-----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, Umu3dDj3DaAVqXsDM1LYZSZd84bX63JWop+3ywxhvf/+f91xDJ7891XHEyR9fbqq jhqormML022OGQwSCzYWBA== 0000950152-97-004825.txt : 19970630 0000950152-97-004825.hdr.sgml : 19970630 ACCESSION NUMBER: 0000950152-97-004825 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970627 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24156 FILM NUMBER: 97631501 BUSINESS ADDRESS: STREET 1: 1000 FORE DRIVE CITY: WARRENDALE STATE: PA ZIP: 15086-7502 BUSINESS PHONE: 4127726600 10-K 1 FORE SYSTEMS, INC. ANNUAL REPORT FORM 10-K 1 ================================================================================ 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 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]. FOR THE FISCAL YEAR ENDED MARCH 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]. 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 Incorporation or (I.R.S. Employer Identification No.) Organization) 1000 FORE DRIVE, WARRENDALE, PENNSYLVANIA 15086-7502 (Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (412) 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 30, 1997, 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 $1,387,366,094 (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 30, 1997 was 98,312,974. 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 1997 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. ================================================================================ 2 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 and total capacity 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 and ES-3810 Ethernet switches for ATM connectivity, ForeRunner ATM adapter cards, CellPath(TM) wide area network ("WAN") multiplexing products for WAN access, ForeThought(TM) 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, 1997, the Company had delivered networking solutions to approximately 4,000 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 37%, 39% and 35% of FORE Systems' revenue for the years ended March 31, 1997, 1996 and 1995, respectively. NETWORKING OVERVIEW BACKGROUND As the power of personal computers ("PCs"), workstations and network servers has increased dramatically, these computers have been linked into LANs to share applications and data. These LANs have, in turn, been linked into WANs that enable all of the client and server machines in an enterprise to communicate with each other over enterprise-wide networks. In addition, the greater computational power of PCs and workstations and their interconnection into LANs and WANs have made possible new networked applications, which often require integrated video, audio and data content. These new applications require large amounts of bandwidth, or network capacity, and also rely on the network to do more than share information equally throughout an organization. For effective network usage, the network must have "smart bandwidth," or the capability to prioritize critical business applications over less important applications and authorize and "police" users on these applications at the proper time of day. CONVENTIONAL NETWORKING TECHNOLOGIES Conventional networking technologies, such as Ethernet, Fast Ethernet, Token Ring and Fiber Distributed Data Interface ("FDDI"), are often referred to as shared-medium networking technologies because they require computers to contend for the total capacity or "bandwidth" of the network. As the number of computers in the network and the volume of network traffic grow, the performance of an application is directly impacted because performance depends on the amount of competition from other computers contending to use the network. Additionally, the growth of "groupware" applications have brought new demands to the network infrastructure. The design of conventional networking technologies, in order to achieve the performance demands of users, assumed that 80% of network traffic would remain in a local subnetwork. As a result, the application server for such "groupware" applications must be replicated. This replication of data results in increased bandwidth and network management requirements. The rise of Internet applications and electronic 2 3 commerce are also increasing the demands on the network infrastructure. The move away from locally oriented, departmentalized mainframe-to-PC connections in the 1970s and 1980s to the creation of enterprise-wide networks, as well as the advent of Web browsers and "any client to any server" access in the 1990s has created unpredictable traffic patterns, which make demands on conventional network technologies that they were not designed to handle. The task of managing an enterprise network becomes even more difficult and costly when the network includes WAN links and transmits multiple types of network traffic. Conventional LAN and WAN networking technologies are faced with the problems of insufficient bandwidth, administrative burden and incompatibility between LANs and WANs. The Company believes that only ATM offers the combination of superior performance, scalable bandwidth, simplicity of management, ability to link geographically dispersed LANs into an enterprise-wide backbone and use of a single protocol across LANs and WANs that is necessary to address these shortcomings. ATM NETWORKING SOLUTIONS ATM technology transcends many of the limitations imposed by conventional networking technologies. ATM has been endorsed as a standard by both the computer and telecommunications industries. It is the only technology that is not limited in its effectiveness to either LAN or WAN implementations, and is, therefore, ideally suited to today's business models which tie together networks both within the enterprise and externally to customers, suppliers and distributors. ATM spans LANs and WANs, seamlessly providing a dramatic increase in bandwidth throughout the network, carrying both LAN and WAN traffic faster than conventional networking technologies. ATM also provides a flexible platform for application deployment, transparently tying branch locations into central headquarters. In addition, because it can seamlessly integrate video, audio and data traffic, ATM easily accommodates future network growth and expansion. Because of ATM's long standing acceptance by service provider organizations, it is also the technology that can connect ATM-based enterprise networks to ATM-based service provider networks. An ATM-based network is also significantly easier to configure and administer than a comparable conventional network. Network capacity can be increased simply by adding ATM switches, obviating the need for network segmentation and extensive down-time. ATM seamlessly integrates LANs and WANs, facilitating the transmission of data from desktop to backbone to wide area and back to the desktop through a variety of standardized physical interfaces, all of which support a single set of ATM protocols. ATM is also an enabling technology, making possible new ways of doing business using network applications that would be impractical on conventional networks. ATM ARCHITECTURE In an ATM network, all data is divided into and transported in small, fixed-size "cells," rather than the larger variable-size "packets" used in conventional network technologies. Text messages, data files and digitized images, as well as continuous streams of video and audio, are all converted into cells for transmission and are reassembled as necessary at their destinations by ATM adapter cards. ATM cells are then transmitted from the adapter card in each computer to an ATM switch, which redirects each cell either through another ATM switch or directly to its destination. Unlike conventional networks, an ATM network has sufficient capacity to handle traffic on all of the incoming links simultaneously, so that the performance of an application is not affected by unrelated "cross traffic" from other networked computers. ATM technology permits multiple users to transmit and receive data simultaneously over multiple "virtual connections" rather than contending for network access. This is similar to the way a telephone call, once established, is not affected by the number of other callers using the network at any given time. Each ATM switch is able to maintain thousands of these virtual connections between pairs of senders and receivers, thereby supporting the concurrent transmission of data, audio and video among numerous participants in the network. 3 4 ATM technology can be integrated easily into customers' existing network environments. ATM switches can serve as the backbone of an enterprise-wide network, and existing departmental LANs can be connected to the ATM backbone by means of LAN access switches that support Ethernet, Fast Ethernet and FDDI or other conventional technologies and convert them to ATM. ATM can form the basis of a collaborative workgroup comprised of individual PCs, workstations and servers equipped with ATM adapter cards. In such a workgroup, ATM can serve as a complete, desktop-to-desktop network solution. As LAN data, WAN data and WAN voice networks converge, ATM is emerging as the technology that can provide the network infrastructure to integrate voice, video and data applications at a high level of performance, capacity and scalability. The Company believes that the integration of LANs and WANs will continue and that ATM will be the technology underlying the interactive broadband architecture of future network environments. STRATEGY FORE Systems' goal is to enhance its leadership position in the networking industry by implementing the following strategies:(1) FOCUS ON ATM FORE Systems is a leader in the ATM market and believes that ATM will be the core technology underlying switched, enterprise-wide networks and the convergence of LAN data, WAN data and WAN voice environments in broadband networks. The Company intends to remain a leader in ATM networking by continuing to develop new products that use ATM at the core of the multiservice networks of the future. DELIVERING COST-EFFECTIVE SOLUTIONS FORE Systems intends to continue to deliver LAN and WAN access products that provide cost-effective "on-ramps" to ATM. The Company believes that by offering products that provide a smooth and seamless migration path from existing networking technologies to ATM, it will speed deployment of ATM and enable customers to enjoy the benefits of ATM without sacrificing their investment in legacy equipment. To that end, FORE Systems offers a complete line of LAN switching products, including the PowerHub family of multilayer LAN switching products and the ES-3810 Ethernet switch that smooth the migration from legacy networks to ATM backbones. FORE Systems also offers CellPath WAN multiplexing products and StreamRunner ATM video products that allow customers to consolidate voice, video and data applications over a single cost-saving multiservice network. ACQUISITIONS In response to evolving market needs, the Company has made, and may continue to make, acquisitions that add products and technologies and enhance the Company's ability to offer customers a smooth migration path to ATM. The Company completed three acquisitions in fiscal 1997, each of which provided the Company with products or technology that extended the "on-ramps" to ATM. The Company acquired Cadia Networks, Inc., an innovator in the development of multi-service WAN adaptation and concentration technology for the service provider market, including high density, carrier-class access technology; Nemesys Research Limited, a developer and manufacturer of ATM video distribution and video conferencing products, enabling end-to-end voice and video solutions for image-intensive applications; and Scalable Networks, Inc., a developer of innovative high-performance Fast Ethernet and Gigabit Ethernet switching technology directed to gaining cost-effective desktop and server connections to ATM backbone networks. - --------------- 1 Certain statements made herein and elsewhere in this report concerning technology, markets, products, strategies and other matters are forward-looking statements and should be read in conjunction with the risk factors that begin on page 9 of this Annual Report on Form 10-K and under the captions "Competition," "Manufacturing" and "Intellectual Property" in the description of the Company's business. 4 5 STRATEGIC ALLIANCES To expand its market reach, the Company plans to continue to form strategic alliances with original equipment manufacturers, third-party application developers, distributors and resellers. The Company's ForeThought partners program now includes more than 40 companies with whom FORE Systems is working to accelerate the deployment of ATM across a variety of application areas. These application areas include LAN and WAN data, WAN voice transmission, embedded ATM applications and residential and corporate broadband applications. The Company believes that the ForeThought partners program helps to spread the influence of its ATM technology across many sectors of the networking market. 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-3810 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. In May 1997, the Company announced a new line of ATM products for the service provider market. 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, 1997, the installed base of ForeRunner ATM switches consisted of approximately 160,000 ports. ForeRunner ATM switches provide a non-blocking switch capacity that ranges from 2.5 to 10 gigabits per second (Gbps) for up to 96 connections. 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) and OC12 (622 Mbps), and 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 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. 5 6 ES-3810 ETHERNET SWITCHES The ES-3810 Ethernet switches offer flexible solutions for switched workgroups by providing a wide range of switched Ethernet and ATM connectivity options. The ES-3810 provides ATM uplinks and OC3 connectivity for multimode and singlemode fiber and copper media. The ES-3810 also provides dedicated 10 Mbps and 100 Mbps switching. 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, video conferencing 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. SERVICE PROVIDER ATM PRODUCTS In May 1997, the Company announced the introduction of the TNX line of ATM switches and the MSC-900(TM) multiservice concentrator. These new products, which became available in June 1997, enable broadband based-services such as high speed Internet access, web hosting, video on demand and distance learning. These products will be 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. The MSC-900 is a multiservice concentrator designed to reduce the costs of provisioning narrowband and broadband services while enabling the consolidation of ATM and non-ATM services onto a common ATM core network. MARKETS AND CUSTOMERS The Company's networking solutions address a broad market for switched networking products. As of March 31, 1997, approximately 4,000 customers worldwide had purchased FORE Systems' products. 6 7 Revenue from United States government customers represented 9%, 7% and 7% of the Company's revenue for the years ended March 31, 1997, 1996 and 1995, 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, 1997, 1996 and 1995, 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 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. The Company plans to expand its North America direct sales and marketing operations. As of March 31, 1997, the Company maintained a sales force of approximately 225 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 plans to continue to add third-party channel distributors. As of March 31, 1997, the Company had 104 independent distributors in the United States and 67 countries around the world. For the years ended March 31, 1997, 1996 and 1995, the Company's sales outside the United States accounted for approximately 37%, 39% and 35% 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 7 8 geographic breakdown of the Company's product revenue from sales to customers outside the United States for the years ended March 31, 1997, 1996 and 1995. COMPETITION The networking industry is intensely competitive. Many networking companies, including 3Com Corporation, Bay Networks, Inc., Cabletron Systems, Inc., Cisco Systems, Inc., Ascend Communications Inc. and Newbridge Networks Corporation, and certain computer companies, including Digital Equipment Corporation, 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, may seek to apply their communications expertise to the markets served by the Company. 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. In general, customers may cancel or reschedule orders without penalty. Accordingly, the Company does not maintain a substantial backlog, and backlog as of any particular date may not be indicative of sales in any succeeding period. 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 plans to use third-party, "turnkey" manufacturing arrangements to produce certain products in order to benefit from the reduced unit costs available to such manufacturers for commodity components and to improve the Company's ability to fill an increasing volume of orders in a timely fashion. The Company recently opened its first international manufacturing facility in Dublin, Ireland which commenced manufacturing and shipping products to international customers in May 1997. The Company believes that this new 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 8 9 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, 1997, 1996 and 1995, the Company incurred costs of approximately $55,217,000, $31,212,000 and $13,054,000 (14.0%, 13.3% and 12.3% of revenue), respectively, for research and development activities. At March 31, 1997, the Company had an engineering staff of 458, located at its suburban Pittsburgh headquarters, and in its offices in the Boston, MA, San Jose, CA, Washington, D.C. and Cambridge, England areas. INTELLECTUAL PROPERTY While the Company believes that its success is ultimately dependent upon its ability to innovate and to enhance its presence in the networking market, its capacity to compete successfully in that market also depends upon its ability to protect proprietary technology contained in its products. The Company currently relies upon a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. 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 appropriate 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 technologies or independent third-party development of similar technologies. The development of alternative, proprietary ATM and other technologies by third parties could adversely affect the competitiveness of the Company's products. Further, 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. Finally, 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. The Company, like other companies in the networking industry, is also subject to the risk of litigation alleging infringement of third-party intellectual property rights. There can be no assurance that the Company will not be subject to such litigation with respect to current or future products. Any such claims could require the Company to expend significant sums in litigation, pay damages, develop non-infringing technology or acquire licenses to third party technology. EMPLOYEES At March 31, 1997, the Company employed 1,361 individuals on a full-time basis. Of these, 458 were involved in engineering, 585 were employed in sales, marketing and customer support, 162 were engaged in manufacturing and the remaining 156 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. 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: 9 10 SUBSTANTIAL DEPENDENCE ON ATM ATM is an industry standard for high-speed local-area and wide-area networking. Although many network equipment suppliers have introduced or announced plans to introduce ATM-based products and a number of public carriers have implemented or announced plans to implement ATM services, ATM has not yet achieved broad commercial acceptance. Sales of ATM networking products and related services have represented, and are expected to continue to represent, a substantial portion of the Company's revenue for the foreseeable future. The Company's business strategy is based on the belief that ATM will be the technology underlying switched enterprise-wide networks as well as the interactive broadband architecture of future network environments. Accordingly, the Company's business opportunities and results of operations will be dependent on continued growth and market acceptance of ATM technology and in 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 would be materially adversely affected. DECLINE IN GROWTH RATE Although the Company and the networking industry have historically experienced increasing sales on an annual basis, the rate of growth in revenue of the networking industry and the Company appears to have slowed. The Company's revenue for the fourth quarter of fiscal 1997 totaled $101.3 million or an increase of 35% over the previous year's fourth quarter revenue. By contrast, in the fourth quarter of fiscal 1996, revenue had increased by approximately 100% over the fourth quarter of the previous year. In addition, revenue in the fourth quarter of fiscal 1997 was lower than revenue in the third quarter of fiscal year 1997. The Company's rate of growth in revenue in the fourth quarter of its 1997 fiscal year was adversely affected by several factors, including increased competition in the switched networking segment of the networking industry, longer sales cycles for the larger deals for which the Company competes and slower sales growth in international markets. Due to these and other factors, the Company expects that, in the future, its revenue may grow at a slower rate than was experienced in previous periods. 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. MANAGEMENT OF GROWTH The Company's growth, both in sales and in the number of its employees, has placed and could continue to place a significant strain on its resources. Certain of the Company's senior management and other key employees have not had previous experience in managing a large company. The integration of ALANTEC Corporation, which was acquired by the Company in February 1996, in addition to the integration of three smaller companies, acquired during the 1997 fiscal year, has required, and will continue for the foreseeable future to require, substantial attention from senior management and key employees of the Company. In addition, the Company may in the future acquire additional businesses, products or technologies. There can be no assurance that the Company will be able to manage its expansion or integrate the operations of any businesses, products or technologies it has acquired or may in the future acquire; the failure to do so could materially adversely affect the Company. 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 10 11 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 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. DEPENDENCE ON KEY PERSONNEL The Company's success to date has been significantly dependent on the contributions of certain key personnel, and the loss of the services of one or more of them could have a material adverse effect on the Company. 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. DEPENDENCE ON CUSTOMERS Revenue from United States government agencies represented approximately 9%, 7% and 7% of the Company's revenue on a consolidated basis for the years ended March 31, 1997, 1996 and 1995, 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, could have a material adverse effect on the Company. INTERNATIONAL SALES, REGULATORY STANDARDS AND CURRENCY EXCHANGE International sales accounted for 37%, 39% and 35% of the Company's revenue on a consolidated basis for the years ended March 31, 1997, 1996 and 1995, respectively. The Company expects that international sales will continue to be a significant portion of its business as it seeks to expand its international presence. However, in the fourth quarter of fiscal 1997, the Company experienced slower sales in certain international markets and there can be no assurance that the Company's revenue from international sales will continue to constitute a significant portion of its business; a decline in international sales could have a material adverse effect on the Company. In addition, while the Company's current products are designed to meet relevant regulatory requirements of foreign markets in which they are sold, any inability to obtain any required foreign regulatory approvals on a timely basis could have a material adverse effect on the Company. Additionally, the Company's international business may be adversely affected by changes in demand resulting from fluctuations in currency exchange rates and local purchasing practices, including seasonal fluctuations in demand and slower payment of invoices, as well as by risks such as increases in duty rates, difficulties in distribution and constraints upon international trade. EFFECT OF ECONOMIC AND MARKET CONDITIONS Sales of networking products fluctuate, from time to time, based on numerous factors, including customers' capital spending levels and general economic conditions. Future declines in networking product 11 12 sales, as a result of general economic conditions or for any other reason, could have a material adverse effect on the Company. POTENTIAL FLUCTUATIONS IN OPERATING RESULTS The Company may experience fluctuations in operating results, both on an annual and a quarterly basis, caused by various factors, including general economic conditions, specific economic conditions in the networking industry, the size and timing of customer orders, the pattern and seasonality of customer purchasing cycles, the introduction of new technologies and products by the Company or its competitors, the mix of products sold and the mix of product channels through which products are sold. In addition, as a strategic response to a changing competitive environment, the Company may elect, from time to time, to make certain pricing, product or marketing decisions, and any such decisions could have a material adverse effect on its periodic results of operations. POTENTIAL VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock has been and may continue to be volatile. Factors such as fluctuations in the Company's operating results, both sequentially and in year-over-year comparisons, announcements of technological innovations or new products by the Company or its competitors, developments with respect to patents or proprietary rights, changes in financial estimates by, or expectations or recommendations of, securities analysts, general market conditions and sales of substantial amounts of the Company's Common Stock in the public market, or the prospect of such sales, may have a significant effect on the market price of its Common Stock. Stock price fluctuations could affect the Company's operations by making it more difficult to attract and retain qualified personnel or complete business acquisitions in the future. 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. 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 and an additional building under construction 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 two nearby facilities totaling an additional 160,000 square feet. Approximately 69% 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, Boxborough, MA, Bethesda, MD, New York, NY, London, England and Tokyo, Japan. Also, during fiscal 1997, the Company entered into an agreement to lease a manufacturing facility in Dublin, Ireland. The Company believes that its present facilities are well maintained and in good operating condition. 12 13 ITEM 3. LEGAL PROCEEDINGS. In February 1997, ALANTEC Corporation ("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 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. 13 14 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the executive officers of the Company:(2)
NAME AGE POSITION ------------------ --- -------------------------------------------------------- Eric C. Cooper 38 Chairman, Chief Executive Officer and a Director Onat Menzilcioglu 38 President and a Director Thomas J. Gill Chief Operating Officer, Chief Financial Officer and 39 Treasurer Michael I. Green 49 Vice President of Worldwide Sales
Dr. Cooper is a co-founder of the Company and has served as Chairman and Chief Executive Officer and as a director since April 1990. Dr. Cooper served as President from April 1990 until December 1994. 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. Dr. Menzilcioglu is a co-founder of the Company and has served as a director since April 1990. Dr. Menzilcioglu served as Vice President of Engineering from June 1990 until December 1994 and has served as President since December 1994. Prior to co-founding the Company, Dr. Menzilcioglu was a member of the Computer Science research faculty of Carnegie Mellon University where he received his Ph.D. in Computer Engineering in 1988. Mr. Gill has served as Chief Operating Officer since January 1997 and has been Vice President of Finance, Chief Financial Officer and Treasurer of the Company since December 1993. 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. Green has served as Vice President of Worldwide Sales of the Company since January 1997, served as Vice President of Sales and Marketing from May 1995 to January 1997, 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). - --------------- 2 On April 1, 1997, each of Dr. Robert D. Sansom and Mr. Francois J. Bitz resigned his position as Vice President of Engineering. Dr. Sansom was named to the non-officer position of Vice President of Architecture and Mr. Bitz was named to the non-officer position of Vice President of Advanced Product Development. 14 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 1996: HIGH LOW ------- ------- First Quarter (ended June 30, 1995)........................... $20.000 $12.750 Second Quarter (ended September 30, 1995)..................... $21.000 $14.875 Third Quarter (ended December 31, 1995)....................... $33.875 $15.375 Fourth Quarter (ended March 31, 1996)......................... $37.500 $23.375 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
The approximate number of record holders of the Company's Common Stock as of May 30, 1997 was 1,820. 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 any 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
YEAR ENDED MARCH 31 ---------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT FOR SHARE AND PER-SHARE DATA) Revenue............................. $395,347 $235,189 $106,188 $39,340 $12,527 Gross profit........................ $226,229 $136,523 $ 60,991 $24,188 $ 7,744 Merger-related expenses............. $ 1,747 $ 29,375 $ -- $ -- $ -- Income (loss) from operations....... $ 61,322 $ 10,648 $ 16,061 $ 4,689 $(1,253) Litigation settlement charges....... $ (8,257) $ -- $ -- $ -- $ -- Net income (loss)................... $ 41,470 $ 9,737 $ 12,860 $ 3,678 $(1,367) Net income per common share......... $ 0.41 $ 0.11 $ 0.18 $ 0.06* $ -- Weighted average common and common equivalent shares outstanding..... 99,948,902 86,432,248 73,481,490 59,298,000* -- Total assets........................ $538,577 $424,362 $131,482 $59,026 $14,794 Redeemable preferred stock.......... $ -- $ -- $ -- $ 5,500 $14,842
- ------------ * Based on pro forma weighted average common and common equivalent shares outstanding 15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS GENERAL FORE Systems is a leader in the design, development, manufacture and sale of high-performance networking products based on ATM technology. ATM provides dramatically greater scalability and total capacity than conventional networking technologies. ATM improves the performance of today's network applications, and also enables new applications, including integrated video, audio and data communications. The Company believes that it currently offers the most comprehensive ATM product line available including ForeRunner ATM switches for enterprise applications, TNX ATM switches for service provider applications, PowerHub LAN switches and ES-3810 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. In November 1996, the Company acquired Nemesys Research Limited ("Nemesys"), a supplier of ATM video distribution and video conferencing products, including a range of ATM video encoders and decoders. Also, in November 1996, the Company acquired Scalable Networks, Inc. ("Scalable"), a developer of high-performance, switched Fast Ethernet desktop and Gigabit Ethernet switching technology directed to gaining cost-effective desktop and server connections to ATM backbone networks. In December 1996, the Company acquired Cadia Networks, Inc. ("Cadia"), a developer of multiservice WAN adaptation and concentration technology for the service provider market. Each of these business combinations has been accounted for as a pooling of interests. 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. In view of the Company's growth, the Company believes that period-to-period comparisons of its financial results are not necessarily meaningful as an indication of future performance. In addition, the Company's results of operations may fluctuate from period to period in the future. 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. 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. In the fourth quarter of fiscal year 1997, the Company experienced slower sales in certain international markets and there can be no assurances that the Company's revenue from international sales will continue to constitute the same historical percentage of revenue as experienced in previous fiscal years. The Company measures overall unit volume for its ATM switching products based on the number of ATM 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 over 160,000, as compared with approximately 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") did not compile LAN switch product data by port in fiscal 1996. The total number of LAN switching products shipped in the year ended March 31, 1997 was over 8,700, as compared with over 3,400 in the previous year. The total number of adapter cards shipped in the year ended March 31, 1997 was 34,000, as compared with approximately 18,600 in the previous year. The total installed base of adapter cards as of March 31, 1997 was over 62,000, as compared with approximately 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, 16 17 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. Average selling price for LAN switches shipped during the year ended March 31, 1997 was $15,800, as compared to $22,200 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. The Company believes that reductions in price per port on ATM and LAN switching products and price reductions on adapter cards will help stimulate demand for its products. However, many risk factors, including the risk that networking products based on ATM may not achieve broad commercial acceptance, the risk of competition from larger and better financed competitors and the risk that new technologies may render the Company's products obsolete or noncompetitive, may cause actual results to differ. Gross Profit. Gross profit increased to $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. The Company intends to price its products competitively in order to continue to increase revenue and to stimulate demand for its products. In future periods, gross margins may be adversely affected by price competition or changes in sales channels, increases in the costs of goods or changes in the mix of products sold. Research and Development. Research and development expense 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 $90.4 million or 22.9% 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. The Company expects to increase sales and marketing expenses both domestically and internationally as part of its continuing effort to expand its markets, introduce new products, build marketing staff and programs and expand its international presence. Such efforts are subject to a number of risk factors and there can be no assurance that such efforts will be successful. General and Administrative. General and administrative expense for the year ended March 31, 1997 was $17.5 million or 4.4% of revenue, as compared with $11.2 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. The Company plans to make appropriate expenditures in the general and administrative organization as necessary and does not expect the overall cost as a percentage of revenue to decline in the next twelve months. 17 18 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 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 to 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 share, as compared with $9.7 million, or $.11 per 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 share for the year ended March 31, 1997 as compared to $32.0 million or $.36 per share in 1996. YEAR ENDED MARCH 31, 1996 COMPARED WITH YEAR ENDED MARCH 31, 1995 Revenue. Revenue increased by 121% to $235.2 million for the year ended March 31, 1996, as compared with $106.2 million in the previous year. The distribution of revenue from sales to domestic and foreign customers was 61% and 39%, respectively, in the year ended March 31, 1996. This compares with 65% and 35%, respectively, in the previous year. The increase in domestic revenue dollars was attributable to the increased market acceptance of ATM and LAN switch products. The increase in foreign revenue in dollars and as a percentage of revenue resulted from the Company's expansion of its international distribution channels and to growing acceptance of ATM and LAN switch products. The Company measures overall unit volume for its ATM switch products based on the number of ATM ports, or network connections, shipped. The total number of ATM ports shipped in the year ended March 31, 1996 was 44,500, as compared with 16,400 in the previous year. The total installed base of ATM ports as of March 31, 1996 was 65,000, as compared with 20,200 as of March 31, 1995. The total number of LAN switch products shipped in the year ended March 31, 1996 was 3,400, as compared with 1,500 in the previous year. The total number of adapter cards shipped in the year ended March 31, 1996 was 18,600, as compared with 7,500 in the previous year. The total installed base of adapter cards as of March 31, 1996 was 28,000, as compared with 9,400 as of March 31, 1995. In the year ended March 31, 1996, revenue mix, as a percentage of revenue, among ATM switch products, LAN switch products, adapter cards and other revenue (principally service support and development contracts) was 53%, 32%, 7% and 8%, respectively. Revenue mix for the previous year was 45%, 34%, 11% and 10%, respectively. Average selling price per ATM port during the year ended March 31, 1996 was $2,800, as compared with $2,900 in the previous year. Average selling price for adapter cards shipped during the year ended March 31, 1996 was $930, as compared with $1,600 in the previous year. Average selling price for LAN switches shipped during the year ended March 31, 1996 was $22,200, as compared with $27,000 in the previous year. Gross Profit. Gross profit increased to $136.5 million or 58.0% of revenue in the year ended March 31, 1996, as compared with gross profit of $61.0 million or 57.4% of revenue in the previous year. The dollar 18 19 increase in gross profit was the result of increased revenue from ATM switch products, LAN switch products and adapter cards. The increase in gross profit as a percentage of revenue was the result of improved product price mix for ATM switch products, reduced manufacturing costs and lower OEM product contribution, offset partially by lower than historical margins associated with the Company's lower-end LAN switch products. Research and Development. Research and development expense for the year ended March 31, 1996 was $31.2 million or 13.3% of revenue, as compared with $13.1 million or 12.3% of revenue in the previous year. The increase in research and development expense was largely the result of additional engineering costs associated with the acquisitions of CAT, ANT and RCI, increased hiring of engineering employees, including recruiting expenses, and increased purchases of research and development materials. The number of employees of the Company engaged in research and development increased to 335 at March 31, 1996 from 149 at March 31, 1995. Sales and Marketing. Sales and marketing expense for the year ended March 31, 1996 was $54.1 million or 23.0% of revenue, as compared with $26.0 million or 24.5% 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 promotion and product evaluation costs. The reduction in sales and marketing expense as a percentage of revenue was the result of increased revenue volume absorbing a greater portion of fixed overhead associated with the sales and marketing organization. The number of employees of the Company engaged in sales and marketing activities increased to 412 at March 31, 1996 from 200 at March 31, 1995. General and Administrative. General and administrative expense for the year ended March 31, 1996 was $11.2 million or 4.7% of revenue, as compared with $5.9 million or 5.5% of revenue in the previous year. The dollar increase was largely due to increased hiring of administrative personnel in systems administration, accounting and human resources. The percentage decrease resulted from increased revenue absorbing a larger portion of the Company's fixed overhead expenses. The number of employees of the Company engaged in general and administrative activities increased to 119 at March 31, 1996 from 60 at March 31, 1995. Merger-related. Total merger-related expenses of $29.4 million were recorded for the year ended March 31, 1996 upon completion of the ALANTEC, CAT, ANT and RCI acquisitions. These expenses included 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. The Company had no merger-related expenses during the corresponding period in 1995. Interest Income. Interest income, net of interest expense, for the year ended March 31, 1996, was $9.9 million, as compared with $2.8 million in the year ended March 31, 1995. The increase in interest income resulted largely from interest earned on the net proceeds of $208 million received from common stock offerings in April 1995 and October 1995. Income Taxes. The provision for income taxes recorded in the year ended March 31, 1996 was $10.8 million, or an effective tax rate of 52.6%, as compared with $6.0 million, or an effective tax rate of 31.8%, in the previous year. The increase in the effective tax rate resulted primarily from certain merger- related expenses that are not deductible for tax purposes and partially from lower net operating loss carryforward available to offset 1995 taxable income. Excluding these merger-related expenses, the effective tax rate for the year ended March 31, 1996 would have been 36.0%. Net Income. Net income for the year ended March 31, 1996 was $9.7 million, or $.11 per share, as compared with $12.9 million, or $.18 per share, for the year ended March 31, 1995. Net income for the year ended March 31, 1996 included $29.4 million in merger-related expenses. Excluding these merger-related expenses and their tax effect, but including the operating results of CAT, ANT and RCI, the Company would have realized net income of $32.0 million or $.36 per share 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. 19 20 The cash provided by operations was $7.4 million in 1997. Net cash provided by operations was the result of increases to net income, offset by increases to accounts receivable and inventories, and decreases to income taxes payable and accrued merger costs. 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 that was completed in fiscal 1996. The cash provided by operations was $29.1 million in 1996. Net cash provided by operations was the result of net income and increased current liabilities offset by increased accounts receivable, inventories and deferred income tax benefit. The increase in inventories was the result of increased revenue and the introduction of new products. 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, 1997, the Company had cash and cash equivalents of approximately $129.4 million, short-term investments of $170.3 million and an unused line of credit of $20 million. During fiscal 1996, the Company entered into arrangements to lease headquarters and operating facilities to be constructed on land purchased by the Company. The facilities have largely been completed and the Company is occupying 200,000 square feet of the facilities while the remaining 100,000 square feet is still under construction. These arrangements include a ten-year operating lease pursuant to which the Company has committed to make annual minimum rental payments of approximately $3.4 million commencing in fiscal 1998, and a guarantee by the Company of the repayment of approximately $37 million of the lessor's construction financing for the facilities. As part of the lease transaction, the Company, as of March 31, 1997, pledged $28.1 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 that the proceeds from its public offerings, together with its existing sources of liquidity and internally generated cash, will satisfy the Company's projected cash needs through at least the next twelve months. The Company may require additional sources of liquidity to fund future growth, including additional equity offerings or debt financing. To date, inflation has not had a material impact on the Company's financial results. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128") was issued by the Financial Accounting Standards Board. FAS 128 specifies modifications to the calculation of earnings per share from that currently used by the Company. Under FAS 128, "basic earnings per share" will be calculated based upon the weighted average number of common shares actually outstanding, and "diluted earnings per share" will be calculated based upon the weighted average number of common shares outstanding and other potential common shares if they are dilutive. FAS 128 is effective for the Company's third quarter of 1998 and will be adopted at that time. Prior periods will be restated. Had the Company determined earnings per share in accordance with FAS 128, basic earnings per share for 1997, 1996 and 1995 would have been $0.45, $0.12 and $0.20, respectively, and diluted earnings per share would have been $0.41, $0.11 and $0.18, respectively. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not Applicable. 20 21 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 40 present fairly, in all material respects, the financial position of FORE Systems, Inc., and its subsidiaries at March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, 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 Price Waterhouse LLP Boston, Massachusetts April 22, 1997 21 22 CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
YEAR ENDED MARCH 31 ---------------------------------- 1997 1996 1995 -------- -------- -------- Revenue.................................................. $395,347 $235,189 $106,188 Cost of sales............................................ 169,118 98,666 45,197 -------- -------- -------- Gross profit............................................. 226,229 136,523 60,991 -------- -------- -------- Operating expenses: Research and development............................... 55,217 31,212 13,054 Sales and marketing.................................... 90,444 54,132 26,008 General and administrative............................. 17,499 11,156 5,868 Merger-related......................................... 1,747 29,375 -- -------- -------- -------- Total operating expenses............................... 164,907 125,875 44,930 -------- -------- -------- Income from operations................................... 61,322 10,648 16,061 Interest income, net..................................... 12,427 9,906 2,793 Litigation settlement charges............................ (8,257) -- -- -------- -------- -------- Income before provision for income taxes................. 65,492 20,554 18,854 Provision for income taxes............................... 24,022 10,817 5,994 -------- -------- -------- Net income............................................... $ 41,470 $ 9,737 $ 12,860 ======== ======== ======== Net income per common share.............................. $ 0.41 $ 0.11 $ 0.18 ======== ======== ======== Weighted average common and common equivalent shares outstanding............................................ 99,948,902 86,432,248 73,481,490 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. 22 23 CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31 --------------------- 1997 1996 -------- -------- ASSETS: Current assets: Cash and cash equivalents........................................... $129,424 $204,013 Short-term investments.............................................. 170,258 92,142 Accounts receivable, net of allowance for doubtful accounts of $4,090 at March 31, 1997 and $1,087 at March 31, 1996............ 84,997 49,990 Inventories......................................................... 50,769 27,495 Deferred income taxes............................................... 29,296 19,574 Prepaid income taxes................................................ 19,153 -- Prepaid expenses and other current assets........................... 6,774 6,382 -------- -------- Total current assets............................................. 490,671 399,596 Fixed assets, net..................................................... 47,906 24,766 -------- -------- Total assets........................................................ $538,577 $424,362 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable.................................................... $ 36,919 $ 32,430 Accrued payroll and related costs................................... 13,909 10,723 Income taxes payable................................................ -- 4,542 Other current liabilities........................................... 10,230 8,578 Accrued merger costs................................................ 4,869 20,045 Deferred revenue.................................................... 18,471 12,054 -------- -------- Total current liabilities........................................ 84,398 88,372 -------- -------- Commitments and contingencies STOCKHOLDERS' EQUITY: Common stock, par value $.01 per share; 300,000,000 shares authorized; shares issued 97,792,458 at March 31, 1997 and 87,982,594 at March 31, 1996..................................... 405,768 323,134 Retained earnings................................................... 53,130 13,384 Treasury stock, at cost: 120,000 shares............................. (3,248) -- Cumulative translation adjustment................................... 53 -- Valuation allowance for short-term investments...................... (1,524) (528) -------- -------- Total stockholders' equity....................................... 454,179 335,990 -------- -------- Total liabilities and stockholders' equity.......................... $538,577 $424,362 ======== ========
The accompanying notes are an integral part of these financial statements. 23 24 CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCK AND STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
VALUATION COMMON STOCK ALLOWANCE FOR RETAINED CUMULATIVE ---------------------- SHORT-TERM EARNINGS TRANSLATION TREASURY SHARES AMOUNT INVESTMENTS (DEFICIT) ADJUSTMENT STOCK TOTAL ---------- -------- ------------- -------- ----------- -------- -------- Balance, March 31, 1994....... 40,598,092 $ 47,180 $ -- $ (8,186) $-- $ -- $ 38,994 Issuance of common stock under stock option and employee purchase plans... 2,178,384 1,796 -- -- -- -- 1,796 Issuance of common stock in public offering........... 9,800,000 35,450 -- -- -- -- 35,450 Conversion of FORE Series A redeemable convertible preferred stock........... 16,129,020 5,500 -- -- -- -- 5,500 Income tax benefit from stock option plan activity.................. -- 3,390 -- -- -- -- 3,390 Change in valuation allowance for short-term investments............... -- -- (264) -- -- -- (264) Net income.................. -- -- -- 12,860 -- -- 12,860 ---------- -------- ------- -------- --- -------- -------- 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 ========== ======== ======= ======== === ======== ========
The accompanying notes are an integral part of these financial statements. 24 25 CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31 (IN THOUSANDS) ---------------------------------- 1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................. $ 41,470 $ 9,737 $ 12,860 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.......................................... 16,402 6,817 2,857 Amortization of capitalized software development costs............................................... 782 1,673 601 Deferred income tax benefit........................... (3,387) (13,011) (5,745) Income tax benefit related to stock options........... 34,016 5,254 3,390 Cumulative translation adjustment..................... 53 -- -- Change in operating assets and liabilities: Accounts receivable................................. (34,697) (24,250) (13,889) Inventories......................................... (23,180) (8,567) (11,922) Prepaid expenses and other current assets........... (302) (2,217) (2,214) Accounts payable.................................... 4,001 18,977 5,832 Accrued liabilities................................. 4,678 10,066 5,057 Prepaid income taxes and income taxes payable....... (23,722) (766) 3,894 Accrued merger costs................................ (15,176) 20,045 -- Deferred revenue.................................... 6,417 5,375 4,707 -------- -------- -------- Net cash provided by operating activities.................. 7,355 29,133 5,428 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments...................... (393,588) (159,174) (44,942) Redemption and sale of short-term investments............ 314,476 96,250 16,197 Capitalization of software development costs............. (677) (1,364) (924) Cash from acquisitions................................... 4,616 1,273 -- Purchases of fixed assets................................ (38,875) (23,507) (8,204) -------- -------- -------- Net cash used in investing activities...................... (114,048) (86,522) (37,873) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable and capital lease obligations........................................... (102) (280) (267) Purchase of treasury stock............................... (3,248) -- -- Proceeds from issuance of common stock................... 35,454 222,699 37,246 -------- -------- -------- Net cash provided by financing activities.................. 32,104 222,419 36,979 -------- -------- -------- Increase (decrease) in cash and cash equivalents........... (74,589) 165,030 4,534 -------- -------- -------- Cash and cash equivalents at beginning of year............. 204,013 38,983 34,449 -------- -------- -------- Cash and cash equivalents at end of year................... $129,424 $204,013 $ 38,983 ======== ======== ======== Cash paid during the year for: Interest................................................. $ 27 $ 18 $ 63 Income taxes............................................. $ 17,326 $ 19,833 $ 4,875
The accompanying notes are an integral part of these financial statements. 25 26 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") designs, develops, manufactures and sells high-performance networking products based on Asynchronous Transfer Mode ("ATM") technology. ATM is the international standard that was developed by the telecommunications industry to support broadband multimedia applications transmitted over high-speed networks. 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 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 26 27 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 $175 and $280 are included in prepaid expenses and other current assets at March 31, 1997 and 1996, 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 7 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 provides a warranty generally 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 month to two years and are entered to hedge certain firm purchase commitments denominated in those currencies. At March 31, 1997 and 1996, the Company had outstanding forward currency exchange contracts to buy $143 and $171, respectively. At March 31, 1997, the Company had an outstanding forward treasury agreement. 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 operating facilities (see Note 14). The interest rate fluctuations will result in a receipt or disbursement of funds by the Company upon termination of the agreement on July 31, 1997. The amount exchanged will be amortized over the term of the lease. Net Income per share Net income per common share is calculated based on the weighted average number of common shares and common equivalent shares outstanding during the year. In February 1997, Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128") was issued by the Financial Accounting Standards Board. FAS 128 specifies modifications to the calculation of earnings per share from that currently used by the Company. Under FAS 128, "basic earnings per share" will be calculated based upon the weighted average number of common shares actually outstanding, and "diluted earnings per share" will be calculated based upon the weighted average number of common shares outstanding and other potential common shares if they are dilutive. FAS 128 is effective for the Company's third quarter of 1998 and will be adopted at that time. Prior periods will be restated. Had the Company determined earnings per share in accordance with FAS 128, basic earnings per share for 1997, 1996 and 1995 would have been $0.45, $0.12 and $0.20, respectively, and diluted earnings per share would have been $0.41, $0.11 and $0.18, respectively. 27 28 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 No. 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 1997, 1996 and 1995, and there were no capitalized advertising costs at March 31, 1997 and 1996. Advertising expense for 1997, 1996 and 1995 was $6,716, $5,314 and $2,693 respectively. Reclassifications Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. 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 video conferencing products, including a range of ATM video encoders and decoders. The Company issued 413,635 shares of its Common Stock, (resulting in an increase to Common Stock of $328,000) in exchange for all of the 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 $2,140,000) 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 $4,361,000) 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 $1.7 million 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 $176,000, $470,000 and $1,078,000 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. 28 29 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. Merger-related expenses of approximately $27 million were expensed upon the consummation of the acquisition in the quarter ended March 31, 1996. Merger-related expenses included $10 million of transaction costs, $9 million related to duplicate facilities and assets, $4 million for transition and severance agreements for duplicate employees and $4 million of other costs. Transaction costs incurred by the Company include fees to financial advisors, legal and accounting fees and other related expenses. The following information shows revenue and net income of the separate companies during the period preceding the acquisition:
YEAR ENDED MARCH 31, 1995 -------------- Revenue FORE................................................................ $ 75,498 ALANTEC............................................................. 30,690 -------- $106,188 ======== Net income FORE................................................................ $ 7,360 ALANTEC............................................................. 5,500 -------- $ 12,860 ========
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 $2,248,000) 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 $690,000 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 $780,000) 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 $1.6 million 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 $574,000, and as of the beginning of fiscal 1996, to reflect the accumulated deficit of CAT of $453,000. The aggregate revenue and earnings of CAT, ANT and RCI for fiscal years 1995 and 1994 are immaterial in comparison to the revenue and earnings reported by the Company for those periods. 29 30 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents and short-term investments, classified as available for sale, consist of the following:
MARCH 31, 1997 ---------------------------------- UNREALIZED AMORTIZED GAIN MARKET COST (LOSS) 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 ======== ======== ========
MARCH 31, 1996 ---------------------------------- UNREALIZED AMORTIZED GAIN MARKET COST (LOSS) VALUE -------- -------- -------- Municipal notes and bonds.................................. $ 54,337 $ (568) $ 53,769 Commercial paper and other................................. 24,416 (38) 24,378 U.S. Government securities................................. 13,917 78 13,995 -------- -------- -------- $ 92,670 $ (528) $ 92,142 ======== ======== ========
The contractual maturity of available-for-sale securities within one year at March 31, 1997 and 1996 were $216,137 and $263,908, respectively. The contractual maturity of available-for-sale securities over one year and less than three years at March 31, 1997 and 1996 were $38,853 and $12,555, respectively. Gross realized gains and losses on sales of securities in 1997 and 1996 were immaterial. At March 31, 1996, cash and cash equivalents include $184,321 of securities which are classified as held to maturity and for which cost approximates fair value. 4. INVENTORIES Inventories are summarized as follows:
MARCH 31 ------------------- 1997 1996 ------- ------- Raw materials................................................... $16,054 $ 9,408 Work in process................................................. 5,097 10,939 Finished goods.................................................. 29,618 7,148 ------- ------- Total inventories............................................... $50,769 $27,495 ======= =======
5. FIXED ASSETS Fixed assets are summarized as follows:
MARCH 31 ------------------- 1997 1996 ------- ------- Leasehold improvements.......................................... $ 3,372 $ 1,627 Land............................................................ 2,176 2,151 Equipment and furniture......................................... 70,285 32,353 ------- ------- Total fixed assets.............................................. 75,833 36,131 Less: accumulated depreciation and amortization................. 27,927 11,365 ------- ------- Fixed assets, net............................................... $47,906 $24,766 ======= =======
30 31 6. LINE OF CREDIT The Company has a line of credit available from a bank under which it can borrow up to $20 million. The agreement bears 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, 1997. 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, 1997. 7. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS At March 31, 1997 and 1996, the Company had notes payable and capital lease obligations aggregating $615 and $717, respectively, which are included in other current liabilities. Interest expense for the years ended March 31, 1997, 1996 and 1995 was $4, $29 and $64, respectively. 8. INCOME TAXES The components of the provision for income taxes for the years ended March 31, 1997, 1996 and 1995 are as follows:
YEAR ENDED MARCH 31 ----------------------------- 1997 1996 1995 ------- ------- ------- Current income tax expense: Federal........................................................ $20,593 $19,503 $ 9,620 State.......................................................... 4,759 4,677 1,869 Foreign........................................................ 606 141 22 ------- ------- ------- Total current income tax expense............................... 25,958 24,321 11,511 ------- ------- ------- Deferred income tax benefit: Federal........................................................ (1,446) (10,725) (5,028) State.......................................................... (490) (2,779) (489) ------- ------- ------- Total deferred income tax benefit.............................. (1,936) (13,504) (5,517) ------- ------- ------- Total income taxes............................................. $24,022 $10,817 $ 5,994 ======= ======= =======
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 for the years ended March 31, 1997 and 1996:
YEAR ENDED MARCH 31 ------------------- 1997 1996 ------- ------- Deferred tax assets (liabilities): Reserves not currently deductible....................................... $13,066 $ 9,896 Deferred revenue........................................................ 2,706 1,481 Depreciation and amortization........................................... 290 357 Other................................................................... 2,451 1,038 Capitalized software development costs.................................. (69) (114) Research and development credits........................................ 489 131 Net operating loss carryforwards........................................ 2,528 1,033 Merger-related expenses................................................. 1,572 5,638 Acquired assets basis difference........................................ 6,194 -- ------- ------- Net deferred tax assets................................................. $29,227 $19,460 ======= =======
The deferred tax liabilities of $69 and $114 at March 31, 1997 and 1996, respectively, are included in other current liabilities. 31 32 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 ------------------------- 1997 1996 1995 ----- ----- ----- Statutory rate applied to income before taxes....................... 35.00% 35.00% 34.00% State income taxes, net of federal benefit.......................... 3.82 5.70 4.27 Foreign Sales Corporation........................................... (2.49) (8.77) -- Research and development credits.................................... (1.79) (0.80) (1.76) Foreign income taxed at different rates............................. 0.49 0.39 -- Realization of net operating loss carryforwards..................... -- -- (6.58) Merger-related expenses............................................. 0.69 20.83 -- Other, net.......................................................... 0.95 0.27 1.86 ----- ----- ----- Total income taxes.................................................. 36.67% 52.62% 31.79% ===== ===== =====
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. 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 32,453,048 shares of common stock, of which 9,029,077 shares are available for future grants at March 31, 1997. 32 33 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 an incentive stock option 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, 1994.............................. 8,771,838 $ 0.81 Granted.................................................. 4,319,138 $ 8.72 Exercised................................................ (2,125,514) $ 0.36 Cancelled................................................ (551,523) $ 3.37 ----------- Outstanding at March 31, 1995.............................. 10,413,939 $ 4.05 Granted.................................................. 6,020,150 $19.95 Exercised................................................ (2,648,278) $ 1.60 Cancelled................................................ (1,469,644) $ 7.10 ----------- Outstanding at March 31, 1996.............................. 12,316,167 $11.98 Granted.................................................. 6,475,890 $32.82 Exercised................................................ (4,233,499) $ 6.97 Cancelled................................................ (1,845,510) $24.38 ----------- Outstanding at March 31, 1997.............................. 12,713,048 $22.48 Exercisable at March 31, 1995.............................. 1,693,062 $ 0.99 Exercisable at March 31, 1996.............................. 3,048,687 $ 5.02 Exercisable at March 31, 1997.............................. 3,272,211 $ 9.35
Options outstanding as of 3/31/1997
WEIGHTED AVERAGE NUMBER REMAINING WEIGHTED OUTSTANDING CONTRACTUAL LIFE AVERAGE RANGE OF EXERCISE PRICE 3/31/97 (IN YEARS) EXERCISE PRICES ------------------------------- ------------ ---------------- --------------- $ 0.02 -- $ 3.00 2,519,411 6.66 $ 1.12 $ 3.70 -- $25.19 3,132,279 8.13 $ 15.78 $25.25 -- $33.13 2,520,248 9.13 $ 29.36 $33.25 -- $33.38 2,820,260 9.05 $ 33.37 $33.44 -- $43.88 1,720,850 9.30 $ 37.90 $ 0.02 -- $43.88 12,713,048 8.40 $ 22.48
33 34 Options exercisable as of 3/31/1997
NUMBER WEIGHTED EXERCISABLE AVERAGE RANGE OF EXERCISE PRICES 3/31/97 EXERCISE PRICE ------------------------ ----------- -------------- $ 0.02 -- $ 3.00 1,671,497 $ 0.91 $ 3.70 -- $25.19 1,200,562 $14.28 $25.25 -- $33.13 344,352 $29.00 $33.25 -- $33.38 4,000 $33.33 $33.44 -- $43.88 51,800 $34.99 $ 0.02 -- $43.88 3,272,211 $ 9.35
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 304,857 and 203,794 as of March 31, 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 No. 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. Pro forma information regarding net income and earnings per share is required by SFAS No. 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 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 PURCHASE STOCK OPTION PLAN PLAN ----------------- ----------------- 1997 1996 1997 1996 ----- ----- ----- ----- Risk-free rate (%)....................... 5.74 6.54 5.07 5.31 Volatility (%)........................... 34.98 38.24 41.69 41.92 Expected Life (in years)................. 2.55 2.62 0.24 0.24 Dividend Yield (%)....................... 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, 1997 and 1996 was $ 9.91 and $7.90 per share, respectively. The weighted average estimated fair value of shares granted under the Stock Purchase Plan during the years ended March 31, 1997 and 1996 was $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:
1997 1996 ------- ----- Pro forma net income........................................ $18,362 $ 127 Pro forma net income per common share....................... $ 0.18 $0.00
34 35 Because the Company anticipates making additional grants and options vest over several years, the effects on pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on pro forma disclosures of future years. SFAS No. 123 is applicable only to options granted subsequent to March 31, 1995. 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, 1997, 1996 and 1995 were $2,495, $1,014 and $421, 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, 1997, 1996 and 1995 was 9%, 7% 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, 1997, 1996 and 1995. 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 ---------- 1997 1996 ---- ---- Domestic......................................................... 46% 66% Foreign.......................................................... 44 31 U.S. Government.................................................. 10 3 --- --- 100% 100% === ===
13. INTERNATIONAL REVENUE Revenue from sales to customers outside the United States for the years ended March 31, 1997, 1996 and 1995 was distributed as follows:
YEAR ENDED MARCH 31 ------------------------------ 1997 1996 1995 -------- ------- ------- Europe.......................................... $ 67,405 $46,797 $16,522 Pacific Rim..................................... 62,381 31,821 18,893 Other........................................... 16,448 13,711 1,972 -------- ------- ------- Total........................................... $146,234 $92,329 $37,387 ======== ======= =======
14. LEASE COMMITMENTS In December 1995, the Company entered into agreements to lease headquarters and operating facilities to be constructed on land which was purchased by the Company. The lessor and an additional lender have committed to fund up to a maximum of $41 million for the construction of the buildings. The Company is now 35 36 occupying 200,000 square feet of the facilities and the remaining 100,000 is still under construction. 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. Future annual minimum rental payments under the lease are approximately $3.4 million and are expected to commence in fiscal 1998. During the construction period, the Company has guaranteed the repayment of up to approximately $37 million of the lessor's construction financing for the facilities. Accordingly, as part of the above lease transaction, the Company pledged $28.1 million, as of March 31, 1997, of securities it holds as collateral for specified obligations of the lessor. In addition, under the terms of the lease, the Company is required to comply with certain financial covenants including the maintenance of a minimum tangible net worth. Other restrictive covenants limit indebtedness and the payment of dividends. The Company may, at its option, purchase the facilities during or at the expiration of the term of the lease at an amount equal to the remaining balance of any debt of the lessor related to the construction of 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, 1997, 1996 and 1995 was $9,764, $5,167 and $2,671, respectively. Future minimum payments under all non-cancelable operating leases as of March 31, 1997 are summarized as follows:
OPERATING LEASES -------- 1998...................................... $ 9,279 1999...................................... 10,194 2000...................................... 7,284 2001...................................... 6,180 2002...................................... 5,560 Thereafter................................ 61,996 -------- Total..................................... $100,493 ========
36 37 15. QUARTERLY RESULTS (UNAUDITED)
YEAR ENDED MARCH 31, 1997 ------------------------------------------ Q4 Q3 Q2 Q1 -------- -------- ------- ------- (IN THOUSANDS, EXCEPT FOR PER-SHARE DATA) 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................................ $ 11,352 $ 17,495 $17,832 $14,643 Litigation settlement charges......................... $ (8,257) $ -- $ -- $ -- Net income............................................ $ 3,887 $ 12,839 $13,351 $11,393 Net income per common share........................... $ .04 $ .13 $ .14 $ .12
YEAR ENDED MARCH 31, 1996 ------------------------------------------ Q4 Q3 Q2 Q1 -------- -------- ------- ------- (IN THOUSANDS, EXCEPT FOR PER-SHARE DATA) Revenue............................................... $ 75,271 $ 63,974 $52,062 $43,882 Gross profit.......................................... $ 43,811 $ 37,158 $30,168 $25,386 Merger-related expenses............................... $ 27,098 $ 690 $ -- $ 1,587 Income (loss) from operations......................... $(13,870) $ 10,343 $ 8,623 $ 5,552 Litigation settlement charges......................... $ -- $ -- $ -- $ -- Net income (loss)..................................... $ (9,575) $ 8,516 $ 6,734 $ 4,062 Net income (loss) per common share.................... $ (.11) $ .09 $ .08 $ .05
16. LITIGATION SETTLEMENT 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 ("Defendents") in a suit brought in 1994 by two 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. 37 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 38 39 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. 39 40 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.................................................. 21 Consolidated Statement of Income for the years ended March 31, 1997, 1996 and 1995............................................................................. 22 Consolidated Balance Sheet as of March 31, 1997 and 1996........................... 23 Consolidated Statement of Changes in Common Stock and Stockholders' Equity for the years ended March 31, 1997, 1996 and 1995........................................ 24 Consolidated Statement of Cash Flows for the years ended March 31, 1997, 1996 and 1995............................................................................. 25 Notes to Consolidated Financial Statements......................................... 26-37 Financial Statement Schedule: Schedule II--Valuation and Qualifying Accounts and Reserves...................... 43
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 - ----------- ----------- 2.1 Agreement and Plan of Merger, dated as of December 20, 1996, by and among FORE Systems, Inc., Alpha Acquisition Corporation, Cadia Networks, Inc., Bing Yang, Gregor N. Ferguson, Peter J. Nesbeda, Jeffrey P. McCarthy, Raymond W. DeZenzo, Jr., Caralyn A. Brown and David E. Schantz (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K, dated December 23, 1996, filed on January 7, 1997). 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). 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.(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)
40 41
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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 1997 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 Pittsburgh Office and Research Park Building II Lease Agreement by and between Zell Two Inc. and FORE Systems, Inc., dated as of July 24, 1995 (incorporated by reference to Exhibit 10.9 to the Company's Form 10-Q for the quarterly period ended December 31, 1995). 10.14 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). 10.15 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). 10.16 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).
41 42
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.17 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). 10.18 Pledge and Security Agreement, dated as of December 13, 1995, by and among FORE 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). 10.19 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). 10.20 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). 10.21 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). 10.23 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) 11.1 Statement re computation of per share earnings. 21.1 Subsidiaries of the Registrant. 22.1 Consent of Independent Accountants. 27.1 Financial Data Schedule.
- --------- (1) Management contract or compensatory plan or arrangement. (b) REPORTS ON FORM 8-K: The Company filed the following Reports on Form 8-K during the quarter ended March 31, 1997: On January 7, 1997, the Company filed a report under Item 2 of Form 8-K dated December 23, 1996 regarding the acquisition by the Company of Cadia pursuant to an Agreement and Plan of Merger, dated as of December 20, 1996, by and among the Company, Alpha Acquisition Corporation, a wholly-owned subsidiary of the Company, Cadia, Bing Yang, Gregor N. Ferguson, Peter J. Nesbeda, Jeffrey P. McCarthy, Raymond W. Dezenzo, Jr., Caralyn A. Brown and David E. Schantz. 42 43 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE THREE YEARS ENDED MARCH 31, 1997 (IN THOUSANDS) SCHEDULE II
BALANCE AT BALANCE AT DESCRIPTION MARCH 31, 1996 ADDITIONS DEDUCTIONS MARCH 31, 1997 - ----------- -------------- --------- ---------- -------------- Allowance for doubtful accounts....... $ 1,087 $ 3,003 $ -- $4,090 Merger related costs.................. $ 20,045 $ 1,133 $(16,309) $4,869 ======== ======= ======== ======
BALANCE AT BALANCE AT DESCRIPTION MARCH 31, 1995 ADDITIONS DEDUCTIONS MARCH 31, 1996 - ----------- -------------- --------- ---------- -------------- Allowance for doubtful accounts....... $574 $ 587 $ (74) $ 1,087 Merger related costs.................. $ -- $29,375 $ (9,330) $ 20,045 ==== ======= ======== ========
BALANCE AT BALANCE AT DESCRIPTION MARCH 31, 1994 ADDITIONS DEDUCTIONS MARCH 31, 1995 - ----------- -------------- --------- ---------- -------------- Allowance for doubtful accounts....... $208 $ 409 $(43) $574 Merger related costs.................. $ -- $ -- $ -- $ -- ==== ===== ==== ====
43 44 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 and Chief Executive Officer June 27, 1997 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.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ ERIC C. COOPER Chairman and Chief Executive Officer June 27, 1997 - ------------------------------------- (Principal Executive Officer) and a Eric C. Cooper Director /s/ THOMAS J. GILL Chief Operating Officer, Chief June 27, 1997 - ------------------------------------- Financial Officer and Treasurer Thomas J. Gill (Principal Financial and Accounting Officer) /s/ ONAT MENZILCIOGLU President and a Director June 27, 1997 - ------------------------------------- Onat Menzilcioglu /s/ ROBERT D. SANSOM Secretary and a Director June 27, 1997 - ------------------------------------- Robert D. Sansom /s/ JOHN C. BAKER Director June 27, 1997 - ------------------------------------- John C. Baker /s/ DANIEL W. MCGLAUGHLIN Director June 27, 1997 - ------------------------------------- Daniel W. McGlaughlin
44 45 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.2 Second Amended and Restated By-laws of FORE Systems, Inc. (as amended through March 5, 1997). 10.11 Summary of Fiscal Year 1997 Senior Management Bonus Plan. 11.1 Statement re computation of per share earnings. 21.1 Subsidiaries of the Registrant. 22.1 Consent of Independent Accountants. 27.1 Financial Data Schedule.
45 EX-3.2 2 EXHIBIT 3.2 1 EXHIBIT 3.2 SECOND AMENDED AND RESTATED BY-LAWS OF FORE SYSTEMS, INC. (AS AMENDED THROUGH MARCH 5, 1997) ARTICLE I MEETINGS OF STOCKHOLDERS SECTION 1 -- PLACE OF MEETINGS Meetings of the stockholders shall be held at such place within or without the State of Delaware as shall be designated by the Board of Directors or the person or persons calling the meeting. SECTION 2 -- ANNUAL MEETINGS The annual meeting of the stockholders of the Corporation shall be held during the month of July at such time and on such date as shall be determined by the Board of Directors, or during such other month, at such time and on such date, as the Board shall otherwise fix, for the purpose of electing directors and for the transaction of such other business as may lawfully come before the meeting. SECTION 3 -- SPECIAL MEETINGS Subject to the rights of the holders of any class or series of capital stock having a preference over the common stock as to dividends or upon liquidation, special meetings of the stockholders may be called at any time only by the President and Chief Executive Officer or the Board of Directors. SECTION 4 -- NOTICE OF MEETINGS A written notice of every meeting of stockholders specifying the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote thereat, not less than 10 days nor more than 60 days before the date of the meeting, unless a greater period of time is required by law in a particular case. When a meeting is adjourned to another time or place it shall not be necessary to give any notice of the adjourned meeting, other than by announcement at the meeting at which such 2 adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. Whenever written notice is required to be given under the provisions of these By-laws, a waiver thereof in writing, signed by the person entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, the meeting need be specified in the waiver of notice of such meeting. SECTION 5 -- RECORD DATE In order to determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed, then the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 6 -- QUORUM The presence in person or by proxy of the holders of a majority of the shares entitled to vote at a meeting shall constitute a quorum. The stockholders present at a duly organized meeting can continue to do business until adjourned, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. If a meeting cannot be organized because a quorum has not attended, those present in person or by proxy shall have the power, except as otherwise provided by statute, to adjourn the meeting to such time and place as they may determine, but in the case of any meeting called for the election of directors, those who attend the second of such adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purpose of electing directors. - 2 - 3 SECTION 7 -- ACTION BY STOCKHOLDERS; VOTING (a) Except as may be otherwise provided by statute, the Amended and Restated Certificate of Incorporation or these By-Laws, (i) each stockholder of record present in person or by proxy shall be entitled, at every stockholders' meeting, to one vote for each share of capital stock having voting power standing in the name of such stockholder on the books of the Corporation, and (ii) the affirmative vote of a majority of the shares present in person or represented by proxy at a duly organized meeting and entitled to vote on the subject matter shall be the act of the stockholders. (b) Voting by the stockholders, for the election of directors or on any other matter, may but need not be by written ballot. (c) Prior to the Corporation becoming subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended, with respect to any class of its capital stock, any action required to be taken or which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to the Secretary or to its offices in Warrendale, Pennsylvania, by hand or by certified or registered mail. Every written consent shall bear the date of signature of each stockholder who signs such consent. No written consent shall be effective unless, within sixty days of the date the Corporation, a written consent or consents signed by a sufficient number of stockholders to take the action referred to therein are delivered to the Corporation in the manner prescribed in this subsection. SECTION 8 -- ADVANCE NOTICE OF STOCKHOLDER-PROPOSED BUSINESS AT ANNUAL MEETINGS (a) At an annual meeting of stockholders, only such business shall be conducted as shall have been properly brought before the meeting. (b) To be properly brought before an annual meeting, business must be either (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the - 3 - 4 Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board, or (iii) otherwise properly brought before the meeting by a stockholder. (c) In addition to any other applicable requirements for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 60 days prior to the meeting. (d) A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the Corporation's capital stock which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. (e) Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 8. (f) The chairman of an annual meeting shall, if the facts warrant, determine that business was not properly brought before the meeting in accordance with the provisions of this Section 8, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. ARTICLE II DIRECTORS SECTION 1 -- POWERS OF DIRECTORS The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, which shall exercise all powers that may be exercised or performed by the Corporation and that are not by statute, the Certificate of Incorporation or these By-Laws directed to be exercised or performed by the stockholders. - 4 - 5 SECTION 2 -- NUMBER, ELECTION, AND TERM OF OFFICE The number of members of the Board of Directors shall be not less than three (3) nor more than nine (9), as determined from time to time by the Board of Directors. The directors need not be stockholders of the Corporation. The directors shall be divided into three (3) classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third (1/3) of the total number of directors constituting the entire Board of Directors. Effective immediately upon the filing of the Amended and Restated Certificate of Incorporation of the Corporation on February 28, 1994, Class I directors shall serve for a term ending upon the annual meeting of stockholders held in the Corporation's fiscal 1995 year, Class II directors shall serve for a term ending upon the annual meeting of stockholders held in Corporation's fiscal 1996 year and Class III directors shall serve for a term ending upon the annual meeting of stockholders held in Corporation's fiscal 1997 year. At each succeeding annual meeting of stockholders beginning with the annual meeting of stockholders held in the Corporation's fiscal 1995 year, successors to the class of directors whose term expires at such annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, incapacitation or removal from office, and except as otherwise required by law. In the event such election is not held at the annual meeting of stockholders, it shall be held at any adjournment thereof or a special meeting. SECTION 3 -- PROCEDURE FOR NOMINATION OF DIRECTORS (a) Only persons nominated in accordance with the following procedures shall be eligible for election as directors, except as may otherwise be provided by the terms of the Corporation's Amended and Restated Certificate of Incorporation with respect to the rights of holders of any class or series of preferred stock to elect directors under specified circumstances. - 5 - 6 (b) Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board, or by any stockholder of the Corporation entitled to vote for election of directors at the meeting who complies with the notice procedures set forth in this Section 3. Nominations other than those made by or at the direction of the Board of Directors or any nominating committee or person appointed by the Board shall be made pursuant to timely notice in proper written form to the Secretary of the Corporation. (c) To be timely, a stockholder's request to nominate a person for director, together with the written consent of such person to serve as a director, must be received by the Secretary of the Corporation not less than 60 days prior to the date fixed for the meeting. To be in proper written form, such stockholder's notice shall set forth in writing: (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director (A) the name, age, business address and residence address for such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of capital stock of the Corporation which are beneficially owned by such person and (D) such other information relating to such person as is required to be disclosed in solicitations of proxies for election of directors, or as otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; and (ii) as to the stockholder giving the notice (A) the name and address, as they appear on the Corporation's books, of such stockholder and (B) the class and number of shares of capital stock of the Corporation which are beneficially owned by such stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. (d) No persons shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein and in the Corporation's Certificate of Incorporation. The chairman of any meeting shall, if the facts so warrant, determine that a nomination was not made in accordance with the procedures prescribed by the Corporation's Amended and Restated Certificate of Incorporation and By-Laws, and if he should so determine, he shall so declare to the meeting and the defective nomination(s) shall be disregarded. - 6 - 7 SECTION 4 -- VACANCIES (a) Except as otherwise required by law, any vacancy on the Board of Directors that results from an increase in the number of directors shall be filled only by a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring in the Board of Directors shall be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his or her predecessor and shall hold office until the next election of the class for which such director shall have been chosen, and until his or her successor shall be elected and qualified. A director may be removed only for cause by the stockholders. (b) Notwithstanding the foregoing, whenever the holders of any one or more classes or series of stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of the Corporation's Amended and Restated Certificate of Incorporation applicable thereto and such directors so elected shall not be divided into classes pursuant to Section 2 of this Article II, in each case unless expressly provided by such terms. SECTION 5 -- MEETINGS OF DIRECTORS Regular meetings of the Board of Directors shall be held without notice at such times and places as the Board may from time to time designate. Special meetings of the Board of Directors may be called at any time by the President and Chief Executive Officer or by any two directors. It shall be the duty of the Secretary, upon being so requested, to call such meetings by giving at least 24 hours' notice in writing, by telephone or other oral message or by telegraph to each member of the Board. A director may, however, in any instance waive such notice insofar as he is concerned either by attendance at the meeting or by signing a waiver either before or after such meeting. Except as otherwise provided in these By-Laws, a majority of the total number of directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. - 7 - 8 SECTION 6 -- INFORMAL ACTION Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 7 -- TELEPHONE PARTICIPATION IN MEETINGS Members of the Board of Directors, or any committee designated by the Board, may participate in a meeting of the Board of Directors or such committee by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 7 shall constitute presence in person at such meeting. SECTION 8 -- EXECUTION OF DOCUMENTS AND INSTRUMENTS Notwithstanding any subsequent provisions of these By-Laws, the Board shall have power from time to time by resolution to prescribe by what officers or agents particular documents or instruments, or particular classes of documents or instruments, shall be signed, countersigned, endorsed or executed, provided, however, that any person, firm or corporation may and shall be entitled to accept and to act upon any document or instrument signed, countersigned, endorsed or executed by officers or agents of the Corporation pursuant to the provisions of these By-Laws unless prior to receipt of such document or instrument such person, firm or corporation has been furnished with a certified copy of a resolution of the Board prescribing a different signature, counter-signature, endorsement or execution. SECTION 9 -- COMPENSATION OF DIRECTORS The Board of Directors shall have the authority to fix the compensation of directors or to determine that no compensation shall be paid to directors for their services as directors. Directors may receive such compensation (in cash or otherwise) for their services as the Board shall determine; in addition, compensation and expenses of attendance may be allowed for attendance at each regular or special meeting of the Board. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees of the Board may be allowed compensation for attending meetings. Additional compensation may be made to any director for special service rendered. - 8 - 9 ARTICLE III COMMITTEES SECTION 1 -- EXECUTIVE COMMITTEE The Board of Directors may by resolution designate one or more directors in addition to the Chairman of the Board to constitute an Executive Committee. The Chairman of the Board shall be a member of the Executive Committee by virtue of his office. The Executive Committee, in the intervals between the meetings of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, including without limitation adopting a certificate of ownership and merger pursuant to Section 253 (or any amended or successor provision) of the Delaware General Corporation Law, except that the Executive Committee shall not have any power or authority (a) in reference to amending the Corporation's Amended and Restated Certificate of Incorporation, adopting an agreement of merger or consolidation under Sections 251 or 252 (or any amended or successor provisions) of the Delaware General Corporation Law, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the By-Laws of the Corporation, (b) to declare a dividend or to authorize the issuance of stock (other than upon the exercise by the holders thereof of stock options granted by authority of the Board of Directors or any duly constituted Committee thereof or upon authority granted in a resolution of the Board of Directors), or (c) to change the number of directors or fill any vacancy in the Board of Directors or any committee thereof. A majority of the Executive Committee shall constitute a quorum. SECTION 2 -- AUDIT COMMITTEE The Board of Directors may by resolution designate two or more directors to constitute an Audit Committee, provided that a majority of the members of the Audit Committee shall be independent directors. For purposes of this Section 2, "independent director" shall mean a person other than an officer or employee of the Corporation or its subsidiaries or any other person having a relationship which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The Board shall designate from such Committee a chairman, who shall continue to be chairman of the Committee at the pleasure of the Board of Directors. - 9 - 10 SECTION 3 -- OTHER COMMITTEES The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more other committees, each of which shall consist of one or more directors. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Each such committee shall have and may exercise such powers and authority of the Board of Directors in the management of the business and affairs of the Corporation as the Board shall provide in the resolution designating such committee, except as otherwise provided by statute. SECTION 4 -- DESIGNATION BY COMMITTEES OF ALTERNATE MEMBERS In the absence or disqualification of any member of any committee other than the Executive Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Alternate members of the Executive Committee shall be designated only by a majority of the whole Board. SECTION 5 -- COMMITTEE PROCEDURE The Board of Directors may establish reasonable rules and regulations for the conduct of the proceedings of any committee and may appoint a chairman of the committee who shall be a member thereof and a secretary of the committee who need not be a member thereof. To the extent that the Board shall not exercise such powers, they may be exercised by the committee, subject always to the power of the Board to change such action. SECTION 6 -- COMMITTEE MEETINGS Each committee shall meet at the call of its chairman or any two regular members of such committee upon 24 hours' written or oral notice to each member of such committee. The presence or telephone participation of members (regular or alternate) of any committee equal in number to a majority of the members of a committee shall constitute a quorum for the transaction of business, and the vote of a majority of the members present at or so participating in any meeting at which a quorum is present shall be the act of the committee. - 10 - 11 SECTION 7 -- COMMITTEE REPORTS At each regular meeting of the Board of Directors, each committee shall report to the Board the substance of all action taken by such committee since the date of its last report to the Board. Each report shall be filed with the minutes of the meeting of the Board of Directors to which it is presented, as part of the corporate records. SECTION 8 -- TERM OF COMMITTEES Each committee of the Board of Directors shall serve at the pleasure of the Board. ARTICLE IV OFFICERS SECTION 1 -- ENUMERATION The Chairman of the Board, the Chief Executive Officer, the President, the Treasurer and the Secretary of the Corporation shall be elected or appointed by the Board of Directors. In addition, the Board of Directors may, in its discretion, elect a Chief Operating Officer. The Board may also elect or appoint such Executive Vice Presidents (if any), Senior Vice Presidents (if any), Vice Presidents (if any) and Assistants (if any) to any officers as the Board shall from time to time determine. In addition, the Board may appoint or designate, and/or may delegate to the Chief Executive Officer the power to appoint or designate, such other Vice Presidents (if any) in non-officer capacities, as the Board, or the Chief Executive Officer acting pursuant to authority delegated by the Board, shall from time to time determine. The Chairman of the Board shall be a member of the Board of Directors. Any two or more offices may be held by the same person. SECTION 2 -- CHAIRMAN OF THE BOARD The Chairman of the Board shall preside at meetings of the Board of Directors and at all meetings of stockholders and shall perform such other duties and have such powers as may from time to time be designated by the Board of Directors. The Chairman of the Board, by virtue of his office, shall be a member of the Executive Committee. - 11 - 12 SECTION 3 -- CHIEF EXECUTIVE OFFICER The Chief Executive Officer shall be the chief executive officer of the Corporation and shall, subject to the control of the Board of Directors, have direct charge of the business and daily affairs of the Corporation. The Chief Executive Officer shall perform all duties incident to the office of a chief executive officer of a corporation and such other duties as from time to time may be assigned to him by the Board of Directors. He may sign, with the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certificates of stock of the Corporation; he may sign and execute, in the name of the Corporation, all authorized deeds, leases, mortgages, bonds, contracts or other instruments, except in cases in which the signing and execution thereof shall have been expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The Chief Executive Officer may appoint such officers (to the extent that the roles of such officers are not enumerated herein), non-officer Vice Presidents (to the extent that the authority so to appoint such non-officer Vice Presidents shall have been delegated by the Board), agents and employees, in addition to those who may be elected or appointed by the Board, as he shall from time to time deem necessary for the proper conduct of the business of the Corporation and he may fix their compensation and terminate their employment. SECTION 4 -- PRESIDENT The President shall perform all duties assigned to him from time to time by the Chief Executive Officer or by the Board of Directors and shall have that responsibility for overseeing the operations of the Corporation which is not delegated to the Chief Operating Officer (if any). If requested by the Chief Executive Officer or by the Board of Directors, the President may sign all certificates, documents or other instruments which Section 3 of this Article IV authorizes the Chief Executive Officer to sign. SECTION 5 -- CHIEF OPERATING OFFICER The Chief Operating Officer shall perform all duties assigned to him from time to time by the Chief Executive Officer, by the President or by the Board of Directors and shall have such responsibility for overseeing the operations of the Corporation as shall be delegated to him by the President. If requested by the Chief Executive Officer, by the President or by the Board of Directors, the Chief Operating Officer may sign all certificates, documents or other instruments which Section 3 of this Article IV authorizes the Chief Executive Officer to sign. - 12 - 13 SECTION 6 -- EXECUTIVE VICE PRESIDENT, SENIOR VICE PRESIDENT AND VICE PRESIDENT The Executive Vice President, Senior Vice President or Vice President (together, the "Vice Presidential Officers"), in the absence or disability or at the request of the Chief Executive Officer, shall perform the duties and exercise the functions of the President, and when so acting shall have the powers of the President. If there be more than one Vice Presidential Officer, the Chief Executive Officer shall determine which one or more of the Vice Presidential Officers shall perform any of the duties or exercise any of such functions, or if such determination is not made by the Chief Executive Officer, the Board of Directors, the Executive Committee or the Chairman of the Board shall make such determination. Any Vice Presidential Officer shall have such powers and perform such duties as from time to time may be assigned to him by the Board of Directors, the Chief Executive Officer or these By-Laws. In the absence or disability of any Vice Presidential Officer, his Assistant shall perform the duties and may exercise the power of such Vice Presidential Officer. SECTION 7 -- SECRETARY The Secretary shall keep the minutes of the meetings of the stockholders and the Board of Directors and of the Executive Committee in books provided for the purpose; he shall see that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; he shall be custodian of the records and of the corporate seal or seals of the Corporation; he shall see that the corporate seal is affixed to all documents, the execution of which, on behalf of the Corporation, under its seal, is duly authorized and when so affixed may attest the same; and, in general, he shall perform all duties incident to the office of a secretary of a corporation, and such other duties as from time to time may be assigned to him by the Chief Executive Officer or the Board of Directors. The Secretary may sign, with the Chief Executive Officer or with the President, certificates of stock of the Corporation. In the absence or disability of the Secretary, any Assistant Secretary shall perform the duties and may exercise the power of the Secretary. SECTION 8 -- TREASURER The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the Chief Executive Officer or the Board of Directors; he shall render to the Chief Executive - 13 - 14 Officer and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation; he may sign, with the Chief Executive Officer, certificates of stock of the Corporation; and, in general, he shall perform all the duties incident to the office of a treasurer of a corporation, including the investment of funds of the Corporation, and such other duties as from time to time may be assigned to him by the Chief Executive Officer or the Board of Directors. In the absence or disability of the Treasurer, any Assistant Treasurer shall have the same authority as the Treasurer. SECTION 9 -- OTHER OFFICERS The powers and duties of each other officer who may from time to time be chosen by the Board of Directors or the Chief Executive Officer shall be as specified by, or pursuant to authority delegated by, the Board of Directors, or by the Chief Executive Officer, as the case may be, at the time of the appointment of such other officer or from time to time thereafter. In addition, each officer designated as an assistant officer shall assist in the performance of the duties of the officer to which he or she is assistant, and shall have the powers and perform the duties of such officer during the absence or inability to act of such officer. SECTION 10 -- NON-OFFICER VICE PRESIDENTS The Board, or the Chief Executive Officer acting pursuant to authority delegated by the Board, may appoint or designate such number of additional Vice Presidents who shall not be officers of the Corporation ("non-officer Vice Presidents") as they may deem advisable. Each non-officer Vice President shall have such powers and duties as shall be specified by the Board of Directors or the Chief Executive Officer, or, as the case may be, at the time of the appointment of such non-officer Vice President or from time to time thereafter. SECTION 11 -- TERM AND COMPENSATION Officers and non-officer Vice Presidents shall be elected or appointed by the Board of Directors or (to the extent that the role of such officer or non-officer Vice President is not enumerated herein) appointed by the Chief Executive Officer, from time to time, to serve at the pleasure of the Board or the Chief Executive Officer, as the case may be. Each officer shall hold office until his or her successor is elected or appointed and qualified, or until his or her earlier resignation or removal, and each non-officer Vice President shall serve in such capacity until his resignation or removal from such position. Any officer or non-officer Vice President may resign at any time upon written - 14 - 15 notice to the Corporation. The compensation of all officers and non-officer Vice Presidents shall be fixed from time to time by, or pursuant to authority delegated by, the Board of Directors, or by the Chief Executive Officer, as the case may be. ARTICLE V INDEMNIFICATION SECTION 1 -- INDEMNIFICATION RIGHT The Corporation shall indemnify, to the fullest extent now or hereafter permitted by law, each director, officer or employee of the Corporation who was or is a party to or a witness in or is threatened to be made a party to or a witness in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was an authorized representative of the Corporation, against all expenses (including attorneys' fees and disbursements), judgments, fines (including excise taxes and penalties), and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. SECTION 2 -- ADVANCEMENT OF EXPENSES The Corporation shall pay expenses (including attorneys' fees and disbursements) incurred by a director or officer of the Corporation referred to in Section 1 of this Article V in defending or appearing as a witness in any civil or criminal action, suit or proceeding described in Section 1 of this Article V in advance of the final disposition of such action, suit or proceeding. The expenses incurred by such director or officer in his capacity as a director or officer of the Corporation shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding only upon receipt of an undertaking by or on behalf of such director or officer to repay all amounts advanced if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation because he has not met the standard of conduct set forth in the first sentence of Section 5 of this Article V. SECTION 3 -- INDEMNIFICATION OF OTHERS The Corporation may, as determined by the Board of Directors from time to time, indemnify to the fullest extent now or hereafter permitted by law, any person who was or is a party to or a witness in or is threatened to be made a party to or a witness in, or is otherwise involved in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, - 15 - 16 administrative or investigative, by reason of the fact that he is or was an authorized representative of the Corporation, against all expenses (including attorneys' fees and disbursements), judgments, fines (including excise taxes and penalties), and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding. Subject to Section 2 of this Article V, the Corporation may, as determined by the Board of Directors from time to time, pay expenses incurred by any such person by reason of his participation in any action, suit or proceeding referred to in this Section 3 in advance of the final disposition of such action, suit or proceeding. SECTION 4 -- RELIANCE; NONEXCLUSIVE Each director and officer of the Corporation shall be deemed to act in such capacity in reliance upon such rights of indemnification and advancement of expenses as are provided in this Article V. The rights of indemnification and advancement of expenses provided by this Article V shall not be deemed exclusive of any other rights to which any person seeking indemnification or advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors, statute or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office or position, and shall continue as to a person who has ceased to be an authorized representative of the Corporation and shall inure to the benefit of the heirs, executors and administrators of such person. SECTION 5 -- DETERMINATION OF INDEMNIFICATION Any indemnification under this Article V shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the authorized representative is proper in the circumstances because such person has acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such - 16 - 17 person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person's conduct was unlawful. SECTION 6 -- INSURANCE The Corporation may purchase and maintain insurance on behalf of any person referred to in Sections 1 or 3 of this Article V against any liability asserted against such person and incurred by such person in any capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article V. SECTION 7 -- BORROWING BY CORPORATION The Board of Directors, without approval of the stockholders, shall have the power to borrow money on behalf of the Corporation, including the power to pledge the assets of the Corporation, from time to time to discharge the Corporation's obligations with respect to indemnification and the advancement and reimbursement of expenses referred to in this Article V. SECTION 8 -- CONTINUATION OF INDEMNITY For purposes of this Article V, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its authorized representatives, so that any person who is or was an authorized representative of such constituent corporation shall stand in the same position under this Article V with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. SECTION 9 -- AUTHORIZED REPRESENTATIVE For the purposes of this Article V, the term "authorized representative" shall mean a director, officer, employee or agent of the Corporation or of any subsidiary of the Corporation, or a trustee, custodian, administrator, committeeman or fiduciary of any employee benefit plan established and maintained by the Corporation or by any subsidiary of the Corporation, or a person serving another corporation, partnership, joint venture, trust or other enterprise in any of the foregoing capacities at the request of the Corporation. - 17 - 18 ARTICLE VI CAPITAL STOCK SECTION 1 -- ISSUANCE OF STOCK Shares of capital stock of any class now or hereafter authorized, securities convertible into or exchangeable for such stock, or options or other rights to purchase such stock or securities, may be issued or granted in accordance with authority granted by resolution of the Board of Directors. SECTION 2 -- STOCK CERTIFICATES Certificates for shares of the capital stock of the Corporation shall be in the form adopted by the Board of Directors, may be signed by the President and Chief Executive Officer and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may be sealed with the seal of the Corporation. All such certificates shall be numbered consecutively, and the name of the person owning the shares represented thereby, with the number of such shares and the date of issue, shall be entered on the books of the Corporation. SECTION 3 -- TRANSFER OF STOCK Shares of capital stock of the Corporation shall be transferred only on the books of the Corporation, by the holder of record in person or by the holder's duly appointed representative, upon surrender to the Corporation or a transfer agent or agents appointed by the Board of Directors of the certificate for such shares, duly endorsed for transfer, together with such other documents (if any) as may be required to effect such transfer. SECTION 4 -- LOST, STOLEN, DESTROYED, OR MUTILATED CERTIFICATES New stock certificates may be issued to replace certificates alleged to have been lost, stolen, destroyed or mutilated, upon such terms and conditions, including proof of loss or destruction and the giving of a satisfactory bond of indemnity, as the Board of Directors may from time to time determine. SECTION 5 -- REGULATIONS The Board of Directors shall have power and authority to make all such rules and regulations not inconsistent with these By-Laws as it may deem expedient concerning the issue, transfer, and registration of shares of capital stock of the Corporation. - 18 - 19 SECTION 6 -- HOLDERS OF RECORD The Corporation shall be entitled to treat the holder of record of any share or shares of capital stock of the Corporation as the holder and owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or right, title, or interest in, such share or shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. ARTICLE VII GENERAL PROVISIONS SECTION 1 -- CORPORATE SEAL The Corporation may adopt a seal in such form as the Board of Directors shall from time to time determine. SECTION 2 -- FISCAL YEAR The fiscal year of the Corporation shall be as designated by the Board of Directors from time to time. SECTION 3 -- AUTHORIZATION All checks, notes, vouchers, warrants, drafts, acceptances and other orders for the payment of moneys of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. SECTION 4 -- FINANCIAL REPORTS Financial statements or reports shall be sent to the stockholders of the Corporation annually, but, except as may be required by law, the scope of such statements or reports shall be within the discretion of the Board of Directors and such statements or reports shall not be required to have been examined by or to be accompanied by an opinion of an accountant or firm of accountants. SECTION 5 -- SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS Each year, in advance of the annual meeting of stockholders, the Audit Committee of the Board of Directors shall select the firm of independent public accountants to audit the books and accounts of the Corporation for the fiscal year ending March 31 - 19 - 20 (or such other fiscal year end as shall have been designated by the Board of Directors pursuant to Section 2 of this Article VII) following such annual meeting. Such selection shall be submitted for ratification or rejection by the stockholders at the annual meeting. If the selection should not receive approval by the holders of a majority of the common stock of the Corporation represented at such annual meeting, other independent public accountants will be considered for selection by the Audit Committee. SECTION 6 -- EFFECT OF BY-LAWS No provision in these By-Laws shall vest any property right in any stockholder. ARTICLE VIII AMENDMENT OF BY-LAWS The authority to adopt, amend or repeal By-Laws of the Corporation is expressly conferred upon the Board of Directors, which may take such action by the affirmative vote of a majority of the whole Board of Directors at any regular or special meeting duly convened after notice of that purpose, subject always to the power of the stockholders to adopt, amend or repeal By-Laws. - 20 - EX-10.11 3 EXHIBIT 10.11 1 EXHIBIT 10.11 SUMMARY OF FISCAL YEAR 1997 SENIOR MANAGEMENT BONUS PLAN In April 1996, the Compensation Committee adopted a Senior Management Bonus Plan for the 1997 fiscal year which would reward the Company's senior management personnel with bonus payments if certain revenue and individual performance objectives were achieved. Under the Senior Management Bonus Plan, no bonus pool would be available unless specific revenue objectives were met for the fiscal year. If these objectives were met, 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, and for each $1 million by which the revenue objective was exceeded, an additional .75% of base salary would become available, up to a maximum of 100% of base salary for each member of senior management. Of the available bonus pool, 70% of the bonus of each member of senior management would be based exclusively on the achievement of the corporate revenue objective and the other 30% would be based on the Compensation Committee's assessment of the individual performance of each member of senior management within the context of the senior manager's duties and responsibilities. Because the Company did not meet the established revenue objective for the 1997 fiscal year, no bonuses were paid to the Company's senior management personnel under the Senior Management Bonus Plan. EX-11.1 4 EXHIBIT 11.1 1 EXHIBIT 11.1 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS PRIMARY EARNINGS PER SHARE
YEAR ENDED MARCH 31, ------------------------- 1997 1996 ----------- ----------- Weighted Average Common and Common Equivalent Shares: Weighted Average Common Stock Outstanding During the Period........ 93,117,054 80,269,624 Weighted Average Common Equivalent Shares.......................... 6,831,848 6,166,624 ----------- ----------- 99,948,902 86,432,248 =========== =========== Net income......................................................... $41,470,000 $ 9,737,000 =========== =========== Net income per common share........................................ $ 0.41 $ 0.11 =========== =========== FULLY DILUTED EARNINGS PER SHARE Weighted Average Common and Common Equivalent Shares: Weighted Average Common Stock Outstanding During the Period........ 93,117,054 80,269,624 Weighted Average Common Equivalent Shares.......................... 5,900,603 6,348,529 ----------- ----------- 99,017,657 86,618,153 =========== =========== Net income......................................................... $41,470,000 $ 9,737,000 =========== =========== Net income per common share........................................ $ 0.42 $ 0.11 =========== ===========
EX-21.1 5 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT FORE Systems, Inc. owns, either directly or indirectly, through another wholly-owned subsidiary, all of the outstanding equity interests in each of the following companies which do business under their respective corporate names:
SUBSIDIARY JURISDICTION OF INCORPORATION - ---------- ----------------------------- FORE SYSTEMS Holding Corporation Delaware FORE Systems Federal, Inc. Delaware FORE Systems Worldwide, Inc. Delaware ALANTEC Corporation Delaware CellAccess Technology, Inc. California Scalable Networks, Inc. Delaware Cadia Networks, Inc. Delaware Nemesys Holding Company Delaware ALANTEC International, Inc. California FORE Systems Japan, Inc. Japan FORE Systems Limited United Kingdom FORE Systems International Inc. Barbados FORE Systems GmbH Federal Republic of Germany Nemesys Research United Kingdom FORE Systems S.A.R.L. France FORE Systems AG Switzerland FORE Systems B.V. Netherlands FORE Systems Limited Hong Kong FORE Systems Limited Ireland FORE Systems Limited Bermuda
EX-22.1 6 EXHIBIT 22.1 1 EXHIBIT 22.1 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, 333-00788, 333-01728, 333-04052 and 333-17017), the Post Effective Amendment No. 1 to Registration Statement on Form S-8 (No. 333-00788), the Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 (No.333-00468), the Registration Statements on Form S-3 (Nos. 33-94850, 33-96780, 33-80683, 333-11627, 333-19545, 333-25559 and 333-27409) and the Post Effective Amendment No. 1 to Registration Statement on Form S-3 (No. 033-80683) of FORE Systems, Inc., of our report dated April 22, 1997, appearing on page 21 of this Annual Report on Form 10-K. /s/Price Waterhouse LLP Price Waterhouse LLP Boston, Massachusetts June 27, 1997 EX-27.1 7 EXHIBIT 27.1
5 1000 12-MOS MAR-31-1997 APR-01-1996 MAR-31-1997 129,424 170,258 89,087 4,090 50,769 490,671 75,833 27,927 538,577 84,398 0 0 0 405,768 48,411 538,577 395,347 395,347 169,118 169,118 173,164 0 0 65,492 24,022 41,470 0 0 0 41,470 0.41 0.42
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