against the Company in
the future which could result in substantial costs and the diversion of
management's attention and resources. The failure of the Company to prevail in
any such litigation, or otherwise to obtain needed licenses on commercially
reasonable terms, could have a material adverse effect on the Company's
business, financial position and results of operations.
EMPLOYEES
At March 31, 1998, the Company employed 1,592 individuals on a
full-time basis. Of these, 428 were involved in engineering, 803 were employed
in sales, marketing and customer support, 194 were engaged in manufacturing and
the remaining 167 were devoted to executive management, administration, finance
and strategic planning. The Company considers its relations with its employees
to be good and has not experienced any interruption of operations as a result of
labor disagreements.
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CERTAIN RISK FACTORS
The following risk factors, in addition to the risks described
elsewhere in the description of the Company's business in this report,
including, without limitation, those described under the captions "Competition,"
"Intellectual Property" and "Manufacturing" may cause actual results to differ
materially from those in any forward-looking statements contained in such
business description or elsewhere in this report or made in the future by the
Company or its representatives:
SUBSTANTIAL DEPENDENCE ON ATM
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 to gain broad
commercial acceptance or if other networking technologies gain competitive
advantages over ATM. Sales of ATM networking products have represented, and are
expected to continue to represent for the foreseeable future, a substantial
portion of the Company's revenue. Accordingly, the Company's business
opportunities and results of operations will be dependent on continued growth
and market acceptance of ATM technology and the ability of the Company to offer
products that provide a smooth and seamless migration path from existing
networking technologies to ATM. In the event that other networking technologies
gain competitive advantages over ATM, or networking products based on ATM fail
to achieve broad commercial acceptance, the Company's business, financial
position and results of operation would be materially adversely affected.
ABILITY TO DEVELOP AND MARKET NEW PRODUCTS
The networking industry is intensely competitive, and the Company's
growth and results of operations depend upon its ability to develop and market
new products and enhancements to existing products on a timely basis. There can
be no assurance that the Company can continue to successfully develop and market
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, there can be no assurance that the Company,
even if it develops new products and enhancements, will be successful in
marketing such new products and 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, has been
delayed, and there can be no assurance that such products will be introduced or,
if they are introduced, that they will be successful in the marketplace.
DECLINE IN GROWTH RATE
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. Revenue in fiscal 1998 increased 16% over fiscal 1997. This compares with
a revenue increase of 68% in fiscal 1997 over fiscal 1996, and a revenue
increase of 121% in fiscal 1996 over fiscal 1995. 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.
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INDUSTRY CONSOLIDATION
The networking industry is currently undergoing a period of
consolidation in which companies, including some of the Company's major
competitors, are participating in business combinations and acquisitions,
thereby creating companies with larger market shares, customer bases, sales
forces, product offerings and technology and marketing expertise. There can be
no assurance that the Company will be able to compete successfully in such an
environment.
ACQUISITIONS
The Company has in the past and may in the future make acquisitions of
companies and technologies. Acquisitions are subject to numerous risks, and can
increase research and development and other expenses without necessarily leading
to the introduction of new products or enhancements. Risks inherent in
acquisitions include the difficulty of assessing the values, strengths,
weaknesses and potential profitability of acquisition candidates, and the
potential of adverse effects on the Company's operating results, as well as the
diversion of management's attention, the loss of key personnel and the risks of
unanticipated problems and liabilities. There can be no assurance that the
Company can successfully identify acquisition opportunities or that any
acquisitions that are completed will be successfully integrated with the
Company's operations. Moreover, the trend towards consolidation in the
networking industry may raise the prices of prospective acquisition candidates,
thereby making it more difficult for the Company to complete acquisitions or
making it more difficult for any acquisitions that are completed to prove
profitable or successful.
EVOLVING INDUSTRY STANDARDS AND RAPID TECHNOLOGICAL DEVELOPMENT
The markets for the Company's products are characterized by evolving
industry standards and rapid technological development. The Company's success
will depend, in part, upon its ability to influence the development of industry
standards, to maintain its technological leadership, to enhance and expand its
existing product offerings and to develop in a timely manner new products which
achieve market acceptance. The Company believes that its ability to compete
successfully is also dependent upon the continued compatibility and
interoperability of its products with products and architectures offered by
various vendors and on the timely development of industry standards. There can
be no assurance that the Company will be able effectively to address the
compatibility and interoperability issues raised by technological changes or
that new industry standards will be developed in a timely manner. The Company's
business, financial position and results of operations would be materially
adversely affected if it were to incur significant delays or be unsuccessful in
developing new products or enhancements, if any such products or enhancements
did not gain market acceptance or if a delay in the creation of industry
standards resulted in customers deciding not to deploy ATM in their networks or
to delay such deployment. In addition, there can be no assurance that products
or technologies developed by others will not render the Company's products
noncompetitive or obsolete.
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DEPENDENCE ON KEY PERSONNEL
The Company believes that its future success will depend not merely on
retaining its key personnel, but also upon its ability to attract and retain
additional highly-skilled technical, managerial, manufacturing, sales and
marketing personnel. Competition for such personnel is intense. There can be no
assurance that the Company will be able to anticipate accurately, or to obtain,
the personnel that it may require in the future. The failure to obtain needed
personnel, when and as needed, could have a material adverse effect on the
Company's business, financial position and results of operations.
INTERNATIONAL SALES, REGULATORY STANDARDS AND CURRENCY EXCHANGE
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.
DEPENDENCE ON CUSTOMERS
Revenue from United States government agencies represented
approximately 7%, 9% and 7% of the Company's revenue on a consolidated basis for
the years ended March 31, 1998, 1997 and 1996, respectively. These United States
government customers include more than twenty different agencies, each of which
makes its own procurement decisions. These government customers may from time to
time reduce their budgets and expenditures or cancel orders. In addition,
current Congressional initiatives to balance the federal budget could curtail
spending of government agencies in a manner which may lead such customers to
reduce their expenditures for the Company's products. Reductions in sales to
current customers, if not offset by sales to new or existing customers, would
have a material adverse effect on the Company's business, financial position and
results of operations.
DECLINE OF MARGINS
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 such operating expenses are relatively fixed in the
short term. If revenue is below expectations in any particular period, operating
results are likely to be lower than expected in that period. Any such failure to
meet expectations would be likely to result in a decrease in the market price of
the Company's Common Stock.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
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
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quarter, the announcement or introduction of new products and technologies by
the Company or its competitors, the pattern and seasonality of customer
purchasing cycles, variations in the mix of products sold and sales channels,
price competition, manufacturing lead times, developments with respect to
patents or proprietary rights and changes in industry or general economic
conditions. Due to these and other factors, revenue in any one quarter may not
be indicative of revenue in any future period and, accordingly, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indicators of future
performance.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Company's Common stock has been, and may
continue to be, volatile. Such volatility results from many factors, including
fluctuations in the Company's operating results, both sequentially and in
year-over-year comparisons, changes in financial estimates by, or expectations
or recommendations of, securities analysts, sales of substantial amounts of the
Company's Common stock in the public market or the prospect of such sales and
market conditions. Volatility in the price of the Company's Common stock could
have a material adverse effect on the Company's business, financial position and
results of operations by making it more difficult to attract and retain
qualified personnel and to complete business acquisitions. In addition, it is
not uncommon for class action securities litigation to be instituted against a
company following a significant drop in the market price of such company's
securities, and such litigation, even if it is without merit, may result in
substantial costs and a diversion of management's attention and resources.
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YEAR 2000
The Company believes that most of its internal information systems are
Year 2000 compliant, in that they will be able to distinguish accurately between
20th century and 21st century dates, and that the costs of converting or
replacing those that are not Year 2000 compliant will not have a material
adverse effect on the Company's business, financial position or results of
operations. However, the information systems of the Company's suppliers and
customers may not 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.
ANTITAKEOVER EFFECT OF CERTAIN CHARTER, BY-LAW AND OTHER PROVISIONS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation, as amended, and Second Amended and Restated By-laws and Delaware
law could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common stock.
Certain of such provisions allow the Company to issue preferred stock with
rights senior to those of the Common stock and impose various procedural and
other requirements which could make it more difficult for stockholders to effect
certain corporate actions.
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<PAGE> 13
ITEM 2. PROPERTIES.
The Company's principal offices are located in newly-built headquarters
and operating facilities in Warrendale, Pennsylvania (a suburb of Pittsburgh).
These facilities total approximately 300,000 square feet. The Company is leasing
the facilities under a ten-year operating lease and has options to renew the
lease for two additional five-year terms. See Note 14 of the Notes to
Consolidated Financial Statements included elsewhere in this report for a
description of these agreements. The Company also leases a nearby facility
totaling an additional 60,000 square feet. Approximately 67% of the space in all
of the foregoing facilities is used or reserved for manufacturing, engineering,
product development and testing. The balance of the space is used or reserved
for sales, marketing and other general administrative activities. The Company
also leases facilities in various parts of the United States and in foreign
countries. Included among those facilities are regional offices located in San
Jose, CA, Tewksbury, MA, Vienna, VA, New York, NY, Watford, England, Hong Kong,
China and Tokyo, Japan. During fiscal 1998, the Company leased a newly-
constructed 56,000 square foot manufacturing facility in Dublin, Ireland. The
Company purchased this facility following the close of the fiscal year. The
Company believes that its present facilities are well maintained and in good
operating condition.
ITEM 3. 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 Common Stock
during the period from October 17, 1996 through April 1, 1997, inclusive.
Pursuant to court order, the lawsuits were consolidated and a consolidated
amended complaint was filed by the lead plaintiffs on December 31, 1997. The
Company believes the allegations in the consolidated amended complaint are
completely without merit and intends to defend these actions vigorously. The
Company and the other defendants filed a motion to dismiss the consolidated
amended complaint, on the basis that the plaintiffs have failed to state a claim
upon which relief may be granted, on February 17, 1998. The Magistrate Judge
assigned to the case has issued a report and recommendation wherein he
recommends that defendants' motion be denied. Defendants have filed objections
with the Judge assigned to the case. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Eric C. Cooper, Ph.D. 39 Chairman and a Director
Thomas J. Gill 40 President and Chief Executive Officer and a
Director
Bruce E. Haney 42 Senior Vice President and Chief Financial
Officer
Michael I. Green 50 Senior Vice President and General
Manager, Worldwide Sales
Robert D. Sansom, Ph.D. 38 Senior Vice President and Chief Technology
Officer
</TABLE>
Dr. Cooper is a co-founder of the Company and has served as Chairman
and as a director since April 1990. Dr. Cooper served as President from April
1990 until December 1994 and as Chief Executive Officer from April 1990 until
January 1998. Prior to co-founding the Company, Dr. Cooper was a faculty member
at Carnegie Mellon University. Dr. Cooper received his Ph.D. in Computer Science
from the University of California at Berkeley in 1985.
Mr. Gill has served as a director and President and Chief Executive
Officer of the Company since January 1998. He served as Chief Operating Officer
from January 1997 to January 1998 and Vice President of Finance, Chief Financial
Officer and Treasurer of the Company from December 1993 to January 1998. From
February 1993 to December 1993, he served as Treasurer and Controller of the
Company. Prior to joining the Company Mr. Gill was employed in various financial
capacities by Cimflex Teknowledge Corporation (a supplier of factory automation
systems and software), most recently as Vice President of Finance and Treasurer.
Mr. Haney has served as Senior Vice President and Chief Financial
Officer since May 1998. Prior to joining the Company, Mr. Haney was employed for
more than 12 years by The Gustine Group, a privately-held real estate
development company based in Pittsburgh, Pennsylvania, most recently as its
President. Prior to that, Mr. Haney was employed as a certified public
accountant with Arthur Andersen LLP.
Mr. Green has served as Senior Vice President and General Manager,
Worldwide Sales since March 1998, as Vice President of Worldwide Sales from
January 1997 to March 1998, as Vice President of Sales and Marketing from May
1995 to January 1997, as Vice President of Sales from April 1993 to May 1995 and
was the Company's Director of Sales from April 1992 to April 1993. From February
1989 to April 1992, Mr. Green was a Sales Manager at Ultra Network Technologies
(a provider of networking equipment). Prior to February 1989, Mr. Green was
Federal Regional Manager and Southeast Regional Manager of Network Systems Corp.
(a provider of networking equipment).
Dr. Sansom is a co-founder of the Company and has served as a director
from April 1990 to December 1992 and since February 1994 and as Senior Vice
President and Chief Technology Officer since March 1998. Dr. Sansom served as
Executive Vice President from the Company's inception in April 1990 to December
1993, served as Secretary from November 1992 to July 1997, served as Vice
President, Engineering from December 1993 to April 1997 and served as Vice
President, Architecture from April 1997 to March 1998. Prior to co-founding the
Company, Dr. Sansom was a member of the Computer Science research faculty at
Carnegie Mellon University where he received his Ph.D. in Computer Science in
1988.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common stock of the Company is traded on The Nasdaq National Market
under the symbol "FORE." The following table sets forth the range of high and
low sale prices of the Common stock as reported on The Nasdaq National Market
for the fiscal periods indicated. The information set forth in the table has
been adjusted retroactively to reflect a two-for-one stock split which occurred
on June 3, 1996.
Fiscal 1997: High Low
First Quarter (ended June 30, 1996) $44.750 $27.250
Second Quarter (ended September 30, 1996) $43.625 $23.500
Third Quarter (ended December 31, 1996) $43.500 $30.375
Fourth Quarter (ended March 31, 1997) $36.000 $14.375
Fiscal 1998: High Low
First Quarter (ended June 30, 1997) $17.875 $10.000
Second Quarter (ended September 30, 1997) $21.500 $13.250
Third Quarter (ended December 31, 1997) $21.813 $13.250
Fourth Quarter (ended March 31, 1998) $17.938 $13.625
The approximate number of record holders of the Company's Common stock
as of May 27, 1998 was 1,807.
The Company has not paid cash dividends on its Common stock since its
inception. The Company currently intends to retain earnings for development of
its business and, therefore, does not anticipate paying cash dividends in the
foreseeable future. The declaration and payment by the Company of any future
dividends and the amount thereof will depend upon the Company's results of
operations, financial condition, cash requirements, future prospects,
limitations imposed by credit agreements or senior securities and other factors
deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT FOR PER-SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue $458,369 $395,347 $235,189 $106,188 $39,340
Gross profit $255,196 $226,229 $136,523 $ 60,991 $24,188
Merger-related expenses $ - $ 1,747 $ 29,375 $ - $ -
Income from operations $ 36,572 $ 61,637 $ 10,689 $ 16,068 $ 4,717
Litigation settlement charges $ - $ (8,257) $ - $ - $ -
Net income $ 35,155 $ 41,470 $ 9,737 $ 12,860 $ 3,678
Net income per common share-basic $ 0.35 $ 0.45 $ 0.12 $ 0.20 $ 0.07*
Net income per common share-diluted $ 0.35 $ 0.41 $ 0.11 $ 0.18 $ 0.06*
Total assets $621,207 $538,577 $424,362 $131,482 $59,026
Redeemable preferred stock $ - $ - $ - $ - $ 5,500
</TABLE>
* Based on pro forma weighted average common and common equivalent shares
outstanding.
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1998 COMPARED WITH YEAR ENDED MARCH 31, 1997
REVENUE. Revenue increased by 16% to $458.4 million for the year ended
March 31, 1998, as compared with $395.3 million in the previous year. The
distribution of revenue from sales to domestic and foreign customers in the year
ended March 31, 1998 was 69% and 31%, respectively. This compares with 63% and
37%, respectively, in the previous year. In the year ended March 31, 1998, the
distribution of revenue from sales to foreign customers by geographic region was
19%, 8% and 4% for Europe (which includes the Middle East and Africa), Pacific
Rim and other, respectively. Geographic mix for the corresponding period in 1997
was 17%, 16% and 4%, respectively. The increase in revenue dollars was
attributable to the increased market acceptance of ATM and LAN switching
products in certain geographic areas. The decrease in foreign revenue in dollars
and as a percentage of revenue, for the year ended March 31, 1998, was largely
attributable to a decrease in sales in Japan which was due to decreased sales to
the Japanese government, increased competition in Japan and slower commercial
acceptance of ATM technology in Japan.
The Company measures overall unit volume for its switching products
based on the number of ports, or network connections, shipped. The total number
of ATM ports shipped in the year ended March 31, 1998 was 150,600, as compared
with 95,500 in the previous year. The total installed base of ATM ports as of
March 31, 1998 was 310,000, as compared with 160,000 as of March 31, 1997. The
total number of LAN switching ports shipped in the year ended March 31, 1998 was
451,000 as compared with 291,000 in the year ended March 31, 1997. The total
number of adapter cards shipped in the year ended March 31, 1998 was 49,000, as
compared with 34,000 in the previous year. The total installed base of adapter
cards as of March 31, 1998 was 111,000, as compared with 62,000 as of March 31,
1997. In the year ended March 31, 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 59%, 27%, 4%
and 10%, respectively. Revenue mix for the previous year was 51%, 35%, 5% and
9%, respectively. Average selling price per ATM port during the year ended March
31, 1998 was $1,800, as compared with $2,100 in the previous year. Average
selling price for adapter cards shipped during the year ended March 31, 1998 was
$400, as compared with $650 in the previous year. Average selling price per LAN
switching port was $275 in the year ended March 31, 1998, as compared with $467
in the previous year. In May of 1996, the Company reduced the price of certain
of its ATM switches by up to 40%. At the same time, prices of the Company's
adapter cards were reduced by 50%. The Company reduced the price of certain of
its LAN switching products by up to 15% in September 1996. In January of 1998,
the Company reduced the price of certain of its ATM workgroup products by up to
40%.
GROSS PROFIT. Gross profit increased to $255.2 million or 55.7% of
revenue in the year ended March 31, 1998, as compared with gross profit of
$226.2 million or 57.2% of revenue in the previous year. The dollar increase in
gross profit was the result of increased revenue from ATM switching products and
LAN switching products. The gross margin percentage decline primarily resulted
from continued pricing pressure and increased contributions to product mix from
lower-margin workgroup and
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<PAGE> 17
desktop products for both ATM and LAN switching. The Company intends to price
its products competitively.
RESEARCH AND DEVELOPMENT. Research and development expense for the year
ended March 31, 1998 was $66.8 million or 14.6% of revenue, as compared with
$55.2 million or 14.0% of revenue in the previous year. The increase in research
and development expense in dollars and as a percentage of revenue was largely
attributable to increased purchases of research and development materials,
additional engineering costs associated with the development of products and
technologies of companies acquired in 1996, in particular, access concentrator
products the release of which has been delayed and increases in depreciation.
The number of employees of the Company engaged in research and development
decreased to 428 at March 31, 1998 from 458 at March 31, 1997.
SALES AND MARKETING. Sales and marketing expense for the year ended
March 31, 1998 was $128.5 million or 28.0% of revenue, as compared with $90.0
million or 22.8% of revenue in the previous year. The increase in sales and
marketing expense in dollars and as a percentage was largely the result of
hiring additional sales, marketing and support personnel (including training and
documentation), increased advertising costs and increased salary costs. The
number of employees of the Company engaged in sales and marketing activities
increased to 803 at March 31, 1998 from 585 at March 31, 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 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 for the
year ended March 31, 1998 was $23.4 million or 5.1% of revenue, as compared with
$17.6 million or 4.4% of revenue in the previous year. The increase in general
and administrative expense in dollars and as a percentage was largely due to
increased salary costs, increased hiring of administrative staff, including
those engaged in systems administration, accounting and human resources, and
increased costs for professional services and depreciation. The number of
employees of the Company engaged in general and administrative activities
increased to 167 at March 31, 1998 from 156 at March 31, 1997. The Company plans
to make appropriate expenditures in the general and administrative organization
as necessary, but does not expect expenditures to increase materially as a
percentage of revenue.
MERGER RELATED. The Company had $1.7 million of merger-related expenses
for the year ended March 31, 1997. These expenditures were incurred in
connection with the acquisitions of Nemesys Research Limited ("Nemesys"),
Scalable Networks, Inc. ("Scalable"), and Cadia Networks, Inc. ("Cadia"), and
included fees to financial advisors, legal and accounting fees and other related
expenses.
INTEREST INCOME. Interest income, net of interest expense, for the year
ended March 31, 1998 was $13.4 million, as compared with $12.4 million in the
year ended March 31, 1997. The increase in interest income primarily resulted
from higher average cash balances during the year ended March 31, 1998.
INCOME TAXES. The provision for income taxes recorded in the year ended
March 31, 1998 was $15.1 million, or an effective tax rate of 30%, as compared
with $24.0 million, or an effective tax rate of 36.7%, in the previous year. The
decrease in
17
<PAGE> 18
the effective tax rate is primarily the result of certain tax advantages
associated with the May 1997 opening and operation of the Company's
manufacturing facility in Dublin, Ireland.
NET INCOME. Net income for the year ended March 31, 1998 was $35.2
million, or $.35 per diluted share, as compared with $41.5 million, or $.41 per
diluted share, for the year ended March 31, 1997. Net income for the year ended
March 31, 1997 included $1.7 million in merger-related expenses and $8.3 million
in litigation settlement charges. Excluding these merger-related expenses and
litigation settlement charges, and their tax effect, the Company would have
realized net income of $48.3 million or $.48 per diluted share for the year
ended March 31, 1997.
YEAR ENDED MARCH 31, 1997 COMPARED WITH YEAR ENDED MARCH 31, 1996
REVENUE. Revenue increased by 68% to $395.3 million for the year ended
March 31, 1997, as compared with $235.2 million in the previous year. The
distribution of revenue from sales to domestic and foreign customers in the year
ended March 31, 1997 was 63% and 37%, respectively. This compares to 61% and
39%, respectively, in the previous year. In the year ended March 31, 1997, the
distribution of revenue from sales to foreign customers by geographic region was
17%, 16% and 4% for Europe (which includes the Middle East and Africa), Pacific
Rim and other, respectively. Geographic mix for the corresponding period in 1996
was 20%, 13% and 6%, respectively. The increase in domestic revenue dollars was
attributable to the increased market acceptance of ATM and LAN switching
products. The increase in foreign revenue in dollars resulted from the Company's
expansion of its international distribution channels and to growing acceptance
of ATM and LAN switching products.
The Company measures overall unit volume for its switching products
based on the number of ports, or network connections, shipped. The total number
of ATM ports shipped in the year ended March 31, 1997 was 95,500, as compared
with 44,500 in the previous year. The total installed base of ATM ports as of
March 31, 1997 was 160,000, as compared with 65,000 as of March 31, 1996. The
total number of LAN switching ports shipped in the year ended March 31, 1997 was
291,000; no comparison can be provided with fiscal 1996 because ALANTEC
Corporation ("ALANTEC"), which was acquired by the Company in February 1996, did
not compile LAN switch product data by port in fiscal 1996. The total number of
adapter cards shipped in the year ended March 31, 1997 was 34,000, as compared
with 18,600 in the previous year. The total installed base of adapter cards as
of March 31, 1997 was 62,000, as compared with 28,000 as of March 31, 1996. In
the year ended March 31, 1997, revenue mix, as a percentage of total revenue,
among ATM switching products, LAN switching products, adapter cards and other
revenue (principally service support and development contracts) was 51%, 35%, 5%
and 9%, respectively. Revenue mix for the previous year was 53%, 32%, 7% and 8%,
respectively. Average selling price per ATM port during the year ended March 31,
1997 was $2,100, as compared with $2,800 in the previous year. Average selling
price for adapter cards shipped during the year ended March 31, 1997 was $650,
as compared with $930 in the previous year. Average selling price per LAN
switching port was $467 in the year ended March 31, 1997; no comparison can be
provided with fiscal 1996 because ALANTEC did not compile LAN switch product
data by port in fiscal 1996. In May of 1996, the Company reduced the price of
certain of its ATM switches by up to 40%. At the same time, prices of the
Company's adapter cards
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<PAGE> 19
were reduced by 50%. The Company reduced the price of certain of its LAN
switching products by up to 15% in September 1996.
GROSS PROFIT. Gross profit increased to $226.2 million or 57.2% of
revenue in the year ended March 31, 1997, as compared with gross profit of
$136.5 million or 58.0% of revenue in the previous year. The dollar increase in
gross profit was the result of increased revenue from ATM switching products,
LAN switching products and adapter cards. The gross margin percentage decline
primarily resulted from continued pricing pressure and the product price mix of
low-end LAN switching products.
RESEARCH AND DEVELOPMENT. Research and development expense for the year
ended March 31, 1997 was $55.2 million or 14.0% of revenue, as compared with
$31.2 million or 13.3% of revenue in the previous year. The increase in research
and development expense in dollars and as a percentage of revenue was largely
attributable to additional engineering costs associated with the acquisitions of
Nemesys, Scalable and Cadia, increased hiring of engineering employees,
including recruiting expenses, along with increased purchases of research and
development materials. The number of employees of the Company engaged in
research and development increased to 458 at March 31, 1997 from 335 at March
31, 1996.
SALES AND MARKETING. Sales and marketing expense for the year ended
March 31, 1997 was $90.0 million or 22.8% of revenue, as compared with $54.1
million or 23.0% of revenue in the previous year. The dollar increase in sales
and marketing expense was largely the result of hiring additional sales,
marketing and support personnel (including training and documentation) and
increased marketing promotion costs. The number of employees of the Company
engaged in sales and marketing activities increased to 585 at March 31, 1997
from 412 at March 31, 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expense for the
year ended March 31, 1997 was $17.6 million or 4.4% of revenue, as compared with
$11.1 million or 4.7% of revenue in the previous year. The dollar increase was
largely due to increased hiring of administrative personnel, including those
engaged in systems administration, accounting and human resources. The reduction
in general and administrative expense as a percentage of revenue was the result
of increased revenue volume absorbing a greater portion of fixed overhead
associated with general and administrative activities. The number of employees
of the Company engaged in general and administrative activities increased to 156
at March 31, 1997 from 119 at March 31, 1996.
MERGER RELATED. The Company had $1.7 million of merger-related expenses
for the year ended March 31, 1997. These expenditures were incurred in
connection with the acquisitions of Nemesys, Scalable and Cadia, and included
fees to financial advisors, legal and accounting fees and other related
expenses. Total merger-related expenses were $29.4 million for the year ended
March 31, 1996 as a result of the acquisitions of ALANTEC, CellAccess
Technology, Inc. ("CAT"), Applied Network Technology, Inc. ("ANT") and
RainbowBridge Communications, Inc. ("RCI"). These expenses include transaction
costs (primarily fees to financial advisors and legal and accounting fees),
costs associated with duplicate facilities and assets, payments under transition
and severance agreements and other costs.
INTEREST INCOME. Interest income, net of interest expense, for the year
ended March 31, 1997 was $12.4 million, as compared with $9.9 million in the
year ended March 31, 1996. The increase in interest income primarily resulted
from interest
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<PAGE> 20
earned for a full fiscal year on the net proceeds of $129 million received from
a Common stock offering in October 1995.
INCOME TAXES. The provision for income taxes recorded in the year ended
March 31, 1997 was $24.0 million, or an effective tax rate of 36.7%, as compared
with $10.8 million, or an effective tax rate of 52.6%, in the previous year. The
decrease in the effective tax rate resulted primarily from a lesser amount of
non-deductible merger-related expenses in 1997 as compared with 1996. Excluding
merger-related expenses, the effective tax rate for the years ended March 31,
1997 and 1996 would have been 36.0%.
NET INCOME. Net income for the year ended March 31, 1997 was $41.5
million, or $.41 per diluted share, as compared with $9.7 million, or $.11 per
diluted share, for the year ended March 31, 1996. Net income for the year ended
March 31, 1997 included $1.7 million in merger-related expenses and $8.3 million
in litigation settlement charges. Net income for the year ended March 31, 1996
included $29.4 million in merger-related expenses. Excluding these
merger-related expenses and litigation settlement charges, and their tax effect,
the Company would have realized net income of $48.3 million or $.48 per diluted
share for the year ended March 31, 1997 as compared to $32.0 million or $.36 per
diluted share in 1996.
YEAR 2000
The Company believes that most of its internal information systems are
Year 2000 compliant, in that they will be able to distinguish accurately between
20th century and 21st century dates, and that the costs of converting or
replacing those that are not Year 2000 compliant will not have a material
adverse effect on the Company's financial position or results of operations.
However, the information systems of the Company's suppliers and customers may
not 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed most of its working capital and capital
expenditure requirements to date primarily through cash proceeds from public
offerings and cash generated from operations.
The cash provided by operations was $53.2 million in 1998. Net cash
provided by operations was the result of net income in the current year,
increases in income taxes payable (net of prepaid income taxes) and accrued
liabilities offset by increases in accounts receivable, inventories, prepaid
expenses and other current assets. The increase in accounts receivable was due
to increased revenue. The increase in inventories was the result of increased
revenue and the introduction of new products. The cash provided by operations
was $7.4 million in 1997. Net cash provided by operations in 1997 was the result
of increases to net income, offset by increases to accounts receivable and
inventories and decreases to income taxes
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<PAGE> 21
payable and accrued liabilities. The increase in accounts receivable was due to
increased revenue. The increase in inventories was the result of increased
revenue and the introduction of new products. The decrease in accrued merger
costs was due to disbursements in fiscal 1997 related to the ALANTEC acquisition
completed in fiscal 1996. The Company's investing activities to date have been
for the purchase of fixed assets to support the Company's growth.
In April and October of 1995, public stock offerings were completed,
with aggregate net proceeds to the Company of approximately $208 million. At
March 31, 1998, the Company had cash and cash equivalents of approximately
$127.2 million, short-term investments of $187.0 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 1998. The Company has
guaranteed repayment of up to approximately $32 million of the lenders'
financing of the facilities, which includes, as of March 31, 1998, pledged
amounts of approximately $29 million of marketable securities as collateral for
specified obligations of the lessor. The Company is also required to comply with
certain financial covenants including the maintenance of a minimum tangible net
worth and limitations on the incurrence of debt and the payment of dividends.
The Company believes its existing sources of liquidity and internally
generated cash will satisfy the Company's projected cash needs through at least
the next twelve months. The Company may require additional sources of liquidity
to fund future growth, including additional equity offerings or debt financing.
In July and August 1997, the Company was notified that it was a party
to seven nearly identical class action lawsuits alleging certain violations of
federal securities laws by the Company and certain of its officers, who were
named as defendants in the suits, arising from alleged misstatements or
omissions by the Company. Plaintiffs seek compensatory damages for injuries
allegedly incurred by purchasers of the Company's stock during the period from
October 17, 1996 through April 1, 1997, inclusive. Pursuant to court order, the
lawsuits were consolidated and a consolidated amended complaint was filed by the
lead plaintiffs on December 31, 1997. The Company believes the allegations in
the consolidated amended complaint are completely without merit and intends to
defend these actions vigorously. The Company filed a motion to dismiss the
consolidated amended complaint, on the basis that the plaintiffs have failed to
state a claim upon which relief may be granted, on February 17, 1998. The motion
is fully briefed and the Company has requested that the court conduct oral
argument on the motion. 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.
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<PAGE> 22
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). The Company will implement
SFAS No. 130 and SFAS No. 131, which require the Company to report and display
certain information related to comprehensive income and operating segments, as
required in fiscal 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISK
The Company is exposed to financial market risks, including changes in
interest rates, foreign currency exchange rates and the market value of its
investments. To mitigate these risks, the Company employs a risk management
program that includes the use of derivative financial instruments. The Company
does not use derivative financial instruments for speculative or trading
purposes.
MARKETABLE SECURITIES
The Company maintains an investment portfolio in accordance with its
Investment Policy. The primary objectives of the Company's Investment Policy are
to preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's Investment Policy specifies credit quality
standards for the Company's investments and limits the amount of credit exposure
to any single issue, issuer or type of investment.
The Company's investments consist of securities of various types and
maturities of two years or less, with an average maturity of one year or less.
These securities are typically classified as available for sale and are recorded
on the balance sheet at fair market value with unrealized gains or losses
reported as a separate component of stockholders' equity. Unrealized losses are
charged against income when a decline in fair market value is determined to be
other than temporary. The specific identification method is used to determine
the cost of securities sold. Gains and losses on marketable securities are
included in net interest income when realized.
The securities held in the Company's investment portfolio are subject
to interest rate risk. Changes in interest rates affect the fair market value of
the securities. A hypothetical 50 or 100 basis-point increase in interest rates
would result in an approximate $664,000 or $1.3 million decrease, respectively,
(approximately 0.25% or 0.50%, respectively) in the fair market value of these
securities. Holding interest-sensitive securities until maturity, which the
Company typically does, can minimize the affects of unfavorable interest rate
changes.
CURRENCY FORWARD CONTRACTS
The functional currency for the Company's foreign operations is the
U.S. dollar. Monetary assets and liabilities of the Company's foreign operations
are translated into U.S. dollars at exchange rates in effect as of the balance
sheet date, and non-monetary assets and liabilities are translated at historical
exchange rates. Results of operations are translated at the average exchange
rates for the
22
<PAGE> 23
period. Foreign exchange gains and losses, which are immaterial, are included in
the results of operations.
The Company has operating units throughout the world and consequently
is subject to foreign currency exchange rate risk. To minimize this risk, the
Company employs a risk management program that includes a formal Foreign
Exchange Policy. The primary objectives of the Company's Foreign Exchange Policy
are to minimize cash flow exposures to changes in currency exchange rates,
preserve the Company's future earnings, protect the U.S. dollar value of the
Company's foreign net assets, manage clearly-defined economic exposures from
adversely impacting cash flow and adopt a system of internal controls over the
execution of foreign currency transactions.
The Company does not undertake foreign currency transactions unless in
support of underlying business. The Company hedges transaction exposures and
certain anticipated, contingent and economic exposures and does not hedge
translation exposures.
The principal currencies the Company hedges are the Japanese yen,
German mark, Irish punt, Great British pound and French franc, although this is
subject to change. The Company monitors its foreign exchange exposure daily to
ensure overall effectiveness of its foreign currency hedge positions, however,
there can be no assurance that the Company's foreign currency hedging activities
will substantially offset the impact of fluctuations in currency exchange rates
on its results of operations and financial position (see Note 1 to Consolidated
Financial Statements).
Almost all of the Company's revenue is in U.S. dollars and thus its
foreign exchange rate risk is limited to foreign-currency-denominated expenses,
which are minimal. Because this exposure is so small, and because the Company
actively hedges this exposure, the Company believes that sudden and/or
significant changes in foreign currency exchange rates would have no significant
impact to its operating results or financial position.
INTEREST RATE SWAP
At March 31, 1998, the Company had an outstanding interest rate swap
contract. The Company entered into this agreement to reduce the impact of
changes in interest rates on future lease expense for the new Company
headquarters and operation facilities (see Note 14 to Consolidated Financial
Statements). The interest rate fluctuations will result in a receipt or
disbursement of funds by the Company on each April 30th and October 30th until
the termination of the agreement on October 30, 2007. The amount exchanged will
be amortized over the term of the lease. Gains and losses on this interest rate
swap will generally be offset by corresponding losses and gains on the related
lease agreements, resulting in negligible net exposure to the Company.
EQUITY INVESTMENTS
The Company is exposed to equity price risks on the marketable portion
of an equity investment entered into for the promotion of business and strategic
objectives. This investment is in a small capitalization, high-technology
company. The Company generally has not attempted to reduce its market risk on
this investment.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF FORE SYSTEMS,INC.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 46 present fairly, in all material
respects, the financial position of FORE Systems, Inc., and its subsidiaries at
March 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 22, 1998
24
<PAGE> 25
CONSOLIDATED STATEMENT OF INCOME
IN THOUSANDS, EXCEPT PER-SHARE DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue $458,369 $395,347 $235,189
Cost of sales 203,173 169,118 98,666
--------------------------------
Gross profit 255,196 226,229 136,523
--------------------------------
Operating expenses:
Research and development 66,779 55,217 31,212
Sales and marketing 128,473 90,025 54,132
General and administrative 23,372 17,603 11,115
Merger-related - 1,747 29,375
-------------------------------
Total operating expenses 218,624 164,592 125,834
--------------------------------
Income from operations 36,572 61,637 10,689
Interest income, net 13,446 12,427 9,906
Litigation settlement charges - (8,257) -
Other income (expense) 203 (315) (41)
----------------------------
Income before provision for income taxes 50,221 65,492 20,554
Provision for income taxes 15,066 24,022 10,817
-------------------------------
Net income $ 35,155 $ 41,470 $ 9,737
=================================
Net income per common share - basic $ 0.35 $ 0.45 $ 0.12
=================================
Net income per common share - diluted $ 0.35 $ 0.41 $ 0.11
=================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
CONSOLIDATED BALANCE SHEET
IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
MARCH 31
1998 1997
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $127,231 $129,424
Short-term investments 186,999 170,258
Accounts receivable, net of allowance for doubtful accounts
of $7,194 at March 31, 1998 and $4,090 at March 31, 1997 111,347 84,997
Inventories 70,388 50,769
Deferred income taxes 36,620 29,296
Prepaid income taxes - 19,153
Prepaid expenses and other current assets 12,127 6,774
------------------
Total current assets 544,712 490,671
Fixed assets, net 71,495 47,906
Other non-current assets 5,000 -
-----------------
Total assets $621,207 $538,577
====================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 37,240 $ 36,919
Accrued payroll and related costs 18,560 13,909
Income taxes payable 13,789 -
Deferred revenue 28,719 18,471
Other current liabilities 15,881 15,099
-------------------
Total current liabilities 114,189 84,398
-------------------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; 300,000,000 shares
authorized; shares issued 100,302,143 at March 31, 1998
and 97,792,458 at March 31, 1997 423,782 405,768
Retained earnings 88,285 53,130
Treasury stock, at cost: 137,310 shares at March 31, 1998
and 120,000 shares at March 31, 1997 (3,252) (3,248)
Cumulative translation adjustment (101) 53
Valuation allowance for short-term investments (1,696) (1,524)
-------------------
Total stockholders' equity 507,018 454,179
-------------------
Total liabilities and stockholders' equity $621,207 $538,577
====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 27
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCK AND
STOCKHOLDERS' EQUITY
IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
Valuation
Allowance
Common Stock for Retained Cumulative
------------ Short-term Earnings Translation Treasury
Shares Amount Investments (Deficit) Adjustment Stock Total
------ ------ ----------- --------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1995 68,705,496 $ 93,316 $ (264) $ 4,674 $ - $ - $ 97,726
Issuance of Common stock
under stock option and
employee purchase plans 2,905,522 13,045 - - - - 13,045
Acquisitions (see Note 2) 3,341,786 3,028 - (1,027) - - 2,001
Issuance of Common stock
in public offerings 13,029,790 208,491 - - - - 208,491
Income tax benefit from stock
option plan activity - 5,254 - - - - 5,254
Change in valuation allowance
for short-term investments - - (264) - - - (264)
Net income - - - 9,737 - - 9,737
-----------------------------------------------------------------------------------------
Balance, March 31, 1996 87,982,594 323,134 (528) 13,384 - - 335,990
Issuance of Common stock
under stock option and
employee purchase plans 4,554,631 35,454 - - - - 35,454
Acquisitions (see Note 2) 5,255,233 6,829 - (1,724) - - 5,105
Income tax benefit from
acquisitions - 6,335 - - - - 6,335
Income tax benefit from stock
option plan activity - 34,016 - - - - 34,016
Change in valuation allowance
for short-term investments - - (996) - - - (996)
Purchase of treasury stock - - - - - (3,248) (3,248)
Cumulative translation
adjustment - - - - 53 - 53
Net income - - - 41,470 - - 41,470
----------------------------------------------------------------------------------------
Balance, March 31, 1997 97,792,458 405,768 (1,524) 53,130 53 (3,248) 454,179
Issuance of Common stock
under stock option and
employee purchase plans 2,509,685 16,830 - - - - 16,830
Income tax benefit from stock
option plan activity - 1,184 - - - - 1,184
Change in valuation allowance
for short-term investments - - (172) - - - (172)
Purchase of treasury stock - - - - - (4) (4)
Cumulative translation
adjustment - - - - (154) - (154)
Net income - - - 35,155 - - 35,155
----------------------------------------------------------------------------------------
Balance, March 31, 1998 100,302,143 $423,782 $(1,696) $88,285 $(101) $(3,252) $507,018
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 28
CONSOLIDATED STATEMENT OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,155 $ 41,470 $ 9,737
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 25,238 16,402 6,817
Amortization of capitalized software development costs 976 782 1,673
Deferred income tax benefit (7,324) (3,387) (13,011)
Income tax benefit related to stock options 1,184 34,016 5,254
Cumulative translation adjustment (154) 53 -
Change in operating assets and liabilities:
Accounts receivable (26,350) (34,697) (24,250)
Inventories (19,619) (23,180) (8,567)
Prepaid expenses and other current assets (4,860) (302) (2,217)
Accounts payable 321 4,001 18,977
Accrued liabilities 5,454 (10,498) 30,111
Prepaid income taxes and income taxes payable 32,942 (23,722) (766)
Deferred revenue 10,248 6,417 5,375
-------------------------------
Net cash provided by operating activities 53,211 7,355 29,133
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (192,582) (393,588) (159,174)
Redemption and sale of short-term investments 175,669 314,476 96,250
Investment in other non-current assets (5,000) - -
Capitalization of software development costs (1,469) (677) (1,364)
Cash from acquisitions - 4,616 1,273
Purchases of fixed assets (48,827) (38,875) (23,507)
--------------------------------
Net cash used in investing activities (72,209) (114,048) (86,522)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable and capital lease obligations (21) (102) (280)
Purchase of treasury stock (4) (3,248) -
Proceeds from issuance of Common stock 16,830 35,454 222,699
-------------------------------
Net cash provided by financing activities 16,805 32,104 222,419
-------------------------------
Increase (decrease) in cash and cash equivalents (2,193) (74,589) 165,030
--------------------------------
Cash and cash equivalents at beginning of year 129,424 204,013 38,983
--------------------------------
Cash and cash equivalents at end of year $ 127,231 $ 129,424 $ 204,013
==================================
Cash paid (refunded) during the year for:
Interest $ 54 $ 27 $ 18
Income taxes paid (refunded) $ (11,772) $ 17,326 $ 19,833
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All data in thousands except for share and per-share data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
FORE Systems, Inc. ("FORE Systems" or the "Company") is a leading global
supplier of networking solutions based on an Intelligent Infrastructure(TM)
designed to handle the networked applications of today and tomorrow. The
Company's Networks of Steel(TM) deliver the increased capacity, reduced
complexity and unparalleled flexibility and scalability required to build
networks that last.
Principles of Consolidation and Basis of Presentation
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany transactions have been eliminated.
The Company's fiscal year ends March 31. Any reference to years stated hereafter
represents the fiscal year unless otherwise indicated.
On May 6, 1996, the Company's Board of Directors declared a two-for-one
Common stock split effected in the form of a Common stock dividend paid on June
3, 1996 to stockholders of record on May 20, 1996. All share and per-share data
for all periods presented have been retroactively adjusted to give effect to the
stock split.
Revenue Recognition
Revenue is recognized when the product is shipped provided that all
significant obligations are fulfilled. Revenue from support contracts is
recognized ratably over the term of the related agreements. Revenue from initial
license fees, including limited warranty services, is recognized upon the
delivery of the software and the costs associated with providing such services,
which are immaterial, are accrued.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. Actual
results could differ from those estimates.
Cash and Cash Equivalents and Short-term Investments
The Company's policy is to invest its excess cash in U.S. Government
securities, interest-bearing deposits with major banks, municipal notes and
bonds and commercial paper of companies with strong credit ratings that are
subject to minimal credit and market risk. Cash equivalents consist of money
market funds, commercial paper, U.S. Government securities and municipal
29
<PAGE> 30
notes and bonds which have original maturities of 90 days or less. Short-term
investments include securities purchased with an original maturity of greater
than 90 days.
Inventories
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out method.
Capitalized Software Development Costs
Software development costs for new software and enhancements to existing
software are expensed as incurred until the establishment of technological
feasibility. Subsequent to establishment of technological feasibility, the
Company capitalizes software development costs incurred until the product is
available for general release to customers. Capitalized software development
costs are amortized to cost of sales on a product-by-product basis over the
estimated lives of the related products. Unamortized capitalized software
development costs of $668 and $175 are included in prepaid expenses and other
current assets at March 31, 1998 and 1997, respectively.
Fixed Assets
Equipment and furniture are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets which range
up to 10 years. Leasehold improvements are recorded at cost and amortized over
the shorter of the estimated lives of the related assets or the term of the
lease.
Warranty Reserve
The Company generally provides a warranty for up to fifteen months on its
products. Estimated warranty costs are accrued at the time revenue is recognized
and are charged to cost of sales.
Foreign Currency
The functional currency for the Company's foreign operations is the U.S.
dollar. Monetary assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at exchange rates in effect as of the balance sheet
date, and nonmonetary assets and liabilities are translated at historical
exchange rates. Results of operations are translated at the average exchange
rates for the period. Foreign exchange gains and losses, which are immaterial,
are included in the results of operations.
Financial Instruments
The Company uses forward currency exchange contracts on a limited basis to
manage foreign currency exchange rate risk and does not use them for trading
purposes. The exposure to credit risk for these contracts is minimal since they
are with major financial institutions. These contracts' terms range from one
week to two years and are entered to hedge certain firm commitments denominated
in those currencies. At March 31, 1998, the Company had
30
<PAGE> 31
outstanding forward currency contracts to buy $11,948 worth of various foreign
currencies as outlined below and to sell $549 worth of Japanese yen.
Contract Unrealized Market
Value Gain (Loss) Value
- -------------------------------------------------------------------------------
Contracts to buy foreign currencies:
Irish punt $ 4,607 $(151) $ 4,456
Great British pounds 2,687 107 2,794
French francs 855 (27) 828
German marks 3,799 (118) 3,681
----------------------------------
$11,948 $(189) $11,759
==================================
Contracts to sell foreign currencies:
Japanese yen $ 549 $ (32) $ 517
==================================
At March 31, 1997, the Company had outstanding forward currency contracts to
sell $143 worth of Japanese yen.
At March 31, 1998, the Company had an outstanding interest rate swap
contract. The Company entered into this contract, effective October 31, 1997, to
reduce the impact of changes in interest rates on future lease expense for the
new Company headquarters and operating facilities (see Note 14). Under the terms
of the contract, the Company will receive a floating interest rate based upon
6-month LIBOR in exchange for payment of a fixed interest rate.
Over the life of the contract, the notational amount upon which the interest
payments will be calculated will range between approximately $21.8 million and
$18.0 million. The interest rate fluctuations will result in a receipt or
disbursement of funds by the Company on each April 30th and October 30th until
the termination of the agreement on October 30, 2007. The amount exchanged will
be amortized over the term of the lease. Gains and losses on this interest rate
swap will generally be offset by corresponding losses and gains on the related
lease agreements, resulting in negligible net exposure to the Company.
Net Income Per Share
In February 1997, Statement of Financial Accounting Standards No. 128
"Earnings per share" ("SFAS 128") was issued by the Financial Accounting
Standards Board ("FASB"). Under SFAS 128, "basic earnings per share" is
calculated based upon the weighted average number of common shares actually
outstanding, and "diluted earnings per share" is calculated based upon the
weighted average number of common shares outstanding and other potential common
shares if they are dilutive. Common share equivalents consisting of common
shares issuable on exercise of outstanding options are computed using the
treasury method.
31
<PAGE> 32
Year Ended March 31 1998 1997 1996
- ------------------------------------------------------------------------------
Net income available to common stockholders $ 35,155 $41,470 $ 9,737
----------------------------
Shares used for basic per share computation
weighted average shares outstanding 99,214 92,063 80,521
Effect of Dilutive Securities:
Stock options 2,645 7,886 5,911
----------------------------
Shares used for diluted per share computation 101,859 99,949 86,432
============================
Net Income Per Share:
Basic $ 0.35 $ 0.45 $ 0.12
============================
Diluted $ 0.35 $ 0.41 $ 0.11
============================
Accounting for Stock Options
As permitted under Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"), and related interpretations, in accounting for stock
based awards to employees. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized in the Company's
financial statements for all periods presented.
Advertising
Advertising costs are charged to operations when incurred. The Company did
not incur any costs associated with direct response advertising in 1998, 1997
and 1996 and there were no capitalized advertising costs at March 31, 1998, 1997
and 1996. Advertising expense for 1998, 1997 and 1996 was $10,400, $6,716 and
$5,314, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). The Company will implement SFAS 130 and SFAS
131, which require the Company to report and display certain information related
to comprehensive income and operating segments, as required in fiscal 1999.
2. BUSINESS COMBINATIONS
In November 1996, the Company acquired Nemesys Research Limited, based in
Cambridge, England, ("Nemesys") a developer and supplier of ATM video
distribution and videoconferencing products, including a line of ATM video
encoders and decoders. The Company issued 413,635 shares of its Common stock,
(resulting in an increase to Common stock of $328) in exchange for all of the
32
<PAGE> 33
outstanding ordinary shares of Nemesys. The transaction was accounted for as a
pooling of interests. In addition, the Company reserved 36,360 shares of Common
stock for issuance upon the exercise of options granted in substitution of
options to purchase ordinary shares of Nemesys.
Also, in November 1996, the Company acquired Scalable Networks, Inc.
("Scalable"), a developer of high-performance, cost-effective switched Fast
Ethernet desktop and Gigabit Ethernet switching technology directed to gaining
cost-effective desktop and server connections to ATM backbone networks. The
Company issued 900,870 shares of its Common stock (resulting in an increase to
Common stock of $2,140) in exchange for all of the outstanding shares of
Scalable. The transaction was accounted for as a pooling of interests. The
Company also reserved 46,381 shares of Common stock for issuance upon the
exercise of options granted in substitution of options to purchase shares of
Scalable Common stock.
In December 1996, the Company acquired Cadia Networks, Inc. ("Cadia"), a
developer of multiservice WAN adaptation and concentration technology for the
service provider market. The Company issued 3,940,728 shares of its Common stock
(resulting in an increase to Common stock of $4,361) in exchange for all of the
outstanding shares of Cadia. The transaction was accounted for as a pooling of
interests. The Company also reserved 73,893 shares of Common stock for issuance
upon the exercise of options granted in substitution of options to purchase
shares of Cadia Common stock.
In connection with these business combinations, the Company incurred
merger-related expenses of approximately $1,700 which consist of fees to
financial advisors, legal and accounting fees and other related expenses.
The aggregated historical results of operations and financial position of
Nemesys, Scalable and Cadia are not material to the Company's consolidated
financial statements and prior period amounts have, therefore, not been
restated. Accordingly, retained earnings have been adjusted as of October 1,
1996, to reflect the aggregate accumulated deficits of $176, $470 and $1,078 for
Nemesys, Scalable and Cadia, respectively. The aggregate revenue and earnings of
Nemesys, Scalable and Cadia for fiscal years 1996 and 1995 are immaterial in
comparison to the revenue and earnings reported by the Company for those
periods.
On February 23, 1996, the Company consummated the acquisition of ALANTEC
Corporation ("ALANTEC"). ALANTEC designs, develops, manufactures and sells
intelligent switching hubs for the Ethernet and Fiber Distributed Data Interface
local area networks ("LANs"). The transaction was accounted for as a pooling of
interests. The Company issued 22,427,604 shares of its Common stock in exchange
for all of the outstanding shares of ALANTEC Common stock. Effective upon the
consummation of the acquisition, all outstanding stock options to purchase
shares of ALANTEC Common stock were assumed by the Company and deemed to
constitute options to purchase, on the same terms and conditions (including
per-share exercise price), an equivalent number of shares of the Company's
Common stock. Accordingly, the Company reserved 3,600,140 shares of Common stock
for issuance to holders of options formerly exercisable for shares of ALANTEC
Common stock.
33
<PAGE> 34
Merger-related expenses of approximately $27,000 were expensed upon the
consummation of the acquisition in the quarter ended March 31, 1996.
Merger-related expenses included $10,000 of transaction costs, $9,000 related to
duplicate facilities and assets, $4,000 for transition and severance agreements
for duplicate employees and $4,000 of other costs. Transaction costs incurred by
the Company include fees to financial advisors, legal and accounting fees and
other related expenses.
During the quarter ended December 31, 1995, the Company acquired CellAccess
Technology, Inc. ("CAT"), a developer of digital access products for ATM and
Frame Relay networks. The Company issued 1,408,948 shares of Common stock
(resulting in an increase to Common stock of $2,248) in exchange for all of the
outstanding shares of CAT. This business combination has been accounted for as a
pooling of interests. In connection with this business combination, the Company
incurred merger-related expenses of approximately $690 which consist primarily
of fees to financial advisors, legal and accounting fees, facility consolidation
costs and other related expenses.
During the quarter ended June 30, 1995, the Company acquired Applied Network
Technology, Inc. ("ANT"), a developer of Ethernet switches, and RainbowBridge
Communications, Inc. ("RCI"), a developer of routing software. The Company
issued an aggregate of 1,932,838 shares of its Common stock (resulting in an
increase to Common stock of $780) in exchange for all of the outstanding shares
of ANT and RCI. The Company also reserved 728,404 additional shares of Common
stock for issuance to holders of options formerly exercisable for shares of ANT
Common stock. Each of these business combinations has been accounted for as a
pooling of interests. In connection with these business combinations, the
Company incurred merger-related expenses of approximately $1,600 which consist
of fees to financial advisors, legal and accounting fees and other related
expenses.
The aggregated historical results of operations and financial position of
CAT, ANT and RCI were not material to the Company's consolidated financial
statements and prior period amounts were, therefore, not restated. Accordingly,
retained earnings have been adjusted as of the beginning of fiscal 1996, to
reflect the aggregate accumulated deficit of ANT and RCI of $574, and as of the
beginning of fiscal 1996, to reflect the accumulated deficit of CAT of $453.
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents and short-term investments, classified as available for
sale, consist of the following:
Amortized Unrealized
March 31, 1998 Cost Gain (Loss) Market Value
- -------------------------------------------------------------------------------
Municipal notes and bonds $148,678 $(1,696) $146,982
Commercial paper and other 48,233 (25) 48,208
U.S. Government securities 57,697 25 57,722
-----------------------------------
$254,608 $(1,696) $252,912
=====================================
34
<PAGE> 35
Amortized Unrealized
March 31, 1997 Cost Gain (Loss) Market Value
- -----------------------------------------------------------------------------
Municipal notes and bonds $133,845 $(1,554) $132,291
Commercial paper and other 31,276 100 31,376
U.S. Government securities 91,393 (70) 91,323
-----------------------------------
$256,514 $(1,524) $254,990
=====================================
The contractual maturity of available-for-sale securities within one year at
March 31, 1998 and 1997 was $210,595 and $216,137, respectively. The contractual
maturity of available-for-sale securities over one year and less than three
years at March 31, 1998 and 1997 was $42,317 and $38,853, respectively. Gross
realized gains and losses on sales of securities in 1998 and 1997 were
immaterial.
4. INVENTORIES
Inventories are summarized as follows:
March 31 1998 1997
- -----------------------------------------------------------------------------
Raw materials $15,120 $16,054
Work in process 11,512 5,097
Finished goods 43,756 29,618
---------------------
Total inventories $70,388 $50,769
======================
5. FIXED ASSETS
Fixed assets are summarized as follows:
March 31 1998 1997
- -----------------------------------------------------------------------------
Leasehold improvements $ 13,281 $ 3,372
Land 2,176 2,176
Equipment and furniture 109,203 70,285
---------------------
Total fixed assets 124,660 75,833
Less: accumulated depreciation and amortization 53,165 27,927
--------------------
Fixed assets, net $ 71,495 $47,906
======================
6. LINE OF CREDIT
The Company has a line of credit available from a bank under which it can
borrow up to $20 million. Borrowings under the agreement bear interest at either
the prime rate or the LIBOR rate plus 1%, at the option of the Company.
Borrowings under this arrangement are secured by the Company's fixed assets,
inventories and accounts receivable. There were no borrowings under this line at
March 31, 1998. The bank agreement contains certain covenants, the most
restrictive of which require the maintenance of a certain level of net worth,
and expires on September 30, 1998.
7. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
At March 31, 1998 and 1997, the Company had notes payable and capital lease
obligations aggregating $614 and $615, respectively, which are included in other
current liabilities. Interest expense for the years ended March 31, 1998, 1997
and 1996 was $0, $4 and $29, respectively.
35
<PAGE> 36
8. INCOME TAXES
The components of the provision for income taxes for the years ended March
31, 1998, 1997 and 1996 are as follows:
Year Ended March 31 1998 1997 1996
- --------------------------------------------------------------------------------
Income before taxes:
Domestic $28,486 $64,294 $ 20,254
Foreign 21,735 1,198 300
-----------------------------
Total income before taxes 50,221 65,492 20,554
-----------------------------
Current income tax expense:
Federal 17,071 20,593 19,503
State 1,600 4,759 4,677
Foreign 3,726 606 141
-----------------------------
Total current income tax expense 22,397 25,958 24,321
-----------------------------
Deferred income tax benefit:
Federal (7,023) (1,446) (10,725)
State (308) (490) (2,779)
-----------------------------
Total deferred income tax benefit (7,331) (1,936) (13,504)
-----------------------------
Total income taxes $15,066 $24,022 $ 10,817
=============================
Deferred income taxes result from differences in the timing of recognition of
income and expense items for tax and financial reporting purposes. The principal
sources of such differences and the tax effect of each are as follows at March
31, 1998 and 1997:
March 31 1998 1997
- -------------------------------------------------------------------------------
Deferred tax assets (liabilities):
Reserves not currently deductible $13,560 $13,066
Deferred revenue 2,747 2,706
Depreciation and amortization 852 290
Other 2,566 2,451
Capitalized software development costs (62) (69)
Research and development credits 3,586 489
Net operating loss carryforwards 6,779 2,528
Merger-related expenses 576 1,572
Acquired assets basis difference 5,954 6,194
------------------
Net deferred tax assets $36,558 $29,227
==================
The deferred tax liabilities of $62 and $69 at March 31, 1998 and 1997,
respectively, are included in other current liabilities.
36
<PAGE> 37
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pre-tax income as a result of the following differences:
Year Ended March 31 1998 1997 1996
- -----------------------------------------------------------------------------
Statutory rate applied to income before taxes 35.00% 35.00% 35.00%
State income taxes, net of federal benefit 2.18 3.82 5.70
Foreign Sales Corporation (.62) (2.49) (8.77)
Research and development credits (3.45) (1.79) (0.80)
Foreign income taxed at different rates (7.39) 0.49 0.39
Merger-related expenses - 0.69 20.83
Other, net 4.28 0.95 0.27
------------------------
Total income taxes 30.00% 36.67% 52.62%
========================
The effective income tax rate for the year ended March 31, 1998 was 30%.
Based upon the estimated split between foreign and domestic income for the year,
income taxes were recorded at a 34% effective rate for the first nine months of
the year. The estimate was revised during the fourth quarter, resulting in an
effective tax rate of 22% for the quarter.
9. STOCKHOLDERS' EQUITY
Authorized Capital
On May 6, 1996, the Company's stockholders approved an increase in the
authorized shares of the Company's Common stock, par value $.01 per share, to
300,000,000 shares. The Company has 5,000,000 authorized shares of preferred
stock. Preferred stock may be issued at the discretion of the Board of Directors
of the Company (without stockholder approval), with such designations, rights
and preferences as the Board of Directors may determine from time to time.
Public Offerings
On May 23, 1994, FORE completed its initial public offering of 13,800,000
shares of Common stock, of which 9,800,000 shares were sold by the Company and
4,000,000 shares were sold by selling stockholders. Net proceeds to the Company
as a result of the offering were approximately $35.5 million. Upon consummation
of the FORE initial public offering, all outstanding shares of FORE Series A
redeemable convertible preferred stock were converted into 16,129,020 shares of
Common stock.
On April 20, 1995, ALANTEC completed a public offering of 5,058,390 shares of
Common stock, of which 4,659,790 shares were sold by ALANTEC and 398,600 shares
were sold by selling stockholders. Net proceeds to ALANTEC as a result of the
offering were approximately $79.5 million.
On October 18, 1995, the Company completed a public offering of 9,200,000
shares of Common stock, of which 8,370,000 shares were sold by the Company and
830,000 shares were sold by selling stockholders. Net proceeds to the Company as
a result of the offering were approximately $129.0 million.
37
<PAGE> 38
Stock Option Repricing
On April 4, 1997, the Compensation Committee of the Board of Directors of the
Company determined that, because certain stock options held by employees of the
Company had an exercise price significantly higher than the fair market value of
the Company's Common stock, such stock options were not providing the desired
incentive to employees. Accordingly, the Compensation Committee modified the
exercise price of options to purchase 6,968,552 shares of Common stock. As a
result of such modification, the average exercise price of such options was
changed from $30.02 per share to $15.19 per share, the fair market value of the
Company's Common stock at the close of the market on April 4, 1997. The
Company's founders and executive officers were excluded from this stock option
repricing.
10. STOCK OPTION PLANS
The Company's stock option plans provide for the issuance of an aggregate of
32,702,286 shares of Common stock, of which 4,239,130 shares are available for
future grants at March 31, 1998.
The Compensation Committee of the Board of Directors determines the term of
each option, option exercise price within limits set forth in the plans, number
of shares for which each option is granted and the rate at which each option is
exercisable. However, under certain plans, the exercise price of any stock
option may not be less than the fair market value of the shares on the date
granted (or, with respect to incentive stock options, less than 110% of the fair
market value in the case of an optionee holding more than 10% of the voting
stock of the Company), and the term cannot exceed ten years (five years for
incentive stock options granted to holders of more than 10% of the Company's
voting stock); under certain other plans, the exercise price for stock options,
which do not qualify as incentive stock options under the Internal Revenue Code,
are determined by the Compensation Committee of the Board of Directors in its
discretion and the term of such options cannot exceed ten years. Transactions
under the stock option plans are summarized as follows:
Weighted
Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at March 31, 1995 10,421,939 $ 4.04
Granted 6,007,868 $19.95
Exercised (2,648,278) $ 1.60
Cancelled (1,461,644) $ 7.06
------------------------------
Outstanding at March 31, 1996 12,319,885 $11.97
Granted 7,474,145 $32.36
Exercised (4,233,499) $ 6.97
Cancelled (1,833,008) $24.35
------------------------------
Outstanding at March 31, 1997 13,727,523 $22.96
Granted 14,422,982 $15.31
Exercised (2,033,093) $ 5.33
Cancelled (10,380,070) $26.08
-------------------------------
Outstanding at March 31, 1998 15,737,342 $16.17
===============================
Exercisable at March 31, 1996 3,050,389 $ 5.02
Exercisable at March 31, 1997 3,285,699 $ 9.41
Exercisable at March 31, 1998 5,283,110 $14.46
38
<PAGE> 39
Options outstanding as of March 31, 1998:
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Range of Exercise Prices Outstanding Life (in years) Prices
- ----------------------------------------------------------------------------
$ 0.02 - $13.06 1,862,497 6.33 $ 4.86
$13.13 - $14.69 3,016,820 9.06 $13.81
$14.75 - $15.19 6,086,170 8.12 $15.17
$15.25 - $18.88 2,282,325 9.66 $16.63
$18.94 - $33.63 2,489,530 8.40 $29.51
-----------------------------------------
$ 0.02 - $33.63 15,737,342 8.36 $16.17
=========================================
Options exercisable as of March 31, 1998:
Weighted
Number Average
Range of Exercise Prices Exercisable Exercise Price
- ----------------------------------------------------------------------------
$ 0.02 - $13.06 1,420,264 $ 3.01
$13.13 - $14.69 621,955 $13.71
$14.75 - $15.19 2,421,867 $15.18
$15.25 - $18.88 17,311 $16.81
$18.94 - $33.63 801,713 $33.11
-----------------------------
$ 0.02 - $33.63 5,283,110 $14.46
===============================
The employee stock purchase plans (the "Stock Purchase Plans") allow eligible
employees the opportunity to purchase up to an aggregate of 2,109,530 shares of
Common stock through payroll deductions at a purchase price per share not less
than 85% of the fair market value on the first or last day of the quarterly
offering periods (as defined in the Stock Purchase Plans), whichever is lower.
The shares issued under the Stock Purchase Plans were 497,070, 304,857 and
203,794 as of March 31, 1998, 1997 and 1996, respectively.
As permitted under Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"), and related interpretations, in accounting for
stock-based awards to employees. Under APB 25, because the
39
<PAGE> 40
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized in the Company's financial statements for all periods presented.
Pro forma information regarding net income and earnings per share is required
by SFAS 123. This information is required to be determined as if the Company had
accounted for its employee stock options (including shares issued under the
Stock Purchase Plan, collectively called "options") granted subsequent to March
31, 1995 under the fair value method of that statement. The fair value of
options granted in fiscal years 1998, 1997 and 1996 reported below has been
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
Stock Option Plan Stock Purchase Plan
1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------
Risk-free rate (%) 5.99 5.74 6.54 5.05 5.07 5.31
Volatility (%) 44.81 34.96 38.24 49.28 41.69 41.92
Expected Life (in years) 2.43 2.55 2.62 0.25 0.24 0.24
Dividend Yield (%) 0.00 0.00 0.00 0.00 0.00 0.00
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options. The weighted average estimated fair value of employee
stock options granted through March 31, 1998, 1997 and 1996 was $4.58, $9.74 and
$7.90 per share, respectively. The weighted average estimated fair value of
shares granted under the Stock Purchase Plans during the years ended March 31,
1998, 1997 and 1996 was $3.83, $8.37 and $4.83, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1998 1997 1996
- -------------------------------------------------------------------------
Pro forma net income $3,486 $19,163 $ 127
Pro forma net income per common share
Basic $ 0.04 $ 0.21 $0.00
Diluted $ 0.03 $ 0.19 $0.00
Because the Company anticipates making additional grants and options vest
over several years, the effects on pro forma disclosures of applying SFAS 123
are not likely to be representative of the effects on pro forma disclosures of
future years. SFAS 123 is applicable only to options granted subsequent to March
31, 1995.
40
<PAGE> 41
11. DEFINED CONTRIBUTION PLAN
In November 1993, the Company adopted a 401(k) plan (the "Plan") that covers
substantially all employees who meet minimum age and service requirements.
Company contributions are determined at the discretion of the Board of
Directors. The Plan also permits tax-deferred salary deductions for eligible
employees in accordance with the Internal Revenue Code.
The expenses of this plan for the years ended March 31, 1998, 1997 and 1996
were $3,451, $2,495 and $1,014, respectively.
12. SEGMENT, MAJOR CUSTOMER AND CONCENTRATION OF CREDIT RISK INFORMATION
The Company operates in a single industry segment encompassing the
development, manufacture, marketing, selling and technical support of networking
products and services.
Revenue from government agencies, as a percentage of total revenue, for the
years ended March 31, 1998, 1997 and 1996 was 7%, 9% and 7%, respectively.
There were no customers with revenue in excess of 10% of the Company's total
revenue for the years ended March 31, 1998, 1997 and 1996.
Financial instruments which potentially expose the Company to concentrations
of credit risk include accounts receivable. The Company performs an initial
credit review and ongoing evaluations of customers' financial conditions and,
generally, does not require collateral. In addition, the Company maintains
reserves for potential credit losses which, in the aggregate, have not exceeded
management expectations.
Accounts receivable were concentrated as follows:
March 31 1998 1997
- --------------------------------------------------------------------------------
Domestic 47% 46%
Foreign 39 44
U.S. Government 14 10
-----------------
100% 100%
==================
13. GEOGRAPHIC INFORMATION
Revenue from sales to customers for the years ended March 31, 1998, 1997 and
1996 was distributed as follows:
Year Ended March 31 1998 1997 1996
- -------------------------------------------------------------------------------
United States $315,561 $249,113 $142,860
Europe (includes Middle East and Africa) 86,393 67,405 46,797
Pacific Rim 34,840 62,381 31,821
Other International 21,575 16,448 13,711
------------------------------
Total $458,369 $395,347 $235,189
================================
41
<PAGE> 42
The Company's operations are in a single industry segment which includes the
design, development, manufacture, sales and support of networking products.
The Company commenced manufacturing operations internationally in May 1997.
The summarized financial information by geographic area is as follows:
<TABLE>
<CAPTION>
United
Year Ended March 31, 1998 States International Elimination Consolidated
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue
Unaffiliated Customers $340,199 $118,170 $ - $458,369
Intercompany 26,534 944 (27,478) -
--------------------------------------------------------
Total $366,733 $119,114 $(27,478) $458,369
========================================================
Income from operations $ 27,047 $ 9,525 $ - $ 36,572
========================================================
Identifiable assets $571,473 $ 49,066 $ - $620,539
========================================================
</TABLE>
14. LEASE COMMITMENTS
In December 1995, the Company entered into an agreement to lease headquarters
and operating facilities constructed on land which was purchased by the Company.
The Company is now occupying the facilities. In October 1997, the lessor
finalized permanent financing arrangements for the facilities with a group of
lenders. The total amount financed was $41 million. The Company is leasing the
facilities under a ten-year operating lease and has options, subject to the
lenders' and lessor's consent, to renew the lease for two additional five-year
terms. Annual minimum rental payments under the lease are approximately $3.3
million and commenced in calendar 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 million, as of March 31,
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 which was determined at
the lease inception date.
The Company has purchased additional option property by issuing a note that
is secured by a mortgage that encumbers the option property. The note of $614 is
included in other current liabilities. The Company also has operating lease
agreements relating to certain other facilities and equipment which expire at
various dates. Rent expense on operating leases for the years ended March 31,
1998, 1997 and 1996 was $13,510, $9,764 and $5,167, respectively.
42
<PAGE> 43
Future minimum payments under all non-cancelable operating leases as of March
31, 1998 are summarized as follows:
Operating Leases
- --------------------------------------------------------------------------------
1999 $10,486
2000 9,160
2001 6,741
2002 5,945
2003 4,937
Thereafter 20,819
------
Total $58,088
=======
15. QUARTERLY RESULTS (UNAUDITED)
Year Ended March 31, 1998 Q4 Q3 Q2 Q1
- --------------------------------------------------------------------------------
Revenue $131,208 $122,083 $109,719 $95,359
Gross profit $ 72,357 $ 68,139 $ 61,525 $53,175
Income from operations $ 13,237 $ 11,615 $ 7,169 $ 4,551
Net income $ 13,153 $ 10,050 $ 6,969 $ 4,983
Net income per common share - basic $ 0.13 $ 0.10 $ 0.07 $ 0.05
Net income per common share - diluted $ 0.13 $ 0.10 $ 0.07 $ 0.05
Year Ended March 31, 1997 Q4 Q3 Q2 Q1
- --------------------------------------------------------------------------------
Revenue $101,326 $112,645 $ 98,019 $83,357
Gross profit $ 57,252 $ 64,159 $ 56,373 $48,445
Merger-related expenses $ - $ 1,747 $ - $ -
Income from operations $ 11,771 $ 17,359 $ 17,862 $14,645
Litigation settlement charges $ (8,257) $ - $ - $ -
Net income $ 3,887 $ 12,839 $ 13,351 $11,393
Net income per common share - basic $ 0.04 $ 0.14 $ 0.15 $ 0.13
Net income per common share - diluted $ 0.04 $ 0.13 $ 0.14 $ 0.12
16. LITIGATION
In February 1997, ALANTEC, a wholly-owned subsidiary of the Company,
contributed $7.5 million as a portion of a settlement entered into by three
former directors and several former stockholders of ALANTEC ("Defendants") in a
suit brought in 1994 by two former founders of ALANTEC. The plaintiffs sought
damages for alleged breaches of fiduciary duties by the Defendants in 1991.
Although ALANTEC was not a party to the lawsuit, it had certain indemnification
obligations to the former directors under its former bylaws and indemnification
agreements. The settlement avoids further litigation with respect to those
indemnification obligations.
In July and August 1997, the Company was notified that it was a party to
seven nearly identical class action lawsuits alleging certain violations of
federal securities laws by the Company and certain of its officers, who were
named as defendants in the suits, arising from alleged misstatements or
omissions by the Company. Plaintiffs seek compensatory damages for injuries
allegedly incurred by purchasers of the Company's stock during the period from
October 17, 1996 through April 1, 1997, inclusive. Pursuant to court order, the
lawsuits were consolidated and a consolidated amended complaint was filed by the
lead plaintiffs on December 31, 1997. The Company believes the allegations in
the consolidated amended complaint
43
<PAGE> 44
are completely without merit and intends to defend these actions vigorously.
The Company filed a motion to dismiss the consolidated amended complaint, on the
basis that the plaintiffs have failed to state a claim upon which relief may be
granted, on February 17, 1998. The motion is fully briefed and the Company has
requested that the court conduct oral argument on the motion. 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 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 two such third parties
regarding the alleged infringement by the company of certain patents owned by
such third parties. Management does not believe that the allegations of either
of such third parties have merit. Management further 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
44
<PAGE> 45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the caption "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K and the information set
forth under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by
reference in response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" in
the Proxy Statement is incorporated herein by reference in response to this Item
11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the subcaption "Compensation Committee
Interlocks and Insider Participation" under the caption "Executive Compensation"
in the Proxy Statement is incorporated herein by reference to this Item 13.
45
<PAGE> 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Financial Statements. The following consolidated financial
statements of the Company are filed as part of this Annual Report on Form 10-K:
PAGE(S)
Report of Independent Accountants 24
Consolidated Statement of Income for the years ended March 31, 1998,
1997 and 1996 25
Consolidated Balance Sheet as of March 31, 1998 and 1997 26
Consolidated Statement of Changes in Common Stock and Stockholders'
Equity for the years ended March 31, 1998, 1997 and 1996 27
Consolidated Statement of Cash Flows for the years ended March 31,
1998, 1997 and 1996 28
Notes to Consolidated Financial Statements 29-44
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts and Reserves 50
Financial statement schedules not listed above have been omitted
because they are inapplicable, are not required under applicable provisions of
Regulation S-X, or the information that would otherwise be included in such
schedules is contained in the registrant's consolidated financial statements or
accompanying notes.
2. EXHIBITS. The Exhibits listed below are filed or incorporated by
reference as part of this Annual Report on Form 10-K.
EXHIBIT NO. DESCRIPTION
----------- -----------
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 By-laws 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. Incentive Stock Option Plan and Nonqualified
Stock Option Plan (incorporated by reference to Exhibit 10.01 to
the Company's Registration Statement on Form S-1, File No.
33-76176).(1)
10.2 FORE Systems, Inc. 1994 Stock Option Plan (incorporated by
reference to Exhibit 10.02 to the Company's Registration
Statement on Form S-1, File No. 33-76176).(1)
10.3 FORE Systems, Inc. 1994 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.05 to the Company's
Registration Statement on Form S-1, File No. 33-76176).(1)
10.4 FORE Systems, Inc. 1995 Stock Incentive Plan (incorporated by
reference to Exhibit 10.4 to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1995).(1)
10.5 FORE Systems, Inc. 1996 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1997).(1)
10.6 ALANTEC Corporation Second Amended and Restated 1991 Stock
Option Plan (incorporated by reference to Exhibit 4.2 to the
Company's Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8, File No. 333-00468).(1)
46
<PAGE> 47
10.7 ALANTEC Corporation 1994 Stock Option Plan (incorporated by
reference to Exhibit 10.15 to ALANTEC Corporation's Form 10-Q
for the quarterly period ended June 30, 1995).(1)
10.8 ALANTEC Corporation 1995 Directors' Option Plan (incorporated by
reference to Exhibit 4.4 to the Company's Post-Effective
Amendment No. 1 to Form S-4 Registration Statement on Form S-8,
File No. 333-00468).(1)
10.9 ALANTEC Corporation 1994 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8, File No. 333-1728).(1)
10.10 FORE Systems, Inc. Change in Control Separation Plan
(incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1996).(1)
10.11 Summary of Fiscal Year 1998 Senior Management Bonus Plan.(1)
10.12(a) Lease between Regional Industrial Development Corporation of
Southwestern Pennsylvania and FORE Systems, Inc., dated as of
July 22, 1993 (incorporated by reference to Exhibit 10.03.01 to
the Company's Registration Statement on Form S-1, File No.
33-76176).
10.12(b) Amendment of Lease between Regional Industrial Development
Corporation of Southwestern Pennsylvania and FORE Systems, Inc.,
dated as of January 10, 1994 (incorporated by reference to
Exhibit 10.03.02 to the Company's Registration Statement on Form
S-1, File No. 33-76176).
10.12(c) Second Amendment of Lease between Regional Industrial
Development Corporation of Southwestern Pennsylvania and FORE
Systems, Inc., dated as of March 31, 1994 (incorporated by
reference to Exhibit 10.11(c) to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1996).
10.12(d) Third Amendment of Lease between Regional Industrial Development
Corporation of Southwestern Pennsylvania and FORE Systems, Inc.,
dated as of May 1, 1994 (incorporated by reference to Exhibit
10.11(d) to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996).
10.12(e) Fourth Amendment of Lease between Regional Industrial
Development Corporation of Southwestern Pennsylvania and FORE
Systems, Inc., dated as of June 10, 1995 (incorporated by
reference to Exhibit 10.11(e) to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1996).
10.12(f) Fifth Amendment of Lease between Regional Industrial Development
Corporation of Southwestern Pennsylvania and FORE Systems, Inc.,
dated as of May 7, 1996 (incorporated by reference to Exhibit
10.11(f) to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996).
10.13 Participation Agreement, dated as of December 13, 1995, by and
among FORE Systems, Inc., Wilmington Trust Company, Mellon
Financial Services Corporation #4 and Mellon Bank, N.A.
(incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarterly period ended December 31, 1995).
10.14 Lease and Open End Mortgage, dated as of December 13, 1995, by
and between FORE Systems, Inc. and Wilmington Trust Company
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarterly period ended December 31, 1995).
10.15 Guaranty, dated as of December 13, 1995, by and among FORE
Systems, Inc., Mellon Bank, N.A. and Mellon Financial Services
Corporation #4 (incorporated by reference to Exhibit 10.3 to the
Company's Form 10-Q for the quarterly period ended December 31,
1995).
10.16 Guaranty Agreement, dated as of December 13, 1995, by and among
FORE Systems Holding Corporation, Mellon Bank, N.A. and Mellon
Financial Services Corporation #4 (incorporated by reference to
Exhibit 10.4 to the Company's Form 10-Q for the quarterly period
ended December 31, 1995).
10.17 Pledge and Security Agreement, dated as of December 13, 1995, by
and among FORE
47
<PAGE> 48
Systems Holding Corporation, Mellon Bank, N.A., Mellon Financial
Services Corporation #4 and Mellon Bank, N.A., as custodian
(incorporated by reference to Exhibit 10.5 to the Company's Form
10-Q for the quarterly period ended December 31, 1995).
10.18 Guaranty and Suretyship Agreement, dated as of December 13,
1995, by and between FORE Systems, Inc. and The Redevelopment
Authority of Allegheny County (incorporated by reference to
Exhibit 10.6 to the Company's Form 10-Q for the quarterly period
ended December 31, 1995).
10.19 Loan and Security Agreement, dated as of December 13, 1995, by
and between The Gustine Company and FORE Systems, Inc.
(incorporated by reference to Exhibit 10.7 to the Company's Form
10-Q for the quarterly period ended December 31, 1995).
10.20 Development Agreement, dated as of October 20, 1995, by and
between The Gustine Company and FORE Systems, Inc. (incorporated
by reference to Exhibit 10.8 to the Company's Form 10-Q for the
quarterly period ended December 31, 1995).
10.21 Amendment No. 1 to the Participation Agreement, dated as of
October 31, 1997, by and among FORE Systems, Inc., Wilmington
Trust Company, Mellon Financial Services Corporation #4 and
Mellon Bank, N.A. (incorporated by reference to Exhibit 10.1 to
the Company's Form 10-Q for the quarterly period ended September
30, 1997).
10.22 Amendment No. 1 to the Guaranty Agreement, dated as of October
31, 1997, by and among FORE Systems Holding Corporation, Mellon
Financial Services Corporation #4 and Mellon Bank, N.A.
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarterly period ended September 30, 1997).
10.23 Amended and Restated Pledge and Security Agreement, dated as of
October 31, 1997, by and among FORE Systems Holding Corporation,
FORE Systems, Inc., Mellon Financial Services Corporation #4 and
Mellon Bank, N.A. (incorporated by reference to Exhibit 10.3 to
the Company's Form 10-Q for the quarterly period ended September
30, 1997).
10.24 Pledge and Security Agreement - B (Refinancing), dated as of
October 31, 1997, by and among FORE Systems Holding Corporation,
FORE Systems, Inc., Mellon Financial Services Corporation #4 and
Mellon Bank, N.A. (incorporated by reference to Exhibit 10.4 to
the Company's Form 10-Q for the quarterly period ended September
30, 1997).
10.25 Confirmation of Guaranty, dated as of October 31, 1997, by and
among FORE Systems, Inc., Mellon Bank, N.A. and Mellon Financial
Services Corporation #4 (incorporated by reference to Exhibit
10.5 to the Company's Form 10-Q for the quarterly period ended
September 30, 1997).
10.26 Form of Non-Competition Agreement, each dated December 21, 1992,
between FORE Systems, Inc. and Dr. Eric C. Cooper, Dr. Robert D.
Sansom, Dr. Onat Menzilcioglu and Mr. Francois J. Bitz
(incorporated by reference to Exhibit 10.04 to the Company's
Registration Statement on Form S-1, File No. 33-76176).(1)
10.27 Non-Competition Agreement, dated January 22, 1998, between FORE
Systems, Inc. and Dr. Onat Menzilcioglu.(1)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
- ---------------------
(1) Management contract or compensatory plan or arrangement.
48
<PAGE> 49
(b) REPORTS ON FORM 8-K:
The Company did not file any Reports on Form 8-K during the quarter
ended March 31, 1998.
49
<PAGE> 50
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED MARCH 31, 1998
(IN THOUSANDS)
SCHEDULE II
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DESCRIPTION MARCH 31, 1997 ADDITIONS DEDUCTIONS MARCH 31, 1998
----------- -------------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts............. $ 4,090 $3,308 $ (204) $7,194
------- ------ ------- ------
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DESCRIPTION MARCH 31, 1996 ADDITIONS DEDUCTIONS MARCH 31, 1997
----------- -------------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts............. $ 1,087 $3,003 $ - $4,090
------- ------ ------- ------
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DESCRIPTION MARCH 31, 1995 ADDITIONS DEDUCTIONS MARCH 31, 1996
----------- -------------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts............. $ 574 $ 587 $ (74) $1,087
------- ------ ------- ------
</TABLE>
50
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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.
By:/s/ ERIC C. COOPER
------------------
Eric C. Cooper
Chairman
June 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ERIC C. COOPER Chairman and a Director June 29, 1998
Eric C. Cooper
/s/ THOMAS J. GILL President and Chief Executive Officer June 29, 1998
Thomas J. Gill (Principal Executive Officer) and a Director
/s/ ROBERT D. SANSOM Senior Vice President and Chief June 29, 1998
Robert D. Sansom Technical Officer and a Director
/s/ BRUCE E. HANEY Senior Vice President and Chief June 29, 1998
Bruce E. Haney Financial Officer (Principal
Financial Officer)
/s/ GARY J. BRUNNER Vice President, Controller and June 29, 1998
Gary J. Brunner Treasurer (Principal Accounting
Officer)
Director June , 1998
Onat Menzilcioglu
/s/ JOHN C. BAKER Director June 29, 1998
John C. Baker
/s/ DANIEL W. MCGLAUGHLIN Director June 29, 1998
Daniel W. McGlaughlin
</TABLE>
51
<PAGE> 52
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.11 Summary of Fiscal Year 1998 Senior Management Bonus Plan.
10.27 Non-Competition Agreement, dated January 22, 1998, between
FORE Systems, Inc. and Dr. Onat Menzilcioglu.(1)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
<PAGE> 1
EXHIBIT 10.11
SUMMARY OF FISCAL YEAR 1998 SENIOR MANAGEMENT BONUS PLAN
In July 1997, the Compensation Committee of the Board of Directors of
FORE Systems, Inc. (the "Compensation Committee") adopted a Senior Management
Bonus Plan for the 1998 fiscal year which would reward the Company's senior
management personnel with bonus payments if certain revenue, earnings per share
and individual performance objectives were achieved. Under the Senior Management
Bonus Plan, no bonus pool would be available unless specific earnings per share
objectives were met in each fiscal quarter. If these objectives were met in each
fiscal quarter, then, at the conclusion of the fiscal year, a bonus pool of 25%
of the base salary of each member of senior management would become available.
Pursuant to the terms of the Senior Management Bonus Plan, the bonus pool could
be increased, up to a maximum of 100% of base salary for each member of senior
management, based upon the achievement by the Company of certain revenue and
earnings per share objectives as well as the achievement by the members of
senior management of individual performance objectives. Of the available bonus
pool, 70% of the bonus for each member of senior management was payable based
exclusively on the achievement of the corporate revenue and earnings per share
objectives and the other 30% was payable based on the Compensation Committee's
assessment of the individual performance of each member of senior management.
Pursuant to the determination of the Compensation Committee, based upon the
Company meeting certain earnings per share expectations of research analysts who
cover the Company and internal earnings per share targets in each quarter of the
1998 fiscal year, a total bonus pool of approximately 35% of the base salary of
each member of senior management was available under the Senior Management Bonus
Plan. The Compensation Committee awarded the entire bonus amount available to
each member of senior management, based upon its assessment of the individual
performance of each member of senior management.
<PAGE> 1
EXHIBIT 10.27
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT ("Agreement") is made and
entered into on and as of the 22nd day of January 1998 ("Effective Date"), by
and between FORE Systems, Inc., a Delaware corporation (the "Company"), and Onat
Menzilcioglu, an individual (the "Employee").
WITNESSETH
WHEREAS, the Employee is a co-founder of the Company and has
served since 1994 as its President; and
WHEREAS the Employee and the Company are parties to a
Non-Competition Agreement dated December 21, 1992, which terminated in
accordance with its terms on December 21, 1997; and
WHEREAS, the Employee and the Board of Directors of the
Company (the "Board") have mutually determined that it is in the best interests
of the Company and all of its stockholders for the Employee to retire from his
position as President of the Company, resign his employment with the Company and
enter into a new non-competition covenant, all in accordance with the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants contained herein, the Company and the Employee, each intending
to be legally bound hereby, agree as follows:
1. Resignation of Employment. Employee acknowledges that he
will retire from his position as President and resign from employment with the
Company, effective as of the Effective Date, after which date he will perform no
further duties, functions or services for the Company, except in relation to his
duties as a member of the Board.
2. Covenant Not to Compete.
(a) For the purposes of this Section 2, the "Company" shall
be deemed to include any entity directly or indirectly controlling, controlled
by or under common control with FORE Systems, Inc. Through the period beginning
on the Effective Date and ending on July 22, 1999 (the "Non-Competition
Period"), Employee shall not:
(i) directly or indirectly induce or attempt to
influence any employee of the Company to terminate his or her
employment with the Company;
(ii) contact, directly or indirectly, any person or
entity (a "Person") who is or was a customer of the Company or
otherwise has or had a business
<PAGE> 2
relationship with the Company for purposes of competing, or aiding any
Person to compete, directly or indirectly, with the Company in any
business engaged in the development, manufacturing, marketing and
selling of the following computer networking equipment: ATM switches,
ATM adapters, ATM video devices, Ethernet or hybrid Ethernet/ATM
switches and ATM access and concentrator devices (a "Directly
Competitive Business") during the Non-Competition Period; or
(iii) engage in, directly or indirectly, whether as a
principal, partner, director, officer, agent, employee, consultant or
in any other capacity, or have any direct or indirect ownership
interest in any Person anywhere in the world which is engaged, either
directly or indirectly, in any Directly Competitive Business; provided,
however, that this Section 2 shall not preclude the Employee from
owning, as a passive investor, up to ten percent (10%) in any Person
which is engaged in a Directly Competitive Business.
(b) The Employee expressly acknowledges that the covenants
contained in this Section 2 are of vital importance to the Company and that such
covenants are a material inducement to the Company to enter into this Agreement
and to pay to the Employee the compensation and other benefits set forth in
Section 3 hereof. Any breach of this Section 2 by the Employee will cause the
Company to suffer irreparable injury. In the event of any such breach by the
Employee of this Section 2, the Company will be entitled, in addition to any
other remedies available to it at law or equity, to injunctive relief,
including, without limitation, a temporary restraining order, without any
necessity of first proving any harm.
3. Payments.
(a) In consideration for the Employee entering into the
Covenant Not to Compete set forth in Section 2 of this Agreement, the Company
will continue Employee's salary payments, at an annual rate of $ 270,000,
throughout the Non-Competition Period, payable in periodic installments in
accordance with the Company's regular payroll practices in effect from time to
time; and
(b) Throughout the Non-Competition Period, the Employee
will receive those benefits afforded generally to employees of the Company.
4. Confidentiality and Invention Assignment. The Company's
standard form of employee confidentiality and invention assignment agreement for
employees, which has been executed by the Employee, will remain in full force
and effect throughout the Non-Competition Period and thereafter in accordance
with its terms.
5. Miscellaneous.
(a) Waiver. Any failure or delay on the part of either
party to exercise any right, remedy, power or privilege under this Agreement
will not operate as a waiver thereof, nor will any single or partial exercise of
any right, remedy, power or privilege preclude any other
-2-
<PAGE> 3
or further exercise of the same or of any other right, remedy, power or
privilege, nor will any waiver of any right, remedy, power or privilege with
respect to any occurrence be construed as a waiver of that right, remedy, power
or privilege with respect to any other occurrence.
(b) Notices. All notices, requests, demands and other
communications required or permitted under this Agreement must be in writing and
will be deemed to have been duly given, made and received only when delivered
(personally, by facsimile transmission or by courier service such as Federal
Express, or by other messenger) or when deposited in the mail, postage prepaid,
return receipt requested, addressed as set forth below:
(i) if to the Employee:
Onat Menzilcioglu
10200 Woodbury Drive
Wexford, Pennsylvania 15090
(ii) if to the Company:
FORE Systems, Inc.
1000 FORE Drive
Warrendale, Pennsylvania 15086
Attn: Corporate Counsel
In addition, notice by mail must be by air mail if posted
outside of the continental United States.
Any party may alter the address to which communications or
copies are to be sent by giving notice of any change of address to the other
party in conformity with the provisions of this paragraph for the giving of
notice.
(c) Binding Nature of Agreement; Assignment. This
Agreement shall be binding upon and inure to the benefit of the Company and its
successors and assigns and shall be binding upon the Employee. The Company may
assign this Agreement at any time to any successor in interest to the entire
business or assets of the Company, and any such assignee may re-assign this
Agreement to any such entity, provided that such assignee shall be bound by the
provisions of this Agreement applicable to the Company. The Employee may not
assign this Agreement.
(d) Execution in Counterparts. This Agreement may be
executed in any number of counterparts, each of which will be deemed to be an
original and all of which will together constitute one and the same instrument.
(e) Provisions Separable. The provisions of this Agreement
are independent of and separable from each other, and no provision will be
affected or rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may
-3-
<PAGE> 4
be invalid or unenforceable in whole or in part. It is the parties' intention
that this Agreement, including Section 2, shall be enforced in accordance with
its terms, and in the event that any of the covenants set forth in Section 2 are
determined to be overly broad in geographical scope or otherwise, such covenants
shall be enforced to the maximum extent permitted by applicable law.
(f) Entire Agreement. This Agreement, together with the
other agreements and instruments referenced herein, contain the entire
understanding between the parties hereto with respect to the subject matter
hereof, and supersede all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
with respect to the subject matter hereof. The express terms hereof control and
supersede any course of performance and/or usage of the trade inconsistent with
any of such terms. This Agreement may not be modified or amended other than by
an agreement in writing signed by both parties.
(g) Section Headings. The section headings in this
Agreement are for convenience only; they form no part of this Agreement and will
not affect its interpretation.
(h) Gender, etc. Words used herein, regardless of the
number and gender specifically used, will be deemed and construed to include any
other number, singular or plural, and any other gender, masculine, feminine or
neuter, as the context indicates is appropriate.
(i) Jurisdiction and Governing Law. This Agreement shall be
construed and interpreted in accordance with, and governed by, the laws of the
Commonwealth of Pennsylvania, excluding any conflicts of laws rules which would
require the laws of any other jurisdiction to apply. Any dispute under this
Agreement shall be litigated in the state or federal courts located in
Pittsburgh, Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed and delivered as of the date first above written.
FORE SYSTEMS, INC.
By: /S/ THOMAS J. GILL
----------------------------------------
Thomas J. Gill
President and Chief Executive Officer
/s/ ONAT MENZILCIOGLU
----------------------------------------
Onat Menzilcioglu
-4-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
FORE Systems, Inc. owns, either directly or indirectly, through another
wholly-owned subsidiary, equity interests in each of the following companies
which do business under their respective corporate names:
FORE Systems Worldwide, Inc. Delaware
FORE Systems Holding Corporation Delaware
FORE Systems Federal, Inc. Delaware
Network Control Technologies, Inc. Delaware
Alantec International, Inc. California
FORE Systems Technology, Inc. Delaware
FORE Systems International, Inc. Barbados
FORE Systems Japan, Inc. Japan
Nunlow Limited Ireland
Nemesys Holding Corporation Delaware
Nemesys Research United Kingdom
FORE Systems B.V. Netherlands
FORE Systems S.A.R.L. France
FORE Systems GmbH Federal Republic of Germany
FORE Systems Limited United Kingdom
FORE Systems ApS Denmark
FORE Systems B.V.B.A. Belgium
FORE Systems AG Switzerland
FORE Systems Limited Hong Kong
FORE Systems Limited Bermuda
FORE Systems Limited Canada
FORE Systems AB Sweden
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-81796, 33-99350, 333-01728, 333-04052, 333-17017
and 333-47483) the Post Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 (No. 333-00468) of FORE Systems, Inc., of our report dated
April 22, 1998, appearing on page 24 of this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
June 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 127,231
<SECURITIES> 186,999
<RECEIVABLES> 118,541
<ALLOWANCES> 7,194
<INVENTORY> 70,388
<CURRENT-ASSETS> 544,712
<PP&E> 124,660
<DEPRECIATION> 53,165
<TOTAL-ASSETS> 621,207
<CURRENT-LIABILITIES> 114,189
<BONDS> 0
0
0
<COMMON> 423,782
<OTHER-SE> 83,236
<TOTAL-LIABILITY-AND-EQUITY> 621,207
<SALES> 458,369
<TOTAL-REVENUES> 458,369
<CGS> 203,173
<TOTAL-COSTS> 203,173
<OTHER-EXPENSES> 218,827
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 50,221
<INCOME-TAX> 15,066
<INCOME-CONTINUING> 35,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,155
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
