-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O7aLCm1gn6YrcHV45NpdacXba741FLWw6q5Q/CYSS2uBtEFc/42N2C/VrPcPQjVk tc+BcVwot5zIB+GIu5iLlg== 0000950128-98-000968.txt : 19980814 0000950128-98-000968.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950128-98-000968 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORE SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0000920000 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 251628117 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24156 FILM NUMBER: 98686575 BUSINESS ADDRESS: STREET 1: 1000 FORE DRIVE CITY: WARRENDALE STATE: PA ZIP: 15086-7502 BUSINESS PHONE: 4127726600 10-Q 1 FORE SYSTEMS, INC. 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 2 FORM 10-Q FORE SYSTEMS, INC. TABLE OF CONTENTS
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements FORE Systems, Inc. Consolidated Balance Sheet as of 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
2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. FORE SYSTEMS, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED) JUNE 30, MARCH 31, 1998 1998 ---- ---- 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 ========= =========
The accompanying notes are an integral part of these financial statements 3 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 5 FORE SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS UNAUDITED (IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, --------------------- 1998 1997 ---- ---- 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 ========= =========
The accompanying notes are an integral part of these financial statements. 5 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 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 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 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 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 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 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 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 14 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 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 16 EXHIBIT INDEX Exhibit No. Description 27.1 Financial Data Schedule 16 EX-27 2 FORE SYSTEMS, INC.
5 1,000 3-MOS MAR-31-1999 APR-01-1998 JUN-30-1998 121,492 201,741 116,977 6,562 76,964 641,331 136,608 61,094 641,331 106,992 0 0 0 436,173 97,552 641,331 143,731 143,731 63,496 63,496 63,725 0 0 20,003 5,601 14,402 0 0 0 14,402 0.14 0.14
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