<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
--------- ----------
Commission file number 0-24156
FORE SYSTEMS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 25-1628117
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S Employer
Incorporation or Organization) Identification No.)
1000 FORE Drive, Warrendale, Pennsylvania 15086-7502
----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (724) 742-4444
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
- ---------------------------- ----------------------------
Common Stock, $.01 par value 101,610,360 Shares
<PAGE> 2
FORM 10-Q
FORE SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORE Systems, Inc. Consolidated Balance
Sheet as of June 30, 1998 and
March 31, 1998 3
FORE Systems, Inc. Consolidated Statement
of Income for the three months ended
June 30, 1998 and 1997 4
FORE Systems, Inc. Consolidated Statement
of Cash Flows for the three months ended
June 30, 1998 and 1997 5
Notes to Unaudited Consolidated Financial
Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
FORE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, MARCH 31,
1998 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 121,492 $ 127,231
Short-term investments 201,741 186,999
Accounts receivable, net of allowance for doubtful
accounts of $6,562 at June 30, 1998 and
$7,194 at March 31, 1998 110,415 111,347
Inventories 76,964 70,388
Deferred income taxes 35,619 36,620
Prepaid expenses and other current assets 14,586 12,127
--------- ---------
Total current assets 560,817 544,712
Fixed assets, net 75,514 71,495
Other non-current assets 5,000 5,000
--------- ---------
Total assets $ 641,331 $ 621,207
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,732 $ 37,240
Accrued payroll and related costs 13,924 18,560
Income taxes payable 18,310 13,789
Deferred revenue 27,858 28,719
Other current liabilities 10,782 15,881
--------- ---------
Total current liabilities 107,606 114,189
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; 300,000,000
shares authorized; shares issued:
101,556,894 at June 30, 1998 and 100,302,143
at March 31, 1998 436,173 423,782
Retained earnings 102,687 88,285
Treasury stock, at cost: 145,130 shares (3,252) (3,252)
Cumulative translation adjustment (238) (101)
Valuation allowance for short-term investments (1,645) (1,696)
--------- ---------
Total stockholders' equity 533,725 507,018
--------- ---------
Total liabilities and stockholders' equity $ 641,331 $ 621,207
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE> 4
FORE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
THREE MONTHS ENDED
JUNE 30,
-------------------
1998 1997
---- ----
Revenue $ 143,731 $ 95,359
Cost of sales 63,496 42,184
--------- --------
Gross profit 80,235 53,175
========= ========
Operating expenses:
Research and development 18,415 15,905
Sales and marketing 38,397 27,938
General and administrative 6,913 4,781
--------- --------
Total operating expenses 63,725 48,624
========= ========
Income from operations 16,510 4,551
Interest income, net 3,823 3,029
Other income (expense) (330) (30)
--------- --------
Income before provision for income taxes 20,003 7,550
Provision for income taxes 5,601 2,567
--------- --------
Net income $ 14,402 $ 4,983
========= ========
Net income per share - basic $ 0.14 $ 0.05
========= ========
Net income per share - diluted $ 0.14 $ 0.05
========= ========
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
FORE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,402 $ 4,983
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 8,249 5,514
Deferred income tax benefit 1,001 (255)
Cumulative translation adjustment (137) 40
Change in operating assets and liabilities:
Accounts receivable 932 344
Inventories (6,576) (3,399)
Prepaid expenses and other current assets (2,516) (6,713)
Accounts payable (508) (3,468)
Accrued liabilities (9,735) (1,713)
Prepaid income taxes and income taxes payable 4,521 1,648
Deferred revenue (861) (36)
--------- ---------
Net cash provided by (used in) operating activities 8,772 (3,055)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (49,701) (48,645)
Redemption and sale of short-term investments 35,010 45,312
Capitalization of software development costs (263) (10)
Purchases of fixed assets (11,948) (12,817)
--------- ---------
Net cash used in investing activities (26,902) (16,160)
--------- ---------
Cash flows from financing activities:
Principal payments on notes payable and capital lease
obligations - (21)
Proceeds from issuance of Common stock 12,391 3,666
--------- ---------
Net cash provided by financing activities 12,391 3,645
--------- ---------
Decrease in cash and cash equivalents (5,739) (15,570)
Cash and cash equivalents at beginning of period 127,231 129,424
--------- ---------
Cash and cash equivalents at end of period $ 121,492 $ 113,854
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
NOTE 1. Interim Financial Statements
The accompanying unaudited interim consolidated financial statements of
FORE Systems, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, these statements include all adjustments,
consisting of normal and recurring adjustments, considered necessary for a fair
presentation of the results for such period. The results of operations for the
three month period ending June 30, 1998 are not necessarily indicative of
results which may be achieved for the entire fiscal year ending March 31, 1999.
The unaudited consolidated interim financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998 as
filed with the Securities and Exchange Commission.
NOTE 2. Inventories (in thousands)
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method, and include raw material
components, processing costs and manufacturing overhead costs. Inventories are
summarized as follows:
June 30, 1998 March 31, 1998
------------- --------------
Raw Materials $22,309 $15,120
Work in Process 10,734 11,512
Finished Goods 43,921 43,756
------- -------
Total Inventories $76,964 $70,388
======= =======
NOTE 3. Lease Commitments
In December 1995, the Company entered into an agreement to lease
headquarters and operating facilities constructed on land that was purchased by
the Company. The Company is now occupying the facilities. In October 1997, the
lessor finalized permanent financing arrangements for the facilities with a
group of lenders. The total amount financed was $41 million. The Company is
leasing the facilities under a ten-year operating lease and has options, subject
to the lenders' and lessor's consent, to renew the lease for two additional
five-year terms. Annual minimum rental payments under the lease are
approximately $3.3 million and commenced in calendar 1998. The Company has
guaranteed repayment of up to approximately $32 million of the lenders'
financing of the facilities, which includes pledged amount of approximately
$29.2 million, as of June 30, 1998, of securities it holds as collateral for
specified obligations of the lessor. In addition, under the terms of the lease,
the Company is required to comply with certain financial covenants including the
maintenance of a minimum tangible net worth. Other restrictive covenants limit
indebtedness and the payment of dividends.
The Company may, at its option, purchase the facilities during or at
the expiration of the term of the lease at an amount equal to the remaining
balance of any debt of the lessor related to the construction of the facilities
plus any applicable prepayment penalties. If the Company does not exercise the
purchase option at the end of the lease, the Company will guarantee the residual
value of the facilities of approximately $24 million, an amount that was
determined at the lease inception date.
6
<PAGE> 7
NOTE 4. Legal Proceedings
In July and August 1997, the Company was notified that it was a party
to seven nearly identical class action lawsuits, filed in the United States
District Court for the Western District of Pennsylvania, alleging certain
violations of federal securities laws by the Company and certain of its
officers, who were named as defendants in the suits, arising from alleged
misstatements or omissions by the Company. Plaintiffs seek compensatory damages
for injuries allegedly incurred by purchasers of the Company's stock during the
period from October 17, 1996 through April 1, 1997, inclusive. Pursuant to court
order, the lawsuits were consolidated and a consolidated amended complaint was
filed by the lead plaintiffs. The Company and the individual defendants
subsequently filed their answer to the consolidated amended complaint. The
Company believes the allegations in the consolidated amended complaint are
completely without merit and intends to defend these actions vigorously.
Management believes that the ultimate outcome of these claims will not have a
material adverse effect on the results of operations or financial position of
the Company.
From time to time, the Company receives notifications alleging that it
is or may be infringing the intellectual property rights of third parties. At
the present time, the Company is in separate discussions with several such third
parties regarding the alleged infringement by the Company of certain patents
owned by such third parties. Management believes that the ultimate outcome of
these matters is not likely to have a material adverse effect on the results of
operations or financial position of the Company.
NOTE 5. New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative and Similar Financial Instruments
and for Hedging Activities" ("SFAS 133"). This new standard requires recognition
of all derivatives as either assets or liabilities at fair value. Based upon the
hedging strategies currently used and the level of activity related to
derivative instruments, the Company does not anticipate the effect of adoption
to have a material impact on either financial position or results of operations.
The Company will implement SFAS 133 in fiscal year 2000, as required.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). During the quarter, the
company adopted SFAS 130. This statement establishes standards for reporting and
the display of comprehensive income and its components in a primary financial
statement. At June 30, 1998 and June 30, 1997, the components of comprehensive
income were as follows:
Three months ended June 30, 1998 1997
Net Income $ 14,402 $ 4,983
Change in currency translation
adjustment $ (137) $ 40
Change in unrealized gain (loss)
on available-for-sale investments $ 56 $ (149)
-------- -------
Comprehensive income $ 14,321 $ 4,874
======== =======
7
<PAGE> 8
NOTE 6. Earnings Per Share (in thousands except per-share data)
In February 1997, Statement of Financial Accounting Standards No. 128
"Earnings per share"("SFAS 128") was issued by the 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.
Three months ended June 30, 1998 1997
Net income available to common stockholders $ 14,402 $ 4,983
-------- --------
Shares used for basic per share computation
weighted average shares outstanding 100,719 98,324
Effect of dilutive securities:
Stock options 5,014 2,174
-------- --------
Shares used for diluted per share computation 105,733 100,498
======== ========
Net income per share:
Basic $ .14 $ .05
======== ========
Diluted $ .14 $ .05
======== ========
8
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS
GENERAL
Certain statements made herein, including, without limitation, statements
regarding increased market acceptance of ATM and LAN switching products,
statements regarding the Company's pricing strategies and resulting effects on
revenue and gross margins and statements regarding the Company's sales and
marketing strategies, may be deemed to be forward-looking statements that
involve risks and uncertainties. Such statements should be read in conjunction
with certain cautionary statements set forth herein and the list of risk factors
set forth in the Company's Annual Report on Form 10-K for the year ended March
31, 1998 (the "Form 10-K"). Such factors could cause actual results to differ
materially from those expressed in any forward-looking statements contained
herein.
QUARTER ENDED JUNE 30, 1998 COMPARED WITH QUARTER ENDED JUNE 30, 1997
REVENUE. Revenue increased by 51% to $143.7 million in the quarter ended
June 30, 1998, from $95.4 million in the quarter ended June 30, 1997. The
distribution of revenue from sales to domestic and foreign customers was 70% and
30%, respectively, in the quarter ended June 30, 1998. This compares with 71%
and 29%, respectively, in the corresponding quarter in 1997. In the quarter
ended June 30, 1998, the distribution of revenue from sales to foreign customers
by geographic region was 21%, 4% and 5% for Europe (which includes Middle East
and Africa), Pacific Rim and other, respectively. Geographic mix for the
corresponding quarter in 1997 was 16%, 4% and 9%, respectively. The increase in
revenue dollars was attributable to the increased market acceptance of ATM and,
to a lesser extent, LAN switching products.
The Company measures overall unit volume for its switching products based
on the number of ATM ports or network connections shipped. The total number of
ATM ports shipped in the quarter ended June 30, 1998 was 49,500 as compared with
25,000 in the corresponding quarter in 1997. The total installed base of ATM
ports as of June 30, 1998 was 360,000 as compared with 185,000 at June 30, 1997.
The total number of LAN switching ports shipped in the quarter ended June 30,
1998 was 138,500 as compared with 107,000 in the previous year's corresponding
quarter. The total number of adapter cards shipped in the quarter ended June 30,
1998 was 13,000 as compared with 7,100 in the previous year's corresponding
quarter. The total installed base of adapter cards as of June 30, 1998 was
124,000 as compared with 69,000 as of June 30, 1997. In the quarter ended June
30, 1998, revenue mix, as a percentage of revenue, among ATM switching products,
LAN switching products, adapter cards and other revenue (principally service
support and development contracts) was 61%, 24%, 3% and 12%, respectively.
Revenue mix for the corresponding quarter in 1997 was 54%, 30%, 4% and 12%,
respectively. Average selling price per ATM port during the quarter ended June
30, 1998 was $1,800 as compared to $2,100 in the corresponding quarter in 1997.
Average selling price per LAN switching port was $245 in the quarter ended June
30, 1998 as compared to $270 in the corresponding quarter in 1997. Average
selling price for adapter cards shipped during the quarter ended June 30, 1998
was $380, as compared to $525 in the previous year's quarter ended June 30,
1997. In January of 1998, the Company reduced the price of certain of its ATM
workgroup products by up to 40%.
GROSS PROFIT. Gross profit increased to $80.2 million or 55.8% as a
percentage of revenue in the quarter ended June 30, 1998 as compared to gross
profit of $53.2 million or 55.8% as a percentage of revenue in the corresponding
quarter in 1997. The dollar increase in gross profit was largely attributable to
the increase in revenue. The Company intends to price its products
competitively. There can be no assurance that gross profit percentage can be
maintained at the current level.
9
<PAGE> 10
RESEARCH AND DEVELOPMENT. Research and development expense was $18.4
million or 12.8% of revenue in the quarter ended June 30, 1998 as compared to
$15.9 million or 16.7% of revenue in the corresponding quarter in 1997. The
increase in research and development expense in dollars was largely attributable
to increased payroll costs, purchases of research and development materials and
depreciation. The decrease in research and development expense as a percentage
of revenue was primarily attributable to increased revenue absorbing a greater
portion of the Company's expenses. The number of employees of the Company
engaged in research and development decreased to 406 at June 30, 1998 from 420
at June 30, 1997.
SALES AND MARKETING. Sales and marketing expense was $38.4 million or 26.7%
of revenue for the quarter ended June 30, 1998 as compared to $27.9 million or
29.3% of revenue in the corresponding quarter in 1997. The increase in sales and
marketing expense in dollars was largely the result of hiring additional sales,
marketing and support personnel (including training and documentation) and
increased advertising costs. The decrease in sales and marketing expense as a
percentage of revenue was primarily attributable to increased revenue absorbing
a greater portion of the Company's expenses. The number of employees of the
Company engaged in sales and marketing activities increased to 851 at June 30,
1998 from 587 at June 30, 1997. The Company expects to continue to increase
sales and marketing expenses in dollars, but not as a percentage of revenue,
both domestically and internationally as a part of its continuing effort to
expand its markets, introduce new products, build marketing staff and programs
and expand its international presence.
GENERAL AND ADMINISTRATIVE. General and administrative expense was $6.9
million or 4.8% of revenue in the quarter ended June 30, 1998 as compared to
$4.8 million or 5.0% of revenue in the corresponding quarter in 1997. The
increase in general and administrative expense in dollars 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. The decrease in general and
administrative expense as a percentage of revenue was primarily attributable to
increased revenue absorbing a greater portion of the Company's expenses. The
number of employees of the Company engaged in general and administrative
activities increased to 178 at June 30, 1998 from 146 at June 30, 1997. The
Company plans to make appropriate expenditures in the general and administrative
organization as necessary, but does not expect the overall expenditures to
increase materially as a percentage of revenue.
INTEREST INCOME. Interest income, net of interest expense, was $3.8 million
in the quarter ended June 30, 1998 as compared to $3.0 million in the
corresponding quarter in 1997. The increase in interest income is principally
due to an increase in the Company's average cash balance.
INCOME TAXES. The provision for income taxes was $5.6 million, or an
effective rate of 28%, in the quarter ended June 30, 1998 as compared to $2.6
million, or 34%, in the previous year's quarter ended June 30, 1997. The
decrease in the effective tax rate is primarily the result of certain tax
advantages associated with the operation of the Dublin, Ireland manufacturing
facility.
YEAR 2000
The Company believes that all of its current products are Year 2000
compliant. However, certain products previously sold by the Company may not be
Year 2000 compliant, and the Company has undertaken a study to determine what
actions may be appropriate for the Company to take with respect to any such
products which continue to be used by customers. The Company believes that the
costs associated with any such actions would not have a material effect on its
financial position or results of operations.
10
<PAGE> 11
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.
FUTURE GROWTH SUBJECT TO RISKS
The Company's quarterly and annual operating results are affected by a wide
variety of risks and uncertainties as discussed in the Company's 1998 Annual
Report on Form 10-K. This Quarterly Report on Form 10-Q should be read in
conjunction with the 1998 Form 10-K, particularly the section entitled "Certain
Risk Factors."
The networking industry is highly competitive and is characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions which could render the Company's products noncompetitive
or obsolete. Because the Company's business strategy is based upon the belief
that ATM will be the technology of choice for the information technology
infrastructure, the Company's business, financial position and results of
operations would be materially adversely affected if ATM fails to gain broad
commercial acceptance or if other networking technologies gain competitive
advantages over ATM. Even if ATM achieves broad commercial acceptance, there can
be no assurance that the Company can continue to successfully develop and
introduce new products and enhancements given the fact that many of the
Company's competitors have significantly greater financial, technological and
personnel resources than does the Company. The 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 this product will be introduced or,
if it is introduced, that it will be successful in the marketplace.
Although the Company has historically experienced increasing sales on an
annual basis, the rate of revenue growth has slowed in the last two fiscal
years. The Company's rate of revenue growth may continue to decline, and there
can be no assurance that the Company will experience revenue growth in the
future at historic rates or at all.
The Company has experienced fluctuating operating results on a quarterly
and annual basis and may continue to do so. These fluctuations are caused by
many factors, including a disproportionate share of sales occurring late in a
given quarter, the introduction of new products and technologies by competitors,
the pattern and seasonality of customer purchasing cycles, variations in the mix
of products sold and sales channels, price competition, manufacturing lead times
and changes in economic conditions. These factors make it difficult to predict
operating results for any given period, and have led to, and are likely to
continue to lead to, volatility in the market price of the Company's Common
stock.
The Company competes in international markets and is, accordingly, subject
to numerous risks. Sales to foreign customers in fiscal 1998 decreased in
dollars and as a percentage of revenue in comparison with fiscal 1997, and there
can be no assurance that such sales will not continue to decline. In addition,
the Company's international business may be adversely affected by foreign
regulatory requirements, changes in demand resulting from fluctuations in
currency exchange rates and local purchasing practices, difficulties in
distribution, slower payment of invoices, increases in duty rates, foreign
political and economic conditions and constraints upon international trade.
11
<PAGE> 12
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. 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.
The Company's gross margins have been adversely affected and may continue
to be adversely affected by competitive pricing pressures and a change in the
mix of products sold toward lower-margin workgroup and desktop products for both
ATM and Ethernet. In addition, the Company's operating margins may be adversely
affected by the need to hire additional sales, marketing and other personnel.
The Company plans its operating expense levels based primarily on forecasted
revenue, and a shortfall in revenue would be likely to lead to operating results
being lower than expected. Any such failure to meet expectations could result in
a decrease in the market price of the Company's Common stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed most of its working capital and capital
expenditure requirements to date primarily through cash proceeds from public
offerings and cash generated from operations.
Net cash provided by operations was $8.8 million for the quarter ended June
30, 1998. Net cash provided by operations was the result of net income and
increases to prepaid income taxes and income taxes payable offset somewhat by
decreases to accrued liabilities and increased inventory. The increase in
inventories was due to increased revenue. Net cash used by operations was $3.1
million for the quarter ended June 30, 1997 which resulted from increased
inventories and a decrease in accounts payable, somewhat offset by net income.
The increase in inventories was due to increased revenue. The Company's
investing activities to date have been for the purchase of fixed assets to
support the Company's growth.
At June 30, 1998, the Company had cash and cash equivalents of
approximately $121.5 million, short-term investments of $201.7 million and an
unused line of credit of $20 million.
In December 1995, the Company entered into an agreement to lease
headquarters and operating facilities constructed on land that was purchased by
the Company. The Company is now occupying the facilities. In October 1997, the
lessor finalized permanent financing arrangements for the facilities with a
group of lenders. The total amount financed was $41 million. The Company is
leasing the facilities under a ten-year operating lease and has options, subject
to the lenders' and lessor's consent, to renew the lease for two additional
five-year terms. Annual minimum rental payments under the lease are
approximately $3.3 million and commenced in calendar year 1998. The Company has
guaranteed repayment of up to approximately $32 million of the lenders'
financing of the facilities, which includes pledged amounts of approximately
$29.2 million, as of June 30, 1998, of securities it holds as collateral for
specified obligations of the lessor. In addition, under the terms of the lease,
the Company is required to comply with certain financial covenants including the
maintenance of a minimum tangible net worth. Other restrictive covenants limit
indebtedness and the payment of dividends.
The Company believes that its existing sources of liquidity and internally
generated cash will satisfy the Company's projected cash needs through at least
the next twelve months. The Company may require additional sources of liquidity
to fund future growth, including additional equity offerings or debt financing.
In July and August 1997, the Company was notified that it was a party to
seven nearly identical class action lawsuits, filed in the United States
District Court for the Western District of Pennsylvania, alleging certain
violations of federal securities laws by the Company and certain of its
officers, who were named as defendants in the suits, arising from alleged
misstatements or omissions by the Company. Plaintiffs seek compensatory damages
for injuries allegedly incurred by purchasers of the Company's stock during
12
<PAGE> 13
the period from October 17, 1996 through April 1, 1997, inclusive. Pursuant to
court order, the lawsuits were consolidated and a consolidated amended complaint
was filed by the lead plaintiffs. The Company and the individual defendants
subsequently filed their answer to the consolidated amended complaint. The
Company believes the allegations in the consolidated amended complaint are
completely without merit and intends to defend these actions vigorously.
Management believes that the ultimate outcome of these claims will not have a
material adverse effect on the results of operations or financial position of
the Company.
To date, inflation has not had a material impact on the Company's financial
results.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative and Similar Financial Instruments and for
Hedging Activities" ("SFAS 133"). This new standard requires recognition of all
derivatives as either assets or liabilities at fair value. Based upon the
hedging strategies currently used and the level of activity related to
derivative instruments, the Company does not anticipate the effect of adoption
to have a material impact on either financial position or results of operations.
The Company will implement SFAS 133 in fiscal year 2000, as required.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). During the quarter, the company adopted SFAS
130. This statement establishes standards for reporting and the display of
comprehensive income and its components in a primary financial statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
13
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In July and August 1997, the Company was notified that it was a party
to seven nearly identical class action lawsuits, filed in the United States
District Court for the Western District of Pennsylvania, alleging certain
violations of federal securities laws by the Company and certain of its
officers, who were named as defendants in the suits, arising from alleged
misstatements or omissions by the Company. Plaintiffs seek compensatory damages
for injuries allegedly incurred by purchasers of the Company's stock during the
period from October 17, 1996 through April 1, 1997, inclusive. Pursuant to court
order, the lawsuits were consolidated and a consolidated amended complaint was
filed by the lead plaintiffs. The Company and the individual defendants
subsequently filed their answer to the consolidated amended complaint. The
Company believes the allegations in the consolidated amended complaint are
completely without merit and intends to defend these actions vigorously.
Management believes that the ultimate outcome of these claims will not have a
material adverse effect on the results of operations or financial position of
the Company.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
The exhibits listed below are filed or incorporated by
reference as part of this quarterly report on Form 10-Q:
3.1 Amended and Restated Certificate of Incorporation of FORE
Systems, Inc. (as amended by Certificate of Amendment dated May 6,
1996) (incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1996).
3.2 Second Amended and Restated Bylaws of FORE Systems, Inc.
(as amended through March 5, 1997) (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1997).
27.1. Financial Data Schedule.
b) Reports on Form 8-K.
The Company did not file any Reports on Form 8-K during the
quarter ended June 30, 1998.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FORE SYSTEMS, INC.
(Registrant)
Date: August 13, 1998 /s/ Bruce E. Haney
-------------------------------------------
Bruce E. Haney
Senior Vice President and Chief
Financial Officer
(Authorized Officer and Principal Financial
Officer)
15
<PAGE> 16
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 121,492
<SECURITIES> 201,741
<RECEIVABLES> 116,977
<ALLOWANCES> 6,562
<INVENTORY> 76,964
<CURRENT-ASSETS> 641,331
<PP&E> 136,608
<DEPRECIATION> 61,094
<TOTAL-ASSETS> 641,331
<CURRENT-LIABILITIES> 106,992
<BONDS> 0
0
0
<COMMON> 436,173
<OTHER-SE> 97,552
<TOTAL-LIABILITY-AND-EQUITY> 641,331
<SALES> 143,731
<TOTAL-REVENUES> 143,731
<CGS> 63,496
<TOTAL-COSTS> 63,496
<OTHER-EXPENSES> 63,725
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 20,003
<INCOME-TAX> 5,601
<INCOME-CONTINUING> 14,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,402
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
