-----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, KgTQO8kePe8grwsKLn6qGD3aFt24va9xC3obTb5qXvexOQb6OoW7lU+o9a9/ub+o 9FoCxeri5Z0wtTRkBv1/Zg== 0000950128-97-001063.txt : 19971117 0000950128-97-001063.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950128-97-001063 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORE SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0000920000 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 251628117 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24156 FILM NUMBER: 97718995 BUSINESS ADDRESS: STREET 1: 1000 FORE DRIVE CITY: WARRENDALE STATE: PA ZIP: 15086-7502 BUSINESS PHONE: 4127726600 10-Q 1 FORE SYSTEMS, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _________to__________ Commission file number 0-24156 FORE SYSTEMS, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 25-1628117 - ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S Employer Incorporation or Organization) Identification No.) 1000 FORE Drive, Warrendale, Pennsylvania 15086-7502 ------------------------------------------------------------ (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (412) 742-4444 -------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 1997 - ---------------------------- ------------------------------- Common Stock, $.01 par value 99,641,543 Shares 2 FORM 10-Q FORE SYSTEMS, INC. TABLE OF CONTENTS Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements FORE Systems, Inc. Consolidated Balance Sheet as of September 30, 1997 and March 31, 1997 3 FORE Systems, Inc. Consolidated Statement of Income for the three months and six months ended September 30, 1997 and 1996 4 FORE Systems, Inc. Consolidated Statement of Cash Flows for the three months and six months ended September 30, 1997 and 1996 5 Notes to Unaudited Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 Exhibit Index 16 -2- 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. FORE SYSTEMS, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED) SEPTEMBER 30, MARCH 31, 1997 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 153,709 $ 129,424 Short-term investments 144,280 170,258 Accounts receivable, net of allowance for doubtful accounts of $7,498 at September 30, 1997 and $4,090 at March 31, 1997 101,721 84,997 Inventories 61,226 50,769 Deferred income taxes 30,267 29,296 Prepaid income taxes 14,145 19,153 Prepaid expenses and other current assets 13,537 6,774 --------- --------- Total current assets 518,885 490,671 Fixed assets, net 59,589 47,906 --------- --------- Total assets $ 578,474 $ 538,577 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 45,621 $ 36,919 Accrued payroll and related costs 16,549 13,909 Other current liabilities 14,844 10,230 Accrued merger costs 2,745 4,869 Deferred revenue 21,473 18,471 --------- --------- Total current liabilities 101,232 84,398 --------- --------- Commitments and contingencies Stockholders' equity: Common stock, par value $.01 per share; 300,000,000 shares authorized; shares issued: 99,591,109 at September 30, 1997 and 97,792,458 at March 31, 1997 416,474 405,768 Retained earnings 65,082 53,130 Treasury stock, at cost: 120,000 shares (3,248) (3,248) Cumulative translation adjustment 208 53 Valuation allowance for short-term investments (1,274) (1,524) --------- --------- Total stockholders' equity 477,242 454,179 --------- --------- Total liabilities and stockholders' equity $ 578,474 $ 538,577 ========= =========
The accompanying notes are an integral part of these financial statements. -3- 4 FORE SYSTEMS, INC. CONSOLIDATED STATEMENT OF INCOME UNAUDITED (IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------------- ---------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Revenue $ 109,719 $ 98,019 $ 205,078 $ 181,376 Cost of sales 48,194 41,646 90,378 76,558 ------------ ------------ ------------ ------------ Gross profit 61,525 56,373 114,700 104,818 ------------ ------------ ------------ ------------ Operating expenses: Research and development 17,132 12,619 33,037 23,809 Sales and marketing 31,501 21,460 59,439 40,221 General and administrative 5,723 4,432 10,504 8,281 ------------ ------------ ------------ ------------ Total operating expenses 54,356 38,511 102,980 72,311 ------------ ------------ ------------ ------------ Income from operations 7,169 17,862 11,720 32,507 Interest income, net 3,264 3,029 6,293 6,187 Other income (expense) 127 (30) 97 (32) ------------ ------------ ------------ ------------ Income before provision for income taxes 10,560 20,861 18,110 38,662 Provision for income taxes 3,591 7,510 6,158 13,918 ------------ ------------ ------------ ------------ Net income $ 6,969 $ 13,351 $ 11,952 $ 24,744 ============ ============ ============ ============ Net income per common share $ 0.07 $ 0.14 $ 0.12 $ 0.26 ============ ============ ============ ============ Weighted average common and common equivalent shares outstanding 102,519,686 95,931,187 101,508,718 96,349,703 ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. -4- 5 FORE SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS UNAUDITED (IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ----------------------- ----------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Cash flows from operating activities: Net income $ 6,969 $ 13,351 $ 11,952 $ 24,744 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,141 4,345 11,655 7,783 Deferred income tax benefit (716) (902) (971) (1,651) Income tax benefit related to stock options 1,376 8,609 1,376 16,186 Cumulative translation adjustment 115 -- 155 -- Change in operating assets and liabilities: Accounts receivable (17,068) (15,654) (16,724) (30,638) Inventories (7,058) (3,849) (10,457) (11,950) Prepaid expenses and other current assets 344 4,549 (6,369) (585) Accounts payable 12,170 501 8,702 313 Accrued liabilities 7,802 (872) 7,275 1,774 Prepaid income taxes and income taxes payable 3,360 (3,762) 5,008 (12,429) Accrued merger costs (938) (3,407) (2,124) (13,255) Deferred revenue 3,038 (625) 3,002 333 --------- --------- --------- --------- Net cash provided by (used in) operating activities 15,535 2,284 12,480 (19,375) --------- --------- --------- --------- Cash flows from investing activities: Purchases of short-term investments (50,290) (91,111) (98,935) (145,344) Redemption and sale of short-term investments 79,851 75,616 125,163 96,712 Capitalization of software development costs (575) (242) (585) (424) Purchases of fixed assets (10,330) (10,094) (23,147) (20,150) --------- --------- --------- --------- Net cash provided by (used in) investing activities 18,656 (25,831) 2,496 (69,206) --------- --------- --------- --------- Cash flows from financing activities: Principal payments on notes payable and capital lease obligations -- (28) (21) (71) Purchase of treasury stock -- (3,248) -- (3,248) Proceeds from issuance of common stock 5,664 8,978 9,330 17,324 --------- --------- --------- --------- Net cash provided by financing activities 5,664 5,702 9,309 14,005 --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents 39,855 (17,845) 24,285 (74,576) Cash and cash equivalents at beginning of period 113,854 147,282 129,424 204,013 --------- --------- --------- --------- Cash and cash equivalents at end of period $ 153,709 $ 129,437 $ 153,709 $ 129,437 ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements. -5- 6 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 NOTE 1. Interim Financial Statements The accompanying unaudited interim consolidated financial statements of FORE Systems, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these statements include all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair presentation of these results for such periods. The results of operations for the three and six month periods ending September 30, 1997 are not necessarily indicative of results which may be achieved for the entire fiscal year ending March 31, 1998. The unaudited consolidated interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997 as filed with the Securities and Exchange Commission. NOTE 2. Inventories (in thousands) Inventories are stated at the lower of cost or market, cost being determined using the first-in, first-out method, and include raw material components, processing costs and manufacturing overhead costs. Inventories are summarized as follows: September 30, 1997 March 31, 1997 ------------------ -------------- Raw Materials $ 16,260 $16,054 Work in Process 8,990 5,097 Finished Goods 35,976 29,618 -------- ------- Total Inventories $ 61,226 $50,769 ======== ======= NOTE 3. Lease Commitments In December 1995, the Company entered into an agreement to lease headquarters and operating facilities constructed on land which was purchased by the Company. The Company is now occupying the facilities. In October 1997, the lessor finalized permanent financing arrangements for the facilities with a group of lenders. Total amount financed was $41 million. The Company is leasing the facilities under a ten-year operating lease and has options, subject to the lenders' and lessor's consent, to renew the lease for two additional five-year terms. Annual minimum rental payments under the lease are approximately $3.3 million and will commence on April 30, 1998. The Company has guaranteed repayment of up to approximately $32 million of the lenders' financing of the facilities. As part of the above lease transaction, the Company pledged $24.3 million, as of October 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. -6- 7 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. NOTE 4. Legal Proceedings In July and August 1997, the Company was notified that it is a party to seven nearly identical class action lawsuits alleging certain violations of federal securities laws by the Company and certain of its officers, who are named as defendants in the suits, arising from alleged misstatements or omissions by the Company. Plaintiffs seek compensatory damages for injuries allegedly incurred by purchasers of the Company's stock during the period from October 17, 1996 through April 1, 1997, inclusive. The Company believes the allegations in each complaint are completely without merit and intends to defend these actions vigorously. The court has ordered that the lawsuits be consolidated and that a consolidated amended complaint be filed no later than December 15, 1997. The Company must file a responsive pleading to the consolidated amended complaint no later than January 31, 1998. Management believes that the ultimate outcome of these claims will not have a material adverse effect on the results of operations or financial position of the Company. NOTE 5. New Accounting Pronouncements In February 1997, Statement of Financial Accounting Standards No. 128 "Earnings per share"("SFAS 128") was issued by the Financial Accounting Standards Board ("FASB"). SFAS 128 specifies modifications to the calculation of earnings per share from that currently used by the Company. Under SFAS 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. SFAS 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 SFAS 128, basic earnings per share and diluted earnings per share for the quarter ended September 30, 1997 would have been $.07 and $.07, respectively, as compared to $.15 and $.14, respectively, for the corresponding period in 1996. Under SFAS 128, basic earnings per share and diluted earnings per share for the six month period ended September 30, 1997 would have been $.12 and $.12, respectively, as compared to $.28 and $.26, respectively, for the corresponding period in 1996. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). The Company will implement SFAS No. 130 and SFAS No. 131 as required in fiscal 1999 which require the Company to report and display certain information related to comprehensive income and operating segments. -7- 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS GENERAL FORE Systems, Inc. (the "Company") 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, including integrated 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(R) ATM adapter cards, CellPath(TM) wide area network ("WAN") multiplexing products for WAN access, ForeThought(TM) internetworking software, ForeView(R) network management software and the StreamRunner(TM) ATM video product line. The Company believes that period-to-period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. In addition, the Company's results of operations may fluctuate from period to period in the future. Certain statements made herein, including, without limitation, statements regarding increased market acceptance of ATM and LAN switching products, statements regarding the Company's pricing strategies and resulting effects on revenue and gross margins and statements regarding the Company's sales and marketing strategies, may be deemed to be forward-looking statements that involve risks and uncertainties. Such statements should be read in conjunction with certain cautionary statements set forth herein and the list of factors set forth in the Company's Annual Report on Form 10-K for the year ended March 31, 1997 (the "Form 10-K"). Such factors could cause actual results to differ materially from those expressed in any forward-looking statements contained herein. QUARTER AND SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH QUARTER AND SIX MONTHS ENDED SEPTEMBER 30, 1996 REVENUE. Revenue increased by 12% to $109.7 million in the quarter ended September 30, 1997, from $98.0 million in the quarter ended September 30, 1996. The distribution of revenue from sales to domestic and foreign customers was 71% and 29%, respectively, in the quarter ended September 30, 1997. This compares with 67% and 33%, respectively, in the corresponding quarter in 1996. In the quarter ended September 30, 1997, the distribution of revenue from sales to foreign customers by geographic region was 17%, 7% and 5% for Europe, Pacific Rim and other, respectively. Geographic mix for the corresponding quarter in 1996 was 11%, 16% and 6%, respectively. Revenue increased by 13% to $205.1 million for the six month period ended September 30, 1997, as compared to $181.4 million in the corresponding six month period in 1996. The distribution of revenue from sales to domestic and foreign customers was 71% and 29%, respectively, in the six month period ended September 30, 1997. This compares with 63% and 37%, respectively, in the corresponding period in 1996. The distribution of revenue from sales to foreign customers by geographic region for the six month period ended September 30, 1997 was 16%, 6% and 7% for Europe, Pacific Rim and other, respectively. Geographic mix for the corresponding six month period in 1996 was 13%, 18% and 6% respectively. The increase in total revenue dollars was attributable to the -8- 9 increased market acceptance of ATM and LAN switching products. The decrease in foreign revenue as a percentage of revenue was largely attributable to a decrease in sales in Japan which were adversely affected by a decrease in sales to the Japanese government, increased competition in Japan and slower overall acceptance of ATM technology in Japan. The principal reason for the decrease in foreign revenue, in dollars and as a percentage, for the six months ended September 30, 1997, was slower sales in Japan. The decrease in Japanese sales during that period is largely attributable to a decrease in sales to the Japanese government, increased competition in Japan and slower overall acceptance of ATM technology in Japan. There can be no assurance that the Company's revenue from international sales will not continue to decline. There can be no assurance that revenue from sales of the Company's products will continue to grow at its historical growth rate, given the competitive nature of the market for networking products, the fact that such market is characterized by evolving industry standards, frequent new product introductions and rapid technological development which could render the Company's products noncompetitive or obsolete and the fact that many of the Company's competitors have significantly greater financial, technological and personnel resources than does the Company. For these and other risk factors affecting the Company, see the list of risk factors set forth in the Form 10-K. The Company measures overall unit volume for its switching products based on the number of ATM ports or network connections shipped. The total number of ATM ports shipped in the quarter ended September 30, 1997 was over 33,000, as compared with almost 23,000 in the previous year's corresponding period. The total installed base of ATM ports as of September 30, 1997 was approximately 218,000, as compared with over 104,000 at September 30, 1996. The total number of LAN switching ports shipped in the quarter ended September 30, 1997 was approximately 106,000, as compared with close to 63,000 in the previous year's corresponding period. The total number of adapter cards shipped in the quarter ended September 30, 1997 was over 11,400, as compared with almost 8,400 in the previous year's corresponding period. The total installed base of adapter cards as of September 30, 1997 was over 80,000 as compared with approximately 44,000 at September 30, 1996. In the quarter ended September 30, 1997, revenue mix, as a percentage of revenue, among ATM switching products, LAN switching products, adapter cards and other revenue (principally service support and development contracts) was 57%, 30%, 5% and 8%, respectively. Revenue mix for the corresponding quarter in 1996 was 54%, 33%, 5% and 8%, respectively. Average selling price per ATM port during the quarter ended September 30, 1997 was $1,900, as compared to $2,300 in the corresponding quarter in 1996. Average selling price per LAN switching port was $300 in the quarter ended September 30, 1997 as compared to $500 in the corresponding quarter in 1996. Average selling price for adapter cards shipped during the quarter ended September 30, 1997 was $500, as compared to $650 in the previous year's quarter ended September 30, 1996. In May of 1996, the Company reduced the price of certain of its ATM switches by up to 40%. 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 will help stimulate demand for those 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 $61.5 million or 56.1% as a percentage of revenue in the quarter ended September 30, 1997, as compared to gross profit of $56.4 million or 57.5% as a percentage of revenue in the corresponding quarter in 1996. Gross profit of $114.7 million or 55.9% as a percentage of revenue for the six month period ended September 30, 1997, compares to gross profit of $104.8 million or 57.8% as a percentage of revenue during the same period in the previous year. The dollar increase in gross profit was largely attributable to the increase in revenue. The gross margin percentage decline primarily resulted from continued pricing pressure and an increased contribution to the total product mix of low-end LAN switching products. The Company intends to price its products -9- 10 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 was $17.1 million or 15.6% of revenue in the quarter ended September 30, 1997, as compared to $12.6 million or 12.9% of revenue in the corresponding quarter in 1996. Research and development expense for the six month period ended September 30, 1997 was $33.0 million or 16.1% of revenue, as compared to $23.8 million or 13.1% of revenue in the year ago six month period. The increase in research and development expense in dollars and as a percentage of revenue was largely attributable to increased purchases of research and development materials, additional engineering costs associated with acquisitions, increases in depreciation and increases in salary costs. The number of employees of the Company engaged in research and development increased to 408 at September 30, 1997, from 400 at September 30, 1996. SALES AND MARKETING. Sales and marketing expense was $31.5 million or 28.7% of revenue for the quarter ended September 30, 1997, as compared to $21.5 million or 21.9% of revenue in the corresponding quarter in 1996. Sales and marketing expense for the six month period ended September 30, 1997 was $59.4 million or 29.0% of revenue, as compared to $40.2 million or 22.2% of revenue in the year ago six month period. The increase in sales and marketing expense was largely the result of hiring additional sales, marketing and support personnel (including training and documentation), increased salary costs and increased marketing promotion costs. The number of employees of the Company engaged in sales and marketing activities increased to 622 at September 30, 1997, from 551 at September 30, 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, including competition in the networking industry, the timing and nature of any new product introductions by the Company or its competitors, the level of customer demand, the possibility that ATM-based networking products will not achieve continuing market acceptance as competing technologies are introduced by competitors, and other risks, and there can be no assurance that such efforts will be successful. GENERAL AND ADMINISTRATIVE. General and administrative expense was $5.7 million or 5.2% of revenue in the quarter ended September 30, 1997, as compared to $4.4 million or 4.5% of revenue in the corresponding quarter in 1996. General and administrative expense for the six month period ended September 30, 1997 was $10.5 million or 5.1% of revenue, as compared to $8.3 million or 4.6% of revenue in the year ago six month period. The increase in general and administrative expense was largely due to increased salary costs, increased hiring of administrative staff, including those engaged in systems administration, accounting and human resources, and increased costs for professional services and depreciation. The number of employees of the Company engaged in general and administrative activities increased to 153 at September 30, 1997, from 142 at September 30, 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 materially fluctuate in the next twelve months. INTEREST INCOME. Interest income, net of interest expense, was $3.3 million and $6.3 million, respectively, in the quarter and six months ended September 30, 1997, as compared to $3.0 million and $6.2 million in the corresponding quarter and six month period in 1996. INCOME TAXES. The provision for income taxes was $3.6 million, or an effective rate of 34%, in the quarter ended September 30, 1997, as compared to $7.5 million, or an effective rate 36%, in the previous year's quarter ended September 30, 1996. The provision for income taxes recorded in the six month period ended September 30, 1997 was 6.2 million, or an effective rate of 34%, as compared to -10- 11 13.9 million, or an effective rate of 36%, in the corresponding six month period in 1996. The decrease in the effective tax rate is primarily the result of certain tax advantages associated with the opening of the Company's new manufacturing facility in Dublin, Ireland. LIQUIDITY AND CAPITAL RESOURCES The Company has financed most of its working capital and capital expenditure requirements to date primarily through cash proceeds from public offerings and cash generated from operations. Net cash provided by operations was $12.5 million for the six month period ended September 30, 1997. Net cash provided by operations was the result of net income and increases to accounts payable and accrued liabilities offset by increases to accounts receivable, prepaid expenses and other current assets and inventories. The increase in accounts receivable and inventories was due to increased revenue. Cash used by operations was $19.4 million for the six months ended September 30, 1996, which resulted from increased accounts receivable and inventories and decreases in accrued merger costs and prepaid income taxes and income taxes payable, offset by net income and increased current liabilities. The Company's investing activities to date have been primarily for the purchase of fixed assets to support the Company's growth. At September 30, 1997, the Company had cash and cash equivalents of approximately $153.7 million, short-term investments of $144.3 million and an unused line of credit of $20 million. In December 1995, the Company entered into an agreement to lease headquarters and operating facilities constructed on land which was purchased by the Company. The Company is now occupying the facilities. In October 1997, the lessor finalized permanent financing arrangements for the facilities with a group of lenders. Total amount financed was $41 million. The Company is leasing the facilities under a ten-year operating lease and has options, subject to the lenders' and lessor's consent, to renew the lease for two additional five-year terms. Annual minimum rental payments under the lease are approximately $3.3 million and will commence on April 30, 1998. The Company has guaranteed repayment of up to approximately $32 million of the lenders' financing of the facilities. As part of the above lease transaction, the Company pledged $24.3 million, as of October 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 believes that the proceeds from its public offerings, together with its existing sources of liquidity and internally generated cash, will satisfy the Company's projected cash needs through at least the next twelve months. The Company may require additional sources of liquidity to fund future growth, including additional equity offerings or debt financing. In July and August 1997, the Company was notified that it is a party to seven nearly identical class action lawsuits alleging certain violations of federal securities laws by the Company and certain of its officers, who are named as defendants in the suits, arising from alleged misstatements or omissions by the Company. Plaintiffs seek compensatory damages for injuries allegedly incurred by purchasers of the Company's stock during the period from October 17, 1996 through April 1, 1997, inclusive. The Company believes the allegations in each complaint are completely without merit and intends to defend these actions vigorously. The court has ordered that the lawsuits be consolidated and that a consolidated amended complaint be filed no later than December 15, 1997. The Company must file a responsive pleading to the consolidated amended complaint no later than January 31, 1998. Management believes that the ultimate outcome of these claims will not have a material adverse effect on the results of operations or financial position of the Company. -11- 12 To date, inflation has not had a material impact on the Company's financial results. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, Statement of Financial Accounting Standards No. 128 "Earnings per share"("SFAS 128") was issued by the Financial Accounting Standards Board ("FASB"). SFAS 128 specifies modifications to the calculation of earnings per share from that currently used by the Company. Under SFAS 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. SFAS 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 SFAS 128, basic earnings per share and diluted earnings per share for the quarter ended September 30, 1997 would have been $.07 and $.07, respectively, as compared to $.15 and $.14, respectively, for the corresponding period in 1996. Under SFAS 128, basic earnings per share and diluted earnings per share for the six month period ended September 30, 1997 would have been $.12 and $.12, respectively, as compared to $.28 and $.26, respectively, for the corresponding period in 1996. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). The Company will implement SFAS No. 130 and SFAS No. 131 as required in fiscal 1999 which require the Company to report and display certain information related to comprehensive income and operating segments. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Not Applicable. -12- 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings. In July and August of 1997, the Company was notified that seven separate complaints (Robert K. Bell, et al. v. FORE Systems, Inc., et al., Alexander Haff v. FORE Systems, Inc., et al., Neil Lazzaro v. FORE Systems, Inc., et al., Oscar Federbusch v. FORE Systems, Inc., et al., Meridian Capital Funding, Inc. v. FORE Systems, Inc., et al., Ray Chiostri v. FORE Systems, Inc., et al., and Rita M. Davidson v. FORE Systems, Inc., et al.) were filed in the United States District Court for the Western District of Pennsylvania alleging certain violations of federal securities laws by the Company and certain of its officers, who are named as defendants in the suits, arising from alleged misstatements or omissions by the Company. Each suit, each of which is identical in nature to the others, was filed as a class action on behalf of the named plaintiffs and others who are purportedly similarly situated. Plaintiffs seek compensatory damages for injuries allegedly incurred by purchasers of the Company's stock during the period from October 17, 1996 through April 1, 1997, inclusive. The Company believes the allegations in each complaint are completely without merit and intends to defend these actions vigorously. The court has ordered that the lawsuits be consolidated and that a consolidated amended complaint be filed no later than December 15, 1997. The Company must file a responsive pleading to the consolidated amended complaint no later than January 31, 1998. Item 4. Submission of Matters to a Vote of Security Holders. (a) The 1997 Annual Meeting of Stockholders of the Company was held on Thursday, July 31, 1997. (b) Not applicable, pursuant to Instruction 3 to Item 4 of this Form 10-Q. (c) A description of the matters voted upon at the meeting along with an indication of the results of the votes on such matters are set forth below: 1. The election of two class I directors to serve for a term of three years and until their respective successors are duly elected and qualified: Votes Authority For Withheld --- -------- Eric C. Cooper 82,210,090 2,342,825 Onat Menzilcioglu 82,205,466 2,347,449 2. Ratification of the selection of Price Waterhouse LLP, independent accountants, to audit the books and accounts of the Company for the year ending March 31, 1998: For: 83,894,986; Against: 192,002; Abstentions: 465,927. (d) Not applicable. -13- 14 Item 6. Exhibits and Reports on Form 8-K. a) Exhibits. The exhibits listed below are filed or incorporated by reference as part of this quarterly report on Form 10-Q: 3.1 Amended and Restated Certificate of Incorporation of FORE Systems, Inc. (as amended by Certificate of Amendment dated May 6, 1996) (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996). 3.2 Second Amended and Restated Bylaws of FORE Systems, Inc. (as amended through March 5, 1997) (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 10.1 Amendment No. 1 to the Participation Agreement, dated as of October 31, 1997, by and among FORE Systems, Inc., Wilmington Trust Company, Mellon Financial Services Corporation #4 and Mellon Bank, N.A. 10.2 Amendment No. 1 to the Guaranty Agreement, dated as of October 31, 1997, by and among FORE Systems Holding Corporation, Mellon Financial Services Corporation #4 and Mellon Bank, N.A. 10.3 Amended and Restated Pledge and Security Agreement, dated as of October 31, 1997, by and among FORE Systems Holding Corporation, FORE Systems, Inc., Mellon Financial Services Corporation #4 and Mellon Bank, N.A. 10.4 Pledge and Security Agreement - B (Refinancing), dated as of October 31, 1997, by and among FORE Systems Holding Corporation, FORE Systems, Inc., Mellon Financial Services Corporation #4 and Mellon Bank, N.A. 10.5 Confirmation of Guaranty, dated as of October 31, 1997, by and among FORE Systems, Inc., Mellon Bank, N.A. and Mellon Financial Services Corporation #4. 11.1. Statement regarding Computation of Per Share Earnings. 27.1. Financial Data Schedule. b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended September 30, 1997. -14- 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FORE SYSTEMS, INC. (Registrant) Date: November 14, 1997 /s/ Eric C. Cooper ------------------------- Eric C. Cooper Chairman and Chief Executive Officer (Principal Executive Officer) Date: November 14, 1997 /s/ Thomas J. Gill ------------------------- Thomas J. Gill Chief Operating Officer, Chief Financial Officer and Treasurer (Principal Financial and Chief Accounting Officer) -15- 16 EXHIBIT INDEX
Exhibit No. Description 10.1 Amendment No. 1 to the Participation Agreement, dated as of October 31, 1997, by and among FORE Systems, Inc., Wilmington Trust Company, Mellon Financial Services Corporation #4 and Mellon Bank, N.A. 10.2 Amendment No. 1 to the Guaranty Agreement, dated as of October 31, 1997, by and among FORE Systems Holding Corporation, Mellon Financial Services Corporation #4 and Mellon Bank, N.A. 10.3 Amended and Restated Pledge and Security Agreement, dated as of October 31, 1997, by and among FORE Systems Holding Corporation, FORE Systems, Inc., Mellon Financial Services Corporation #4 and Mellon Bank, N.A. 10.4 Pledge and Security Agreement - B (Refinancing), dated as of October 31, 1997, by and among FORE Systems Holding Corporation, FORE Systems, Inc., Mellon Financial Services Corporation #4 and Mellon Bank, N.A. 10.5 Confirmation of Guaranty, dated as of October 31, 1997, by and among FORE Systems, Inc., Mellon Bank, N.A. and Mellon Financial Services Corporation #4. 11.1 Statement Re Computation of per Share Earnings 27.1 Financial Data Schedule
-16- EX-10.1 2 FORE SYSTEMS, INC. 1 Exhibit 10.1 ============================================================================== AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT Dated as of October 31, 1997 (amending the Participation Agreement dated as of December 13, 1995) between FORE SYSTEMS, INC., as Lessee, Guarantor, and Construction Agent WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as trustee of BRUSH CREEK BUSINESS TRUST, as Lessor and Certificate Trustee, MELLON FINANCIAL SERVICES CORPORATION #4, as Certificate Purchaser and Tranche B Lender, as Certificate Purchaser and MELLON BANK, N.A., as Construction Lender and Tranche A Lender ============================================================================== 2 AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT THIS AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT dated as of October 31, 1997 (this "Amendment"), among FORE SYSTEMS, INC., a Delaware corporation, as Lessee, Guarantor and Construction Agent; WILMINGTON TRUST COMPANY, not in its individual capacity, except as expressly stated herein, but solely as trustee of BRUSH CREEK BUSINESS TRUST, a Delaware business trust, as Lessor and Certificate Trustee; MELLON FINANCIAL SERVICES CORPORATION #4, a Pennsylvania corporation, as the Certificate Purchaser and Tranche B Lender; and MELLON BANK, N.A., a national banking association ("Mellon"), as Construction Lender and Tranche A Lender, W I T N E S S E T H: WHEREAS, Lessor, the Tranche A Lender and the Tranche B Lender intend to enter into a certain Amended and Restated Term Loan Agreement, dated as of October 31, 1997; WHEREAS, the Guarantor entered into a certain Confirmation of Guaranty, dated as of October 31, 1997 (the "Confirmation of Guaranty") whereby the Guarantor will confirm that the Guaranty remains in full force and effect; WHEREAS, FORE Systems Holding Corporation entered into a certain Amendment No. 1 to the Guaranty Agreement, dated as of October 31, 1997 (the "Amendment of Guaranty Agreement") whereby (among other matters) FORE Systems Holding Corporation will confirm that the Guaranty Agreement remains in full force and effect; NOW, THEREFORE, in consideration of the mutual terms and conditions herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 3 ARTICLE I DEFINITIONS SECTION I.1. Use of Defined Terms; Rules of Usage. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in Appendix I to the Participation Agreement shall have such meanings when used in this Amendment. The rules of interpretation set forth in Appendix I to the Participation Agreement shall apply to this Amendment. SECTION I.2. Certain Defined Terms. The following terms (whether or not underscored) when used in this Amendment, including its preamble and recitals, shall, except where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Amended and Restated Pledge and Security Agreement" means the Amended and Restated Pledge and Security Agreement, dated as of October 31, 1997, among the Pledgor, the Tranche A Lender, FORE, and Mellon Bank N.A., as custodian thereunder (amending and restating the Pledge and Security Agreement). "Amendment" is defined in the preamble. "Amendment of Guaranty Agreement" is defined in the recitals. "Confirmation of Guaranty" is defined in the recitals. "Participation Agreement" means that certain participation agreement dated as of December 13, 1995, entered into by and among FORE Systems, Inc., a Delaware corporation, as lessee, guarantor and construction agent; Wilmington Trust Company, not in its individual capacity, except as expressly stated herein, but solely as trustee of Brush Creek Business Trust, a Delaware business trust, as lessor and certificate trustee; Mellon Financial Services Corporation #4, a Pennsylvania corporation, as the Certificate Purchaser; and Mellon Bank, N.A., a national banking association, as construction lender. 4 ARTICLE II AMENDMENTS SECTION II.1. Amendments to Appendix I to the Participation Agreement. (a) The following definitions contained in Appendix I of the Participation Agreement are hereby amended and restated to read in their entirety as follows: "Alternate Base Rate" means, for any period, an interest rate per annum equal to the sum of (i) the Federal Funds Effective Rate most recently determined by the Lender plus .50% and (ii) in respect of a determination relative to any Certificate, the Certificate Margin. If the aforesaid rate changes from time to time after the date of the Loan Agreement, the Alternate Base Rate shall be automatically increased or decreased, if appropriate and as the case may be, without notice to the Lessee or the Lessor, as of the effective time of each change, provided that the Lender shall endeavor to notify the Lessee of any such change but shall have no liability for any failure to do so. "Applicable Margin" means with respect to Tranche A Loans, 1/2 of 1%. "Base Date" means October 31, 1997. "Default" means any event or condition which, with the lapse of time or the giving of notice, or both, would constitute an Event of Default or a Loan Agreement Event of Default. "Eurodollar Rate" means with respect to each day during the applicable Interest Period, the rate per annum determined by the Tranche A Lender by dividing (the resulting quotient to be rounded upward to the nearest 1/100 of 1%) (a) the rate of interest (which shall be the same for each day in such Interest Period) determined in good faith by the Tranche A Lender in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the average of the rates per annum for deposits in Dollars offered to major money center banks in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the first day - 3 - 5 of such Interest Period for delivery on the first day of such Interest Period in amounts comparable to the proposed Tranche A Loan (or, if there are no such comparable amounts actively traded, the smallest amounts actively traded) and having maturities comparable to such Interest Period, by (b) a number equal to 1.00 minus the Eurocurrency Reserve Requirements. The "Eurodollar Rate" may also be expressed by the following formula: [average of the rates offered to major money] [center banks in the London interbank market] Eurodollar Rate = [as determined by the Tranche A Lender as set forth above ] --------------------------------------------- [1.00 - Eurocurrency Reserve Requirements ] "Interest Period" means, with respect to any Construction Loan and on and prior to the Refinancing, the Certificate: (a) initially, the period commencing on the funding with respect to such Construction Loan and Certificate and ending on the tenth Business Day of the next succeeding month; (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Loan and Certificate and ending (x) in the case of Eurodollar Rate Construction Loans and Certificate any month from one, two, three, six, nine and twelve months thereafter, and (y) in the case of Mellon Bank Cost of Funds Construction Loans and Certificate, any month from one month to twenty-four months thereafter; and with respect to the Tranche A Loan on and after the Refinancing Funding Date: (c) the period commencing on the date the Tranche A Note is deemed to be issued or continued as, or converted into, a Eurodollar Rate Loan and ending on the date which numerically corresponds to such date six months thereafter (or, if such month has no numerically corresponding day, then on the last Business Day of such month); provided that, the foregoing provisions relating to Interest - 4 - 6 Periods are subject to the following: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that would otherwise extend beyond the Construction Loan Expiration Date or the Maturity Date, as the case may be, shall end on the Construction Loan Expiration Date or Maturity Date, as applicable; (iii) the Lessee shall select Interest Periods so as not to require a payment or prepayment of any Construction Loan during an Interest Period for such Construction Loan; and (iv) any Interest Period in respect of a Certificate shall end on the date the Refinancing is consummated. "Loan Agreement Event of Default" means a Construction Loan Agreement Event of Default, an Allegheny Loan Agreement Event of Default or a Refinancing Loan Agreement Event of Default. "Marketable Collateral" means (i) direct obligations of the United States of America and agencies guaranteed by the United States government having a final maturity of 30 months or less from the date of purchase thereof; (ii) direct obligations of any corporation or finance company incorporated or doing business in the United States of America having a final maturity of 30 months or less from the date of purchase and a rating assigned to such corporate bonds of Aa2 or better by Moody's and AA or better by S&P, (iii) direct obligations of any city, state or county and agencies of any such city, state or county guaranteed by the city, state or county government having a final maturity of 30 months or less from the date of purchase thereof and having a rating assigned to such municipal bonds of Aa2 or better by Moody's and AA or better by S&P; (iv) a certificate of deposit issued by Mellon Bank; or (v) cash. - 5 - 7 "Note" is defined in Section 2.3 of the Construction Loan Agreement and after the Refinancing Funding Date, a note issued under the Amended and Restated Term Loan Agreement. "Pledge and Security Agreement" means, as applicable, either: (i) the Amended and Restated Pledge and Security Agreement among Pledgor, the Tranche A Lender, FORE and Mellon Bank, as custodian; or (ii) the Pledge and Security Agreement-B (Refinancing), dated as of October 31, 1997, among the Pledgor, the Tranche B Lender, FORE and Mellon Bank, as custodian thereunder (the "Pledge and Security Agreement-B (Refinancing)"). "Operative Documents" means the following: (a) the Participation Agreement; (b) the Lease; (c) the Trust Agreement; (d) the Certificate; (e) the Construction Loan Agreement; (f) the Note; (g) the Guaranty; (h) the Pledge and Security Agreement; (i) the Assignment of Leases and Rents; (j) the Deed; (k) the Mortgage; (l) the Construction Agency Agreement; (m) the Assignment of Construction Agency Agreement; (n) the Construction Documents Assignment; (o) the Completion Guaranty; (p) the Intercreditor Agreement; (q) the Guaranty Agreement; and (r) the Pledge and Security Agreement-B (Refinancing) "Refinancing Credit Facility Agreements" means the Amended and Restated Term Loan Agreement, Amendment No.1 to the Participation Agreement, Amendment No.1 to the Guaranty Agreement, the Notes, the First Amendment to Open End Mortgage and Security Agreement, the Confirmation of Guaranty, the Amended and Restated Pledge and Security Agreement, and the Pledge and Security Agreement-B (Refinancing). - 6 - 8 "Refinancing Loan Balance" means as of the date of determination the Outstanding Loan Balance. "Scheduled Payment Date" means (a) as to any Construction Loan bearing interest at the Alternative Base Rate, the tenth Business Day of each calendar month and the Expiration Date or, if any such day is not a Business Day, the next succeeding Business Day, (b) as to any Construction Loan bearing interest at the Mellon Prime Rate, the tenth Business Day of each calendar month during the Construction Period and the last day of the Construction Period or, if the last day of the Construction Period is not a Business Day, the next succeeding Business Day, (c) as to all other types of Construction Loans, the tenth Business Day of each calendar month during the Interest Period and the last day of each Interest Period, (d) as to any Tranche A Loan bearing interest at the Eurodollar Rate, the last day of each Interest Period, (e) as to any Tranche A Loan bearing interest at the Alternative Base Rate, the last Business Day of each calendar month and the Maturity Date and (f) as to any Tranche B Loan, each Semi-Annual Payment Date. "Tranche A Commitment" is defined in Section 2.1 of the Amended and Restated Term Loan Agreement. "Tranche A Loans" is defined in Section 2.1 of the Amended and Restated Term Loan Agreement. "Tranche B Loans" is defined in Section 2.1 of the Amended and Restated Term Loan Agreement. (b) The following definitions are hereby inserted into Appendix I of the Participation Agreement in their appropriate alphabetical order: "Amended and Restated Loan Agreement" means the Amended and Restated Term Loan Agreement, dated as of October 31, 1997 (amending and restating the Construction Loan Agreement among the Certificate Trustee, the Tranche A Lender and the Tranche B Lender. "Board" means the Board of Governors of the Federal - 7 - 9 Reserve System of the United States (or any successor). "Borrowing Request" means a loan request and certificate duly executed by the Lessee on behalf of the Certificate Trustee, substantially in the form of Exhibit A hereto. "Construction Note" is defined in Section 2.1 to the Amended and Restated Term Loan Agreement. "Marketable Collateral-B" means, at any time, (i) direct obligations of the United States of America and agencies guaranteed by the United States government having a final maturity of 30 months or less from the date of purchase thereof; (ii) a certificate of deposit issued by Mellon Bank or (iii) cash. "Outstanding Loan Balance" means at any time the aggregate outstanding principal amount of the Tranche A Loans and Tranche B Loans. "Refinancing Funding Date" means the date on which the Tranche B Loan is made. "Refinancing Loan Agreement Event of Default" is defined in Section 6.1(a) of the Amended and Restated Term Loan Agreement. "Semi-Annual Payment Date" means the last day of each April, and October of each calendar year, commencing April 30, 1998; provided that if the Tranche A Loan bears interest at the Eurodollar Rate, prepayments of principal in respect of the Tranche A Loan shall be payable on the last day of the Interest Period ending in each April and October. "Submitted Financial Statements" means the financial statements of FORE Systems, Inc. for the fiscal year ended in 1997 which were audited by Price Waterhouse, copies of which have been delivered to the Lender. "Tranche B Commitment" is defined in Section 2.1 of the Amended and Restated Term Loan Agreement. - 8 - 10 SECTION 2.2 Amendment to Article III of the Participation Agreement. The following Sections 3.8 and 3.9 are added to Article III of the Participation Agreement. Section 3.8. Refinancing the Tranche A Loan. Unless a Default or Event of Default shall exist, at the request and expense of Lessee, and subject to the provisions of Section 2.3(b) of the Loan Agreement, Lessor, upon receipt of written instructions from Lessee and upon compliance with the conditions hereof shall refinance the Tranche A Loan by either: (i) issuing and selling during the Term refunding notes pursuant to and subject to the restrictions of Section 2.3(b) of the Amended and Restated Term Loan Agreement with such terms and conditions as Lessee and the new Tranche A Lender or Lenders may agree upon and, in connection therewith, use the proceeds of such issuance and sale, to prepay, (pursuant to Section 2.3(b) of the Loan Agreement) all of the Tranche A Loan then outstanding, in whole but not in part, or (ii) causing the Tranche A Lender to assign the Tranche A Loan to a commercial bank, savings and loan association, savings bank, pension plan, depository institution, insurance company, branches or agents of foreign banks, a real estate investment trust or other similar institution as the Lessee identifies and as a result of such assignment the Tranche A Lender receives par plus all accrued interest through the date of such assignment, plus all other amounts then due and payable to the selling Tranche A Lender so long as in the case of clause (i) or (ii) all of the following conditions shall have been satisfied: (a) no Default or Event of Default shall have occurred and be continuing; (b) no such refinancing shall increase or decrease the amount, or shorten or lengthen the maturity, of any scheduled payment of any outstanding principal amount thereof; (c) no such refinancing shall increase the principal amount of indebtedness then outstanding under the Tranche A Loan, provided that the interest rate charged by the lenders in connection with any such refinancing may be different from the interest rate under the Tranche A Loan; (d) no such refinancing shall contain any covenants or restrictions upon the - 9 - 11 Lessee or any of its Affiliates which are materially more burdensome to the Lessee or any of its Affiliates than the undertakings and restrictions contained in the Operative Documents; (e) no such refinancing shall create any Liens on any property of the Lessee or any of its Affiliates except for those Liens created pursuant to the Security Documents in accordance with the terms of the Security Documents; provided however, Lessee or its Affiliates may pledge additional collateral up to a value of $5,000,000 to such new lender so long as the pledge of such additional collateral does not violate the covenants set forth in Section 10.3, it being understood that for purposes of applying Section 10.3(d), any such amount pledged to a new lender shall be treated as if it were distributed as a dividend by the Lessee to its shareholders (provided, that this subsection shall not be construed to prohibit such new Tranche A Lender from taking a first priority mortgage position as contemplated in the Intercreditor Agreement); (f) the lenders under such refinancing shall each execute an agreement, in form and substance satisfactory to the Lenders, pursuant to which such refinancing lenders shall agree to be bound by all of the obligations, terms and conditions of the Intercreditor Agreement to which the Tranche A Lender is bound and to assume all of the responsibilities, covenants and agreements of the Tranche A Lender under the Intercreditor Agreement; (g) no such refinancing shall impair the Liens, rights or benefits of the Lenders under the Refinancing Loan Documents, or any documents or agreements executed in connection therewith (provided, that this subsection shall not be construed to prohibit such new Tranche A Lender from taking a first priority mortgage position as contemplated in the Intercreditor Agreement); (h) after giving effect to any such refinancing, no Default or Event of Default shall exist; and (i) Lessee shall cause the Pledgor under the Pledge and Security Agreement-B (Refinancing) to make an additional transfer to the Collateral Account (as defined in Pledge and Security Agreement-B (Refinancing)) in the amount required thereunder as a result of the refinancing or refunding. The parties hereto shall cooperate in the preparation and execution of any amendments, supplements and other writings reasonably requested to accomplish such refinancing, including assignments and/or release instruments, as appropriate. Lessee shall reimburse Lessor, the Tranche A Lender and Tranche B Lender for all reasonable costs and expenses (including all reasonable internal and external costs and fees of - 10 - 12 the Tranche A Lender and Tranche B Lender) incurred in connection with any refinancing of the Tranche A Loan. SECTION 3.9. Instructions to Certificate Trustee. Pursuant to Section 4.4 of the Trust Agreement (Brush Creek Business Trust) the Certificate Purchaser hereby instructs the Certificate Trustee to execute and deliver each of the Refinancing Credit Facility Agreements to which it is a party. All action taken by the Certificate Trustee in connection with this Section 3.9 is covered by the fee and indemnification provisions set forth in Section 7.1 of the Trust Agreement. SECTION 2.3 Amendment to Section 4.6 of the Participation Agreement. Section 4.6 is amended to read in its entirety as follows: Lessee shall pay to the Certificate Purchaser, a fully-earned, non-refundable arrangement fee in the amount of $200,000, payable on January 10, 1996. SECTION 2.4 Amendment to Section 10.3 of the Participation Agreement Section 10.3(c)(3) of the Participation Agreement is amended to read in its entirety as follows: (c) Limitations on Indebtedness. (3) Consolidated Funded Indebtedness shall not at any time exceed 20% of Consolidated Shareholders' Equity. SECTION 2.5 Amendment to Article X of the Participation Agreement. The following Section 10.3.A. is added to Article X of the Participation Agreement. - 11 - 13 SECTION 10.3.A. Negative Covenant. Lessee will not, and will not permit any of its Subsidiaries to, enter into any agreement prohibiting the ability of any Subsidiary to make any payments, directly or indirectly, to the Lessee by way of dividends, advances, repayment of loans or advances, reimbursement of management and other intercompany charges, expenses and accruals or other returns on investments, or any other agreement or arrangement which restricts the ability of any such Subsidiary to make any payment, directly or indirectly, to Lessee. SECTION 2.6 Amendment to Article XIV of the Participation Agreement. The following Section 14.18 is added to Article XIV of the Participation Agreement. SECTION 14.18. Pledged Property. If an Event of Default (as defined in the Amended and Restated Pledge and Security Agreement) exists, the Tranche A Lender (only prior to a sale or refinancing of the Tranche A Loans under Section 3.8) shall with reasonable diligence exercise a substantial remedy in respect of the Pledged Property (unless otherwise prohibited by operation of law) before asserting any claim to a distribution under Section 3.7 of the Intercreditor Agreement. ARTICLE III CONDITIONS PRECEDENT SECTION III.1. Conditions to Effectiveness. This Amendment shall become effective as of the date hereof (the "Effective Date") when each of the conditions precedent set forth in this Article III shall have been satisfied or waived in writing by each of the parties hereto. (a) Each of the conditions precedent set forth in Section 6.1(a),(b),(d), (f), (g),(h),(m), and 6.2(c),(d),(e),(f) and (l) of the Participation Agreement, insofar as the conditions contained therein are applicable to the Refinancing, are hereby - 12 - 14 incorporated by reference into this Section as though specifically set forth herein together with all related definitions and ancillary provisions. SECTION 3.2. Compliance with Warranties. The representations and warranties set forth in Article IV hereof shall be true and correct. SECTION 3.3. Execution and Delivery of Amended and Restated Term Loan Agreement. The Amended and Restated Term Loan Agreement shall have been duly executed and delivered by the Certificate Trustee and the Lenders and the conditions to its effectiveness shall have been satisfied or waived. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION IV.1. Guarantor's Representations and Warranties. The Guarantor represents and warrants to the Lenders as to all matters contained in Section 8.3 of the Participation Agreement insofar as the representations and warranties contained therein are applicable to the Guarantor and its properties, each such representation and warranty set forth in such Section (insofar as applicable as aforesaid) together with all related definitions and ancillary provisions, being incorporated into this Amendment by reference as though specifically set forth in this Section 4.1, provided however that for purposes of Section 8.3(dd) the address of the Guarantor is 1000 FORE Drive, Warrendale, PA 15086. SECTION 4.2. Binding Effect. This Amendment constitutes a valid and binding agreement of each of the parties hereto and each other Refinancing Loan Document executed by Certificate - 13 - 15 Trustee, Lessee, each Lender and the Guarantor, when executed and delivered in accordance with the Amended and Restated Term Loan Agreement, will constitute valid and binding obligations of each of the parties thereto, enforceable against each party in accordance with the respective terms thereof, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. ARTICLE V MISCELLANEOUS PROVISIONS SECTION V.1. Ratification of and References to the Participation Agreement. This Amendment shall be deemed to be an amendment to the Participation Agreement, and the Participation Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Participation Agreement in any Operative Document or any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Participation Agreement as amended hereby. SECTION V.2. Counterparts. This Amendment may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION V.3. Captions. Section captions used in this Amendment are inserted for convenience of reference only and shall not affect the construction of this Amendment or any provisions hereof. SECTION V.4. Governing Law; Entire Agreement. THIS AMENDMENT AND EACH OTHER OPERATIVE DOCUMENT EXECUTED IN CONNECTION HEREWITH SHALL GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES. This Amendment and the other Operative Documents executed in connection herewith constitute the entire understanding among the parties hereto with respect to - 14 - 16 the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. SECTION V.5. Make-Whole Premium. The parties hereto agree that a Make-Whole Premium shall be payable to the Certificate Purchaser by the Trust in all circumstances in which the Trust is obligated to pay a Make-Whole Premium to the Tranche B Lender under the Amended and Restated Term Loan Agreement. Lessee acknowledges that any Make-Whole Premium payable to the Tranche B Lender or the Certificate Purchaser by the Trust shall be payable by Lessee to the Trust as Supplemental Rent; provided, however, in no event shall a Make-Whole Premium be payable as a result of an event described in Sections 15.1(a) or 15.1(b) of the Lease and as provided in Section 2.3 of the Amended and Restated Loan Agreement no prepayment penalty shall be payable for any prepayment on the Tranche A Loan. ARTICLE VI INSTRUCTIONS TO CERTIFICATE TRUSTEE Mellon Financial Services Corporation #4, as Certificate Purchaser, hereby authorizes and directs the Certificate Trustee to enter into, execute and deliver each of the following agreements as of October 31, 1997. (a) Amendment No. 1 to the Participation Agreement; (b) First Amendment to Open End Mortgage and Security Agreement; (c) Amended and Restated Term Loan Agreement; (d) Tranche B Note, in substantially the form of Exhibit B to the Amended and Restated Term Loan Agreement, for the amount advanced by the Tranche B Lender, not to exceed the Tranche B Loan Commitment; and - 15 - 17 (e) a Tranche A Note, in substantially the form of Exhibit A to the Amended and Restated Term Loan Agreement, in substitution of the Construction Note, all in accordance with the Amended and Restated Term Loan Agreement; (f) all other documents, certificates and agreements in connection with the transactions contemplated by the Refinancing; and to do all such things and take all such actions as may be necessary or convenient to consummate the transactions contemplated by the Refinancing, and to perform the terms and conditions of the aforementioned documents and agreements. Lessee hereby consents to the execution, delivery and performance of each of the aforementioned documents and agreements by the Certificate Trustee. [THE REMAINDER OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK] - 16 - 18 IN WITNESS WHEREOF, the parties hereto have caused this AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT to be executed by their respective officers thereunto duly authorized as of the day and year first above written. FORE SYSTEMS, INC. By /s/ THOMAS J. GILL ----------------------------------- Name: Thomas J. Gill Title: Chief Operating Officer WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as trustee of BRUSH CREEK BUSINESS TRUST, By /s/ ANN E. ROBERTS ----------------------------------- Name: Ann E. Roberts Title: Senior Financial Services Officer MELLON FINANCIAL SERVICES CORPORATION #4 By /s/ STEPHEN R. VIEHE ----------------------------------- Name: Stephen R. Viehe Title: Vice President MELLON BANK, N.A. By /s/ BRIAN CIAVERELLA ----------------------------------- Name: Brian Ciaverella Title: Vice President - 17 - EX-10.2 3 FORE SYSTEMS, INC. 1 Exhibit 10.2 =============================================================================== AMENDMENT NO. 1 TO THE GUARANTY AGREEMENT Dated as of October 31, 1997 (amending the Guaranty Agreement dated as of December 13, 1995) between FORE SYSTEMS HOLDING CORPORATION, as Guarantor MELLON FINANCIAL SERVICES CORPORATION #4, as Tranche B Lender and MELLON BANK, N.A., as Tranche A Lender ================================================================================ 2 AMENDMENT NO. 1 TO THE GUARANTY AGREEMENT THIS AMENDMENT NO. 1 TO THE GUARANTY AGREEMENT dated as of October 31, 1997 (this "Amendment"), among FORE SYSTEMS HOLDING CORPORATION, a Delaware corporation, as Guarantor (hereunder the "Guarantor"); MELLON FINANCIAL SERVICES CORPORATION #4, a Pennsylvania corporation, as the Tranche B Lender (the "Tranche B Lender"); and MELLON BANK, N.A., a national banking association ("Mellon"), as Tranche A Lender (the "Tranche A. Lender"). W I T N E S S E T H: WHEREAS, Lessor, the Tranche A Lender, the Tranche B Lender and the Borrower intend to enter into a certain Amended and Restated Term Loan Agreement, dated as of October 31, 1997 (the "Loan Agreement"); WHEREAS, the Guarantor has duly authorized the execution, delivery and performance of this Amendment; and WHEREAS, it is in the best interests of the Guarantor to execute this Amendment inasmuch as the Guarantor will derive substantial benefits from the transactions contemplated by the Refinancing Loan Documents; NOW, THEREFORE, in consideration of the mutual terms and conditions herein contained, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I DEFINITIONS SECTION 1.1. Use of Defined Terms; Rules of Usage. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in Appendix I to the Participation Agreement (as amended by Amendment No. 1 to the Participation Agreement, dated as of October 31, 1997) shall have such meanings when used in this Amendment. The rules of interpretation set forth in Appendix I to the Participation Agreement shall apply to this Amendment. SECTION 1.2. Certain Defined Terms. The following terms (whether or not underscored) when used in this Amendment, including its preamble and recitals, shall, except 3 where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Amendment" is defined in the preamble. "Amendment No. 1 to the Participation Agreement" means that certain Amendment No. 1 to the Participation Agreement dated as of October 31, 1997 among FORE Systems, Inc., a Delaware corporation, as Lessee, Guarantor and Construction Agent; Wilmington Trust Company, not in its individual capacity, except as expressly stated therein, but solely as trustee of Brush Creek Business Trust, a Delaware business trust, as Lessor and Certificate Trustee; Mellon Financial Services Corporation #4, a Pennsylvania corporation, as the Certificate Purchaser and Tranche B Lender; and Mellon Bank, N.A., a national banking association, as Construction Lender and Tranche A Lender. "Guaranty Agreement" means that certain Guaranty Agreement dated as of December 13, 1995 is made by FORE Systems Holding Corporation, a Delaware corporation, the Guarantor, in favor of Mellon Bank, N.A., as Construction Lender (together with the various financial institutions which may from time to time become lenders under the construction loan agreement referred to therein, and in the event of a refinancing, the Tranche A Lender and the Tranche B Lender and Mellon Financial Services Corporation #4, as Certificate Purchaser (together with its successors and assigns in such capacity). "Participation Agreement" means that certain Participation Agreement dated as of December 13, 1995, entered into by and among FORE Systems, Inc., a Delaware corporation, as Lessee, Guarantor and Construction Agent; Wilmington Trust Company, not in its individual capacity, except as expressly stated therein, but solely as trustee of Brush Creek Business Trust, a Delaware business trust, as Lessor and Certificate Trustee; Mellon Financial Services Corporation #4, a Pennsylvania corporation, as the Certificate Purchaser; and Mellon Bank, N.A., a national banking association, as Construction Lender. ARTICLE II AMENDMENTS SECTION 2.1. Amendment to Article I of the Guaranty Agreement. (a) The following definition contained in Section 1.1 of the Guaranty Agreement is hereby amended and restated to read in its entirety as follows: "Obligations" means all of the following, in each case howsoever created, arising or evidenced, whether direct or indirect, joint or several, absolute or contingent, or now or hereafter existing, or due or to become due: all principal of the Note, interest accrued thereon, the Certificate Amount, Certificate Yield accrued thereon and all additional amounts and other sums at any time due and owing, and required to be paid, to the Participants by the Certificate Trustee under the terms of the Loan Agreement, the Note or any other Operative Documents and, in the event of a Refinancing, to the Tranche A Lenders and the Tranche B Lender under any 4 Refinancing Loan Document; provided however, except for the representations and warranties of Guarantor provided herein, the liability of the Guarantor hereunder shall be strictly limited to the amount of the collateral required to be pledged by the Guarantor under (i) the Amended and Restated Pledge and Security Agreement and (ii) Pledge and Security Agreement-B (Refinancing), as applicable, from time to time; provided further, that the aggregate liability of the Guarantor hereunder and Lessee under the Guaranty for the principal amount of the Note outstanding at any time during the Interim Term guaranteed by this Guaranty Agreement and the Guaranty shall not exceed 86.6% of the then outstanding aggregate of the principal amount of the Note and the Certificate Amount at such time; and provided further, that with respect to an exercise of the Remarketing Option pursuant to Section 20.1 of the Lease, the amount guaranteed under this Guaranty shall not exceed the aggregate amounts Lessee is required to pay under the Lease and the other Operative Documents. ARTICLE III MISCELLANEOUS PROVISIONS SECTION 3.1. Ratification of and References to the Guaranty Agreement. This Amendment shall be deemed to be an amendment to the Guaranty Agreement, and the guaranty Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Guaranty Agreement in any Operative Document or any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Guaranty Agreement as amended hereby. SECTION 3.2. Counterparts. This Amendment may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 3.3. Captions. Section captions used in this Amendment are inserted for convenience of reference only and shall not affect the construction of this Amendment or any provisions hereof. SECTION 3.4 Governing Law; Entire Agreement. THIS AMENDMENT AND EACH OTHER REFINANCING LOAN DOCUMENT EXECUTED IN CONNECTION HEREWITH SHALL GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES. This Amendment and the other Refinancing Loan Documents executed in connection herewith constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. [THE REMAINDER OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK] 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to the Guaranty to be executed by their respective officers thereunto duly authorized as of the day and year first above written. FORE SYSTEMS HOLDING CORPORATION By: /s/ THOMAS J. GILL --------------------------------- Name: Thomas J. Gill Title: Treasurer MELLON FINANCIAL SERVICES CORPORATION NO. #4 By: /s/ STEPHEN R. VIEHE --------------------------------- Name: Stephen R. Viehe Title: Vice President MELLON BANK, N.A. By: /s/ BRIAN CIAVERELLA --------------------------------- Name: Brian Ciaverella Title: Vice President EX-10.3 4 FORE SYSTEMS, INC. 1 Exhibit 10.3 AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT THIS AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT, dated as of October 31, 1997 (this "Agreement"), is made by FORE SYSTEMS HOLDINGS CORPORATION, a Delaware corporation (the "Pledgor"), FORE Systems, Inc., a Delaware corporation ("FORE"), MELLON BANK, N.A. (the "Tranche A Lender", together with its successors and assigns from time to time, in its capacity as secured party hereunder (the "Pledgee"), MELLON FINANCIAL SERVICES CORPORATION #4 and MELLON BANK, N.A., as custodian (in such capacity, the "Custodian"). Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in (i) Appendix 1 to that certain Participation Agreement, dated as of December 13, 1995 (as amended, supplemented or otherwise modified from time to time, the "Participation Agreement"), among FORE Systems, Inc., Brush Creek Business Trust, a statutory Delaware business trust (the "Trust") acting through Wilmington Trust Company, not in its individual capacity except as expressly stated therein, but solely as Certificate Trustee, Mellon Financial Services Corporation #4 and Mellon Bank, N.A.; and the rules of interpretation stated in such Appendix 1 shall be applicable to this Agreement and (ii) in the First Amendment to such Participation Agreement dated as of October 31, 1997. PRELIMINARY STATEMENTS (1) The Tranche A Lender has entered into the Amended and Restated Term Loan Agreement, pursuant to which the Tranche A Lender has agreed to make the Tranche A Loan to the Trust, to be evidenced by the Tranche A Note, to provide the funds necessary to refinance a portion of the Note issued to Mellon Bank N.A. under the Construction Loan Agreement. (2) Pledgor will deliver, or cause to be delivered from time to time, to the Custodian in accordance with the terms hereof and of that certain agreement between the Pledgor and the Custodian (the "Custody Agreement"), Pledged Property with a Collateral Value in an amount not less than the Collateral Requirement and at all 2 times until all obligations of the Guarantor and the Borrower created under the Refinancing Loan Documents, with respect to the Tranche A Loan, have been fully satisfied or discharged in accordance with the terms thereof, to maintain, or cause to be maintained from time to time, Pledged Property with the Custodian in an amount not less than the Collateral Requirement from time to time thereafter, for the purpose of securing all obligations of Pledgor, with respect to the Tranche A Loan, under the Guaranty Agreement, as amended, (whether for principal, interest or other amounts due and payable thereunder); provided, however, the maximum liability of the Pledgor hereunder and under the Guaranty Agreement (and of FORE under the Guaranty) is limited to Pledged Property required hereby to be pledged and the "Pledged Property" required to be pledged under the Pledge and Security Agreement-B (Refinancing), however such obligations are created, arising or evidenced, whether direct or indirect, joint or several, absolute or contingent, or now or hereafter existing, or due or to become due (including all amounts which would become due but for the operation of the automatic stay under Section 362(a) of the United States Bankruptcy Code, and the operation of Sections 502(b) and 506(b) of the United States Bankruptcy Code) (all of the foregoing, collectively, the "Secured Obligations"). (3) Pledgor acknowledges and agrees that it will derive substantial benefits from the execution and delivery of this Agreement, and each of the Refinancing Loan Documents to which it is a party, and the transactions contemplated thereunder. -2- 3 NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the Pledgor, the Custodian and the Pledgee, intending to be legally bound, hereby agree as follows: SECTION 1. Pledge and Assignment. As collateral security for the due and punctual payment of all of the Secured Obligations, the Pledgor hereby pledges, assigns, conveys, transfers, delivers and grants to the Pledgee a security interest in and continuing lien on all of the following property, whether now owned or existing or hereafter acquired or arising, and wherever located (collectively, the "Collateral"), subject to the terms and conditions contained herein: (a) the Collateral Account (as hereinafter defined) and all moneys, funds, instruments, and securities, including, Pledged Property, now in or from time to time credited to or on deposit in the Collateral Account, including, all Pledged Property deposited in the Collateral Account pursuant to Sections 3 and 4(a) hereof; (b) all interest, profit (whether of cash or securities) and distributions of any of the foregoing; and (c) all proceeds (as defined in the Uniform Commercial Code) of the foregoing. Notwithstanding anything to the contrary contained herein or in any other Refinancing Loan Document or in any Operative Document, Mellon Bank N.A. (in its capacity as Pledgee under this Agreement) shall only have rights in and to the Pledged Property until the repayment in full of the Secured Obligations. SECTION 2. Collateral Account; Transfer of Collateral; Definitions. (a)Concurrently herewith the Pledgor has established at the branch of the Custodian located at Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania 15259, a collateral account designated on the records of the Custodian as "FORE Systems Holding Corp. Collateral Account, Mellon Bank, N.A., as Secured Party", account number 856-33508-9 (herein, together with any substitution therefor, the "Collateral Account"). The Collateral Account shall be segregated from any and all other accounts or other property of the Pledgor, and subject to Section 4 hereof (with respect to permitted withdrawals) and Section 7 hereof (with respect to investment at the direction of Pledgor), the Pledgee shall have -3- 4 sole dominion and control over the Collateral Account. Without limiting the generality of the foregoing, so long as an Event of Default (as hereinafter defined) has occurred and is continuing the Pledgee shall have the sole right to make withdrawals from the Collateral Account. Except as expressly provided in Section 4, until the Secured Obligations are paid in full, the Pledgor shall have no right to make withdrawals from the Collateral Account or to otherwise exercise any control with respect to any securities or other property from time to time on deposit in or credited to the Collateral Account, or provide substitute Collateral. (b) Intentionally Omitted. (c) The Pledgor shall deliver with any securities transferred hereunder all appropriate undated bond powers, duly executed in blank and any and all other forms related to transfer requested by the Custodian, completed or executed so to make such transfer valid under applicable law and the rules of any securities exchange or otherwise. (d) The Pledgor and the Pledgee agree to do or take all actions (or omit from taking actions) in order to make all transfers contemplated hereby valid under applicable law and the rules of any securities exchange or otherwise. (e) (i) For the purpose of this Agreement, "Pledged Property" shall mean Marketable Collateral and any undistributed Earnings thereon, delivered and duly pledged in accordance with Section 1 and maintained in accordance with Section 3. (ii) For the purpose of this Agreement, the "Collateral Requirement" shall be an amount equal to the sum of the aggregate principal amount outstanding from time to time under the Tranche A Notes plus all accrued but unpaid interest on the entire outstanding principal amount thereof. (iii) For the purposes of establishing the Collateral Value of Pledged Property held in accordance with Sections 1, 3 and 4a in the Collateral Account, the term "Fair Market Value" shall mean, in the case of cash, the amount of such cash, and otherwise, the market value of the applicable Pledged Property as determined by reference to market quotes provided on the date of valuation by Bloomberg Financial Market Service, or if such rate is unavailable, by Interactive Data Services Inc., Telerate, Reuters and/or any major daily financial publication such as the Wall Street Journal or The New York Times. (iv) For the purpose of this Agreement "Collateral Value" shall mean (i) in the case of cash, 100% of the amount of such cash, (ii) in the case of a certificate of deposit issued -4- 5 by Mellon Bank, 100% of the Fair Market Value, (iii) in the case of Pledged Property, other than cash or a certificate of deposit issued by Mellon Bank N.A., 90% of the Fair Market Value of the Pledged Property properly delivered and perfected hereunder. SECTION 3. Maintaining Pledged Property; Additional Deposits to Collateral Account. Subject to Section 4, the Pledgor shall maintain at all times until the Secured Obligations have been fully satisfied and discharged in accordance with the Refinancing Loan Documents Pledged Property having a Collateral Value equal to the Collateral Requirement. All such Pledged Property shall be unrestricted and shall not be subject to any Lien, except for the Liens created by the Refinancing Loan Documents. SECTION 4. Valuation; Required Collateral Level; Substitutions and Release. (a) On the first Business Day of each calendar month during the Collateral Term, the Custodian shall determine the aggregate Collateral Value of the Pledged Property in the Collateral Account. Such determination shall be promptly furnished, in writing, to the Pledgor and the Pledgee. To the extent the Collateral Value of the Pledged Property in the Collateral Account is less than, at any time prior to the full satisfaction and discharge of the Secured Obligations in accordance with the terms of the Refinancing Loan Documents, the Collateral Requirement, the Pledgor promptly, but in any event within seven days after receipt of notice of such determination, shall transfer Pledged Property to such account in an amount equal to or exceeding the Collateral Value shortfall amount so that the Collateral Requirement is maintained at all times prior to the full satisfaction and discharge of the Secured Obligations in accordance with the terms of the Refinancing Loan Documents. To the extent the Collateral Value of the Pledged Property in the Collateral Account exceeds the Collateral Requirement on the first Business Day of any calendar month prior to the full satisfaction and discharge of the Secured Obligations in accordance with the terms of the Refinancing Loan Documents and no Event of Default (as hereinafter defined) or Default shall have occurred and be continuing, the Pledgor may request the Pledgee, with a copy to the Custodian, to release such excess Collateral to the Pledgor or upon its order or the order of its designee, and the Pledgee shall release and direct the Custodian to release such excess Collateral to the Pledgor or upon its order in accordance with the release procedures set forth in Section 4(b) below. (b) During such time as Pledged Property is held in the Collateral Account, upon delivery of prior notice to the Custodian, the Pledgor may, at any time and so long as no Event of Default shall have occurred and be continuing, substitute for any Collateral subject to this Agreement, other Pledged Property -5- 6 having in the aggregate at least equivalent Collateral Value, and such substitute Pledged Property shall be Collateral for all purposes hereunder. All such substitute Pledged Property shall be deposited in and credited to the Collateral Account, and shall be accompanied by proper instruments of assignment and/or bond powers executed in blank or to the Pledgee by the Pledgor in accordance with the instructions of the Pledgee. Collateral for which the Custodian has received substituted Collateral to the extent permitted hereunder or Collateral which is otherwise to be released in accordance with 4(a) above shall be promptly released by the Pledgee and shall be redelivered and retransferred to the Pledgor or transferred to such Pledgor's account by the Custodian upon the instructions of the Pledgor and shall be accompanied by proper instruments of reassignment and/or bond powers (as appropriate) executed by the Custodian (or its nominee) or the Pledgee, as applicable, as the Pledgor shall direct, all at the expense of the Pledgor and without recourse, representation or warranty by the Pledgee or the Custodian or any of their nominees (except for the representation that the released Collateral is free and clear of all Liens created by, through or under the Pledgee or the Custodian). (c) The delivery of a written notice pursuant to clause (a) above by the Pledgor to the Custodian, prior to effecting any sale, substitution, or additional pledge of Collateral as contemplated by this Section 4(c) shall constitute a representation and warranty by the Pledgor that, to Pledgor's knowledge, no violation of the rules and regulations of the Federal Reserve Board exists with respect to the Tranche A Loan and such sale, substitution or pledge of Collateral will not result in a violation of any rule or regulation of the Federal Reserve Board. SECTION 5. The Custodian. (a) The Pledgee hereby appoints the Custodian as the Pledgee's agent (i) for retaining physical possession of any cash included in the Collateral and any physical certificates or instruments or other physical representation or evidence of any Collateral in accordance with the provisions of this Agreement and (ii) for holding the interest of the Pledgee in all book-entry securities in accordance with the provisions of this Agreement. All Collateral shall be in the Collateral Account and segregated from all other property, including, without limitation, that of the Pledgor and the Pledgee. The Custodian hereby accepts such appointment. (b) The Custodian shall retain physical possession of the certificates or instruments representing or evidencing the Collateral if the Collateral is issued in physical form; provided that the Custodian may have such Collateral credited to the Custodian's account at The Depository Trust Company ("DTC"). If the Collateral is in book-entry form, the Collateral shall be (i) -6- 7 credited to the Custodian or its nominee in the Custodian's account at DTC or (ii) registered on the books of the issuer thereof in the name of the Custodian. The Custodian shall mark its books and records with respect to the Collateral to indicate security interests of the Pledgee in the Collateral. Certificated securities may be held (in the discretion of the Pledgee) in the name of the Pledgor, endorsed or assigned in blank, or endorsed or assigned to the Pledgee, the Custodian or DTC (or its nominee). (c) All book-entry obligations of the United States Government issued in the form of an entry on the records of the Federal Reserve Bank of New York shall be (1) identified on the records of the Federal Reserve Bank of New York for the account of Mellon Bank, N.A. or its agent and (2) identified on the records of Mellon Bank, N.A. as part of the Collateral Account. The Custodian shall mark its books and records with respect to the Collateral to indicate the security interests of the Pledgee in the Collateral. (d) In addition, subject to Section 7 hereof, the Custodian shall at all times have the right to exchange certificates or instruments representing or evidencing Pledged Property for certificates or instruments for Pledged Property of smaller or larger denominations for any purpose consistent with its performance of this Agreement; provided that the aggregate principal amount of the certificates or instruments received upon such an exchange shall not be less than the aggregate principal amount of the certificates or instruments tendered for exchange. (e) The Custodian acknowledges receipt of this Agreement, certifies that no notice of any other security agreement or claim affecting the Collateral has been received by it, states that the Collateral will be held in the Collateral Account for the benefit of the Pledgee and agrees to hold the Collateral solely for the benefit of the Pledgee and subject to the control of the Pledgee, as provided in this Agreement. The Custodian agrees to exercise the same degree of care as exercised by banks generally for similar property in exercising its duties under this Agreement. The duties of the Custodian under this Agreement shall only be those set forth in this Agreement. SECTION 6. Interest, Distributions, etc. on Collateral. If, while this Agreement is in effect, the Pledgor shall become entitled to receive or shall receive any interest or other cash payments or property paid in respect of the Pledged Property (to the extent such property or other proceeds, profits, or other property is cash or is reduced to cash, the "Earnings") whether as an addition to, in substitution of, or in exchange for any security included in the Pledged Property, or otherwise, subject to Sections 4(a) and 4(b), the Pledgor agrees to accept the same -7- 8 as the Pledgee's agent and to hold the same in trust on behalf of and for the benefit of Pledgee and to convert the same to Pledged Property, as necessary, and to deliver the same forthwith to the Custodian with the endorsement of the Pledgor when necessary and/or appropriate undated bond powers, duly executed in blank, or to the Pledgee, as the Pledgee may direct, to be deposited in the Collateral Account. SECTION 7. Investment of Collateral. (a) The Custodian shall invest all moneys on deposit from time to time (including moneys on deposit upon the sale or maturity of securities) in the Collateral Account so long as no Event of Default or Default shall have occurred and be continuing, at the direction of the Pledgor, in Pledged Property having an equal or greater Collateral Value than the sold or matured security. Such investments, together with any interest or other earnings resulting from such investments, shall be maintained in the Collateral Account and shall be reinvested as provided in this paragraph. The Custodian shall collect so much of the moneys payable on account of interest as it is able to collect in the ordinary course and shall hold such interest in the Collateral Account, provided that in no event shall the provisions hereof impose on the Custodian the obligation to institute any collection proceedings, judicial or otherwise, in respect of investments comprising the Collateral. Neither the Custodian nor the Pledgee shall be liable or responsible for any loss resulting from any such investments, except for any such loss resulting from the gross negligence or willful misconduct of such person. SECTION 8. Rights of the Custodian. Neither the Custodian nor the Pledgee shall be liable for failure to collect or realize upon the Collateral, or any part thereof, or for any delay in so doing nor shall any of them be under any obligation to take any action whatsoever with regard thereto, except for any such persons failure resulting from the gross negligence or wilfull misconduct of such person. Any or all of the Collateral may, if an Event of Default has occurred and is continuing, without notice, be registered in the name of the Custodian or its nominee or the Pledgee or its nominee, if not then so registered, and the Custodian or its nominee or the Pledgee or its nominee may thereafter without notice, exercise all rights, privileges or options pertaining to any of the securities included in the Collateral, if appropriate, as if it were the absolute owner thereof, all without liability except to account for property actually received by it, and the Pledgor shall execute and deliver (or cause to be executed and delivered) to the Custodian all powers of attorney, interest coupons and other instruments for the purpose of enabling the Custodian to exercise the rights and powers which the Custodian is entitled to exercise pursuant to this Section. -8- 9 SECTION 9. Application of Collateral by Custodian Prior to an Event of Default. At the Maturity Date if the Lessee shall have elected to purchase the Property pursuant to the Lease, so long as no Event of Default or Default shall have occurred and be continuing the Custodian shall, upon 10 days written notice from the Lessee and the Pledgor, liquidate the Pledged Property in the Collateral Account and apply the proceeds to any purchase of the Property pursuant to the Lease; provided, however, that the Custodian shall transfer the proceeds of such Pledged Property only upon receipt of a certification of Lessor stating that the Lessor has received or has made arrangements satisfactory to it to receive in connection with any such purchase an amount which, together with the proceeds of the Pledged Property, will be sufficient to pay the Lease Balance. SECTION 10. Events of Default. Each of the following events shall constitute an event of default under this Agreement (each, an "Event of Default"): (a) The failure of Pledgor to pay, after three days prior written notice by means of invoice, the reasonable fees and expenses of the Custodian; (b) The failure of Pledgor to comply with any of the terms or provisions of this Agreement, which (except as provided in (a) above) failure shall have continued for a period of five (5) days after written notice to FORE or Pledgor; or (c) A Lease Event of Default, or Refinancing Loan Agreement Event of Default shall occur and be continuing. SECTION 11. Remedies upon Default. If an Event of Default shall have occurred and be continuing, then the Pledgee shall have all the rights and remedies of a secured party under the Uniform Commercial Code in effect in (the "UCC") and other applicable law, and, in addition, the Pledgee, upon written notice to FORE, may direct the Custodian from time to time to: (a) deliver and pay over all or any portion of the Collateral in the Collateral Account to the Pledgee, to be applied to satisfy accrued and unpaid Secured Obligations; (b) sell the Collateral, or any part thereof, at any public or private sale or on any securities exchange, for cash, upon credit or for future delivery, as the Pledgee shall deem appropriate. The Pledgee shall be authorized at any such sale to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing the Collateral for their own account for investment and not with a view to the distribution or sale -9- 10 thereof, and upon consummation of any such sale, the Pledgee shall have the right to assign and transfer and have the Custodian transfer and deliver to the purchaser or purchasers thereof the Collateral so sold. Each such purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of the Pledgor and FORE, and each of the Pledgor and FORE hereby waives (to the extent permitted by law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule or law or statute now existing or hereafter enacted. The Pledgee shall give the Pledgor at least ten (10) days' written notice of the Pledgee's intention to make any such public or private sale or sales at any broker's board or on any such securities exchange. Such notice, in case of public sale, shall state the time and place fixed for such sale. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places, as the Pledgee may fix in the notice of such sale. At any such sale, the Collateral, or portion thereof, to be sold may be sold in one sale as an entirety or in separate sales, as the Pledgee may (in its sole and absolute discretion) determine and the Pledgee may bid (which bid may be in whole or in part, in the form of cancellation of indebtedness) for and purchase for the account of the Pledgee the whole or any part of the Collateral. The Pledgee shall not be obligated to make any sale of Collateral if it shall determine not to do so, regardless of the fact that notice of sale of Collateral may have been given. The Pledgee may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case a sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Pledgee until the sale price is paid by the purchaser or purchasers thereof, but the Pledgee shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may be sold again upon like notice; or (c) proceed by a suit or suits at law or in equity to foreclose the security interest granted under this Agreement and to sell the Collateral, or any portion thereof, pursuant to a judgment or decree of a court or courts of competent jurisdiction. In addition, the Pledgee shall have all of the rights granted to the Pledgee under this Agreement upon the occurrence -10- 11 of an Event of Default. FORE (but not the Pledgor) shall be liable for the deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay all amounts to which the Pledgee is entitled, and the fees and disbursements of any attorneys employed by the Pledgee to collect such deficiency. SECTION 12. Application of Proceeds of a Sale. The cash or proceeds of sale of Collateral sold pursuant to Section 11 of this Agreement shall be paid to the Pledgee until the Secured Obligations are paid in full; thereafter all such proceeds shall be delivered to the Pledgor. SECTION 13. Conditions of Effectiveness. This Agreement shall become effective when the Pledgee shall have received a counterpart of this Agreement duly executed and delivered by Pledgor. SECTION 14. Disposition, etc. Without the prior written consent of the Pledgee, the Pledgor agrees not to sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Property held in the Collateral Account, except as provided in Section 4, and Sections 11 and 12, of this Agreement, nor will it create, incur or permit to exist any Lien with respect to any of the Pledged Property held in the Collateral Account, or any interest therein, or any proceeds thereof, except for the lien and security interest provided for by this Agreement. SECTION 15. Exoneration; Indemnity. Neither the Custodian, the Pledgee, nor any director, officer or employee of the Custodian or the Pledgee, shall be liable to the Pledgor or FORE for any action taken or omitted to be taken by them or any one of them, pursuant to this Agreement, except to the extent arising from its or their own gross negligence or willful misconduct; nor shall the Custodian or the Pledgee be responsible for the validity, effectiveness or sufficiency hereof or of any document or security furnished pursuant hereto or in connection herewith. The Custodian and the Pledgee shall be entitled to rely on any communication, instrument or document believed by them to be genuine and correct and to have been signed or sent by the proper person or persons. FORE agrees to indemnify and hold harmless the Custodian and the Pledgee, and/or the directors, officers, employees, agents or nominees of the Custodian or the Pledgee, from and against any and all liability incurred by the Custodian or the Pledgee (or such agent or nominee) hereunder or in connection herewith, except to the extent such liability shall be due to willful misconduct or gross negligence on the part of the Custodian or the Pledgee or such directors, officers, employees, agents or nominees. In furtherance hereof, each of the Pledgor -11- 12 and FORE acknowledges and agrees that the Custodian and the Pledgee may act on the instructions of the Pledgor acting alone with respect to all matters related hereto, including the receipt, release, transfer, substitution or investment of any Collateral or the transfer of any amounts pursuant hereto. Any liability of the Custodian and the Pledgee under this Agreement shall be several and not joint. SECTION 16. The Pledgee Appointed Attorney-in-Fact. The Pledgor hereby appoints the Pledgee and the Custodian, acting either individually or jointly, as the Pledgor's attorney-in-fact for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instrument which they may deem necessary or advisable to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, both the Pledgee and the Custodian, acting either individually or jointly, shall have the right and power to receive, endorse and correct all checks, drafts and other orders for the payment of money made payable to the Pledgor representing any interest payment or other distribution payable or distributable in respect of the Collateral or any part thereof and to give full discharge for the same. SECTION 17. Change of Custodian. No change in Custodian may occur without the express written consent of the Pledgee and the Pledgor. The Custodian may resign by giving thirty (30) days' notice to the parties to this Agreement. The Pledgee may then appoint a successor Custodian with the prior written consent of the Pledgor, which shall not be unreasonably withheld or delayed, whereupon the successor Custodian shall succeed to the rights, powers and duties of the Custodian. SECTION 18. No Waiver; Cumulative Remedies. No failure on the part of Custodian or the Pledgee to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy by the Custodian or the Pledgee preclude any other further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law or in equity. SECTION 19. Termination. This Agreement shall terminate on the payment in full of the Secured Obligations and the payment of all other amounts owing to the Tranche A Lender under the Refinancing Loan Documents, at which time the Pledgee shall execute and deliver to the Pledgor an appropriate release and shall reassign, retransfer and redeliver (or cause to be reassigned, retransferred and redelivered) to the Pledgor, or to such person or persons as the Pledgor shall designate, against -12- 13 receipt, such of the Collateral pledged by the Pledgor as shall have not been sold or otherwise applied pursuant to the terms hereof and shall still be held by the Custodian pursuant to this Agreement, together with proper instruments of reassignment and retransfer. Any such reassignment and retransfer shall be without recourse, representation or warranty by the Pledgee or the Custodian and shall be at the expense of the Pledgor (except for the representation that the released Pledged Property is free and clear of all Liens created by, through or under the Pledgee or the Custodian). SECTION 20. Notices. All communications and notices hereunder shall be in writing, unless otherwise specifically provided herein, and delivered or mailed by first-class mail, postage prepaid, registered or certified, return receipt requested, by overnight courier, or by facsimile transmission, to the address of the Pledgor (which shall be the same address as the address of FORE) and Pledgee set forth in the Participation Agreement, or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties hereto complying as to delivery with the terms of this Section. All notices, requests, demands and other communications provided for hereunder shall be effective upon deposit in the United States mail or upon facsimile transmission during business hours. SECTION 21. Further Assurances; etc. Each of the Pledgor, Pledgee and Custodian agrees to do such further acts and things, and to execute and deliver such additional conveyances, assignments, agreements and instruments, including the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the security interests created hereby as may be reasonably required to effect the terms and provisions of this Agreement. The Pledgor also hereby irrevocably authorizes the Pledgee to file any such financing or continuation statement, without the signature of the Pledgor to the extent permitted by applicable law, as the Pledgee may at any time reasonably request in connection with the administration or enforcement of this Agreement in order better to assure and confirm unto the Pledgee its rights, powers and remedies hereunder. The Pledgor hereby consents and agrees that the issuers of or obligors in respect of the Collateral or any registrar or transfer agent or trustees for any of the Collateral shall be entitled to accept the provisions hereof as conclusive evidence of the right of the Pledgee to effect any transfer pursuant to this Agreement, notwithstanding any other notice or direction to the contrary heretofore or hereafter given by the Pledgor or any other person to any of such issuers or obligors or to any such registrar or transfer agent or trustees. The Pledgor further covenants that it will defend the Pledgee's right, title and interest in the Collateral, from time -13- 14 to time pledged by the Pledgor, against the claims and demands of all Persons. SECTION 22. Assignment. This Agreement, and the terms, covenants and conditions hereof, shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that neither Pledgor nor Pledgee shall be permitted to assign this Agreement except in connection with an assignment permitted under the Participation Agreement. SECTION 23. Amendments. Neither this Agreement nor any provisions hereof may be amended, modified, waived or terminated, except by an instrument in writing signed by a duly authorized officer of the Pledgee and the Pledgor. SECTION 24. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to conflicts of law principles. SECTION 25. Costs, Expenses and Taxes. FORE agrees to pay on demand all reasonable costs and expenses of, and all stamp and other taxes payable (including any penalties) incurred by the Custodian or the Pledgee in connection with the preparation, execution, delivery, administration and enforcement of this Agreement. SECTION 26. Fees and Expenses of Custodian. The fees and expenses of the Custodian shall be payable by FORE as set forth in a separate agreement between the Custodian and FORE, which fees shall be those fees customarily charged by custodians performing the foregoing services. SECTION 27. Headings. The headings in this Agreement are for convenience only and shall not be deemed or construed to affect the meaning or construction of any of the provisions of this Agreement. SECTION 28. Counterparts. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. SECTION 29. SUBMISSION OF JURISDICTION. TO THE FULLEST EXTENT PERMITTED BY LAW, THE PLEDGOR, PLEDGEE AND CUSTODIAN HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA AND ANY COURT OF THE COMMONWEALTH OF PENNSYLVANIA FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY. THE PLEDGOR, PLEDGEE AND CUSTODIAN IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBLIGATION WHICH SUCH PARTY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDINGS BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. -14- 15 IN WITNESS WHEREOF, the parties hereto have caused this AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT to be duly executed by their duly authorized officers on the dates specified below with effect from the date first above written. FORE SYSTEMS HOLDING CORPORATION as Pledgor Attest: /s/ CHRISTOPHER H. GEBHARDT By: /s/ THOMAS J. GILL - ---------------------------- ----------------------------- Name: Thomas J. Gill Title: Treasurer FORE SYSTEMS, INC. Attest: /s/ CHRISTOPHER H. GEBHARDT By: /s/ THOMAS J. GILL - ---------------------------- ----------------------------- Name: Thomas J. Gill Title: Chief Operating Officer MELLON BANK, N.A., as Pledgee Attest: /s/ FRANK LABARBERA By: /s/ BRIAN CIAVERELLA - ---------------------------- ----------------------------- Name: Brian Ciaverella Title: Vice President MELLON BANK, N.A., as Custodian Attest: /s/ JEFFREY T. RECKER By: /s/ CHRISTINA HITCHINS - ---------------------------- ----------------------------- Name: Christina Hitchins Title: Officer -15- 16 MELLON FINANCIAL SERVICES CORPORATION #4 Attest: /s/ MICHAEL J. TIESI By: /s/ STEPHEN R. VIEHE - ---------------------------- ----------------------------- Name: Stephen R. Viehe Title: Vice President 17 TABLE OF CONTENTS
Page ---- SECTION 1. Pledge and Assignment............................................-2- SECTION 2. Collateral Account; Transfer of Collateral; Definitions..........-3- SECTION 3. Maintaining Pledged Property; Additional Deposits to Collateral Account...................................-4- SECTION 4. Valuation; Required Collateral Level; Substitutions and Release..........................................................-4- SECTION 5. The Custodian....................................................-5- SECTION 6. Interest, Distributions, etc. on Collateral......................-7- SECTION 7. Investment of Collateral.........................................-7- SECTION 8. Rights of the Custodian..........................................-7- SECTION 9. Application of Collateral by Custodian Prior to an Event of Default..........................................................-8- SECTION 10. Events of Default................................................-8- SECTION 11. Remedies upon Default............................................-8- SECTION 12. Application of Proceeds of a Sale...............................-10- SECTION 13. Conditions of Effectiveness.....................................-10- SECTION 14. Disposition, etc................................................-10- SECTION 15. Exoneration; Indemnity..........................................-10- SECTION 16. The Pledgee Appointed Attorney-in-Fact..........................-11- SECTION 17. Change of Custodian.............................................-11- SECTION 18. No Waiver; Cumulative Remedies..................................-11- SECTION 19. Termination.....................................................-11- SECTION 20. Notices.........................................................-12-
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Page ---- SECTION 21. Further Assurances; etc.........................................-12- SECTION 22. Assignment......................................................-13- SECTION 23. Amendments......................................................-13- SECTION 24. Governing Law...................................................-13- SECTION 25. Costs, Expenses and Taxes.......................................-13- SECTION 26. Fees and Expenses of Custodian..................................-13- SECTION 27. Headings........................................................-13- SECTION 28. Counterparts....................................................-13-
ii EX-10.4 5 FORE SYSTEMS, INC. 1 Exhibit 10.4 PLEDGE AND SECURITY AGREEMENT-B (REFINANCING) THIS PLEDGE AND SECURITY AGREEMENT-B (REFINANCING), dated as of October 31, 1997 (this "Agreement"), is made by FORE SYSTEMS HOLDINGS CORPORATION, a Delaware corporation (the "Pledgor"), FORE Systems, Inc., a Delaware corporation ("FORE"), MELLON FINANCIAL SERVICES CORPORATION #4 (the "Tranche B Lender"), together with its successors and assigns from time to time, in its capacity as secured party hereunder (the "Pledgee"), and MELLON BANK, N.A., as custodian (in such capacity, the "Custodian"). Capitalized terms used but not otherwise defined in this Agreement have the respective meanings specified in (i) Appendix 1 to that certain Participation Agreement, dated as of December 13, 1995 (as amended, supplemented or otherwise modified from time to time, the "Participation Agreement"), among FORE Systems, Inc., Brush Creek Business Trust, a statutory Delaware business trust (the "Trust") acting through Wilmington Trust Company, not in its individual capacity except as expressly stated therein, but solely as Certificate Trustee, Mellon Financial Services Corporation #4 and Mellon Bank, N.A. and the rules of interpretation stated in such Appendix 1 shall be applicable to this Agreement and (ii) in the First Amendment to such Participation Agreement dated as of October 31, 1997. PRELIMINARY STATEMENTS (1) The Tranche B Lender has entered into the Amended and Restated Term Loan Agreement, pursuant to which the Tranche B Lender has agreed to make the Tranche B Loan to the Trust, to be evidenced by the Tranche B Note. (2) Pledgor will deliver, or cause to be delivered from time to time, to the Custodian in accordance with the terms hereof and of that certain agreement between the 2 Pledgor and the Custodian (the "Custody Agreement-B"), Pledged Property with a Collateral Value in an amount not less than the Collateral Requirement and at all times until all obligations of the Guarantor and the Borrower created under the Refinancing Documents, with respect to the Tranche B Loan, have been fully satisfied or discharged in accordance with the terms thereof, to maintain, or cause to be maintained from time to time, Pledged Property with the Custodian in an amount not less than the Collateral Requirement from time to time thereafter, for the purpose of securing all obligations, with respect to the Tranche B Loan under the Guaranty Agreement as amended (whether for principal, interest, Make-Whole Premium or other amounts due and payable thereunder); provided, however, the maximum liability of the Pledgor hereunder and under the Guaranty Agreement (and of FORE under the Guaranty) is limited to Pledged Property required hereby to be pledged and the "Pledged Property" required to be pledged under the Pledge and Security Agreement - A (Refinancing), however such obligations are created, arising or evidenced, whether direct or indirect, joint or several, absolute or contingent, or now or hereafter existing, or due or to become due (including all amounts which would become due but for the operation of the automatic stay under Section 362(a) of the United States Bankruptcy Code, and - 2 - 3 the operation of Sections 502(b) and 506(b) of the United States Bankruptcy Code) (all of the foregoing, collectively, the "Secured Obligations"). (3) Pledgor acknowledges and agrees that it will derive substantial benefits from the execution and delivery of this Agreement, and each of the Refinancing Loan Documents to which it is a party, and the transactions contemplated thereunder. NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the Pledgor, the Custodian and the Pledgee, intending to be legally bound, hereby agree as follows: SECTION 1. Pledge and Assignment. As collateral security for the due and punctual payment of all of the Secured Obligations, the Pledgor hereby pledges, assigns, conveys, transfers, delivers and grants to the Pledgee a security interest in and continuing lien on all of the following property, whether now owned or existing or hereafter acquired or arising, and wherever located (collectively, the "Collateral"), subject to the terms and conditions contained herein: (a) the Collateral Account (as hereinafter defined) and all moneys, funds, instruments, and securities, including, Pledged Property, now in or from time to time credited to or on deposit in the Collateral Account, including, all Pledged Property deposited in the Collateral Account pursuant to Sections 3 and 4(a) hereof; (b) all interest, profit (whether of cash or securities) and distributions of any of the foregoing; and (c) all proceeds (as defined in the Uniform Commercial Code) of the foregoing. - 3 - 4 Notwithstanding anything to the contrary contained herein, in any other Refinancing Loan Document, or in any other Operative Document, Mellon Financial Services Corporation #4 (in its capacity as Pledgee under this Agreement) shall only have rights in and to the Pledged Property until the repayment in full of the Secured Obligations. SECTION 2. Collateral Account; Transfer of Collateral; Definitions. (a) Concurrently herewith the Pledgor has established at the branch of the Custodian located at Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania 15258, a collateral account designated on the records of the Custodian as "FORE Systems Holding Corp. Collateral Account, Mellon Financial Services Corporation #4, as Secured Party," account number 856-37247-9 (herein, together with any substitution therefor, the "Collateral Account"). The Collateral Account shall be segregated from any and all other accounts or other property of the Pledgor, and subject to Section 4 hereof (with respect to permitted withdrawals) and Section 7 hereof (with respect to investment at the direction of Pledgor), the Pledgee shall have sole dominion and control over the Collateral Account. Without limiting the generality of the foregoing, so long as an Event of Default (as hereinafter defined) has occurred and is continuing the Pledgee shall have the sole right to make withdrawals from the Collateral Account. Except as expressly provided in Section 4, until the Secured Obligations are paid in full, the Pledgor shall have no right to make withdrawals from the Collateral Account or to otherwise exercise any control with respect to any securities or other property from time to time on deposit in or credited to the Collateral Account, or provide substitute Collateral. (b) Intentionally Omitted. (c) The Pledgor shall deliver with any securities transferred hereunder all appropriate undated bond powers, duly executed in blank and any and all other forms related to transfer requested by the Custodian, completed or executed so to make such transfer valid under applicable law and the rules of any securities exchange or otherwise. (d) The Pledgor and the Pledgee agree to do or take all actions (or omit from taking actions) in order to make all - 4 - 5 transfers contemplated hereby valid under applicable law and the rules of any securities exchange or otherwise. (e) (i) For the purpose of this Agreement, "Pledged Property" shall mean Marketable Collateral-B and any undistributed Earnings thereon delivered and duly pledged in accordance with Section 1 and maintained in accordance with Section 3. (ii) For the purpose of this Agreement, the "Collateral Requirement" shall be an amount equal to 50% of the aggregate principal amount outstanding from time to time under the Tranche B Notes; and if Lessee refinances or refunds the Tranche A Loans in accordance with Section 3.8 of the Participation Agreement, the "Collateral Requirement" shall be as of the date the Tranche A Loan is repaid or assigned pursuant to Section 3.8 thereof an amount equal to the sum of 50% of the aggregate principal amount outstanding from time to time under the Tranche B Note plus an amount equal to the value of the Pledged Property in the Collateral Account had Earnings not been distributed at any time after the Refinancing Funding Date minus the value of the Pledged Property in the Collateral Account on the date upon which the Tranche A Loan is refinanced pursuant to Section 3.8 of the Participation Agreement (such amount shall be calculated by FORE and will be verified by Mellon Bank N.A.) (iii) For the purposes of establishing the Collateral Value of Pledged Property held in accordance with Sections 1, 3 and 4(a) in the Collateral Account, the term "Fair Market Value" shall mean, in the case of cash, the amount of such cash, and otherwise, the market value of the applicable Pledged Property as determined by reference to market quotes provided on the date of valuation by Bloomberg Financial Market Service, or if such rate is unavailable, by Interactive Data Services Inc., Telerate, Reuters and/or any major daily financial publication such as the Wall Street Journal or The New York Times. (iv) For the purpose of this Agreement "Collateral Value" shall mean (i) in the case of cash 100% of the amount of such cash, (ii) in the case of a certificate of deposit issued by Mellon Bank, 100% of the Fair Market Value, and (iii) in the case of Pledged Property, other than cash and a certificate of deposit issued by Mellon Bank, 90% of the Fair Market Value of the - 5 - 6 Pledged Property properly delivered and perfected hereunder. SECTION 3. Maintaining Pledged Property; Additional Deposits to Collateral Account. Subject to Section 4, the Pledgor shall maintain at all times until the Secured Obligations have been fully satisfied and discharged in accordance with the Refinancing Loan Documents Pledged Property in the Collateral Account having a Collateral Value equal to or greater than the Collateral Requirement. All such Pledged Property shall be unrestricted and shall not be subject to any Lien, except for the Liens created by the Refinancing Loan Documents. On the date, if any, the Tranche A Loans are repaid or assigned pursuant to Section 3.8 of the Participation Agreement, it is a condition precedent to such refinancing that the Pledgor transfer and assign to the Collateral Account sufficient additional Pledged Property so that the Collateral Value (after taking into account such transfer) is at least equal to the new Collateral Requirement. SECTION 4. Valuation; Required Collateral Level; Substitutions and Release. (a) On the first Business Day of each calendar month during the Collateral Term, the Custodian shall determine the aggregate Collateral Value of the Pledged Property in the Collateral Account. Such determination shall be promptly furnished, in writing, to the Pledgor and the Pledgee. To the extent the Collateral Value of the Pledged Property in the Collateral Account is less than, at any time prior to the full satisfaction and discharge of the Secured Obligations in accordance with the terms of the Refinancing Loan Documents, the Collateral Requirement, the Pledgor promptly, but in any event within seven days after receipt of notice of such determination, shall transfer Pledged Property to such account in an amount equal to or exceeding the Collateral Value shortfall amount so that the Collateral Requirement is maintained at all times prior to the full satisfaction and discharge of the Secured Obligations in accordance with the terms of the Refinancing Loan Documents. To the extent the Collateral Value of the Pledged Property in the Collateral Account exceeds the Collateral Requirement on the first Business Day of any calendar month prior to the full satisfaction and discharge of the Secured Obligations in accordance with the terms of the Refinancing Loan Documents and no Event of Default (as hereinafter defined) or Default shall have occurred and be continuing, the Pledgor may request the - 6 - 7 Pledgee, with a copy to the Custodian, to release such excess Collateral to the Pledgor or upon its order or the order of its designee, and the Pledgee shall release and direct the Custodian to release such excess Collateral to the Pledgor or upon its order in accordance with the release procedures set forth in Section 4(b) below. (b) During such time as Pledged Property is held in the Collateral Account, upon delivery of prior notice to the Custodian, the Pledgor may, at any time and so long as no Event of Default shall have occurred and be continuing, substitute for any Collateral subject to this Agreement, other Pledged Property having in the aggregate at least equivalent Collateral Value, and such substitute Pledged Property shall be Collateral for all purposes hereunder. All such substitute Pledged Property shall be deposited in and credited to the Collateral Account, and shall be accompanied by proper instruments of assignment and/or bond powers executed in blank or to the Pledgee by the Pledgor in accordance with the instructions of the Pledgee. Collateral for which the Custodian has received substituted Collateral to the extent permitted hereunder or Collateral which is to be otherwise released in accordance with 4(a) above shall be promptly released by the Pledgee and shall be redelivered and retransferred to the Pledgor or transferred to such Pledgor's account by the Custodian upon the instructions of the Pledgor and shall be accompanied by proper instruments of reassignment and/or bond powers (as appropriate) executed by the Custodian (or its nominee) or the Pledgee, as applicable, as the Pledgor shall direct, all at the expense of the Pledgor and without recourse, representation or warranty by the Pledgee or the Custodian or any of their nominees (except for the representation that the released Collateral is free and clear of all Liens created by, through or under the Pledgee or the Custodian). (c) The delivery of a written notice pursuant to clause (a) above by the Pledgor to the Custodian, prior to effecting any sale, substitution, or additional pledge of Collateral as contemplated by this Section 4(c) shall constitute a representation and warranty by the Pledgor that, to Pledgor's knowledge, no violation of the rules and regulations of the Federal Reserve Board exists with respect to the Tranche B Loan and such sale, substitution or pledge of Collateral will not result in a violation of any rule or regulation of the Federal - 7 - 8 Reserve Board. SECTION 5. The Custodian. (a) The Pledgee hereby appoints the Custodian as the Pledgee's agent (i) for retaining physical possession of any cash included in the Collateral and any physical certificates or instruments or other physical representation or evidence of any Collateral in accordance with the provisions of this Agreement and (ii) for holding the interest of the Pledgee in all book-entry securities in accordance with the provisions of this Agreement. All Collateral shall be credited to the Collateral Account and segregated from all other property, including, without limitation, that of the Pledgor and the Pledgee. The Custodian hereby accepts such appointment. (b) The Custodian shall retain physical possession of the certificates or instruments representing or evidencing the Collateral if the Collateral is issued in physical form; provided that the Custodian may have such Collateral credited to the Custodian's account at The Depository Trust Company ("DTC"). If the Collateral is in book-entry form, the Collateral shall be (i) credited to the Custodian or its nominee in the Custodian's account at DTC or (ii) registered on the books of the issuer thereof in the name of the Custodian. The Custodian shall mark its books and records with respect to the Collateral to indicate security interests of the Pledgee in the Collateral. Certificated securities may be held (in the discretion of the Pledgee) in the name of the Pledgor, endorsed or assigned in blank, or endorsed or assigned to the Pledgee, the Custodian or DTC (or its nominee). (c) All book-entry obligations of the United States Government issued in the form of an entry on the records of the Federal Reserve Bank of New York shall be (1) identified on the records of the Federal Reserve Bank of New York for the account of Mellon Financial Services Corporation #4, or its agent and (2) identified on the records of Mellon Bank, N.A. as part of the Collateral Account. The Custodian shall mark its books and records with respect to the Collateral to indicate the security interests of the Pledgee in the Collateral. (d) In addition, subject to Section 7 hereof, the Custodian shall at all times have the right to exchange certificates or - 8 - 9 instruments representing or evidencing Pledged Property for certificates or instruments for Pledged Property of smaller or larger denominations for any purpose consistent with its performance of this Agreement; provided that the aggregate principal amount of the certificates or instruments received upon such an exchange shall not be less than the aggregate principal amount of the certificates or instruments tendered for exchange. (e) The Custodian acknowledges receipt of this Agreement, certifies that no notice of any other security agreement or claim affecting the Collateral has been received by it, states that the Collateral will be held in the Collateral Account for the benefit of the Pledgee and agrees to hold the Collateral solely for the benefit of the Pledgee and subject to the control of the Pledgee, as provided in this Agreement. The Custodian agrees to exercise the same degree of care as exercised by banks generally for similar property in exercising its duties under this Agreement. The duties of the Custodian under this Agreement shall only be those set forth in this Agreement. Notwithstanding any other provision contained herein, Pledgor, Pledgee and Custodian agree that Custodian shall comply with entitlement orders originated by Pledgee with respect to any or all of the Collateral, without further consent from Pledgor. Pledgee agrees with and for the benefit of Pledgor, however, that Pledgee will not originate any such entitlement orders except if an Event of Default has occurred and is continuing or in order to release Collateral to Pledgor in accordance with the terms hereof. Custodian also shall comply with entitlement orders originated by Pledgor with respect to the Collateral to the extent provided herein. To the extent that the Custody Agreement-B is inconsistent with this Pledge and Security Agreement-B, this Pledge and Security Agreement-B shall control. SECTION 6. Interest, Distributions, etc. on Collateral. If, at any time on or after the Tranche A Loan is assigned or repaid pursuant to Section 3.8 of the Participation Agreement, the Pledgor shall become entitled to receive or shall receive any interest or other cash payments or property paid in respect of the Pledged Property (to the extent such property or other proceeds, profits, or other property is cash or is reduced to cash, the "Earnings") whether as an addition to, in substitution of, or in exchange for any security included in the Pledged Property, or otherwise, subject to Sections 4(a) and 4(b) the - 9 - 10 Pledgor agrees to accept the same as the Pledgee's agent and to hold the same in trust on behalf of and for the benefit of Pledgee and to convert the same to Pledged Property, as necessary, and to deliver the same forthwith to the Custodian with the endorsement of the Pledgor when necessary and/or appropriate undated bond powers, duly executed in blank, or to the Pledgee, as the Pledgee may direct, to be deposited in the Collateral Account. SECTION 7. Investment of Collateral. (a) The Custodian shall invest all moneys on deposit from time to time (including moneys on deposit upon the sale or maturity of securities) in the Collateral Account so long as no Event of Default or Default shall have occurred and be continuing, at the direction of the Pledgor, in Pledged Property having an equal or greater Collateral Value than the sold or matured security. Such investments, shall be maintained in the Collateral Account and shall be reinvested as provided in this paragraph. The Custodian shall collect so much of the moneys payable on account of interest as it is able to collect in the ordinary course and shall distribute the Earnings upon the written request of the Pledgor, no more frequently than once per fiscal quarter (unless an assignment or repayment of the Tranche A Loan is made under Section 3.8 of the Participation Agreement, in which event such Earnings shall be held in the Collateral Account, subject to Section 4), provided that in no event shall the provisions hereof impose on the Custodian the obligation to institute any collection proceedings, judicial or otherwise, in respect of investments comprising the Collateral. Neither the Custodian nor the Pledgee shall be liable or responsible for any loss resulting from any such investments, except for any such loss resulting from the gross negligence or willful misconduct of such person. SECTION 8. Rights of the Custodian. Neither the Custodian nor the Pledgee shall be liable or responsible for any loss resulting from any such investments, except for any such persons loss resulting from the gross negligence or willful misconduct of such person. Any or all of the Collateral may, if an Event of Default has occurred and is continuing, without notice, be registered in the name of the Custodian or its nominee or the Pledgee or its nominee, if not then so registered, and the Custodian or its nominee or the Pledgee or its nominee may thereafter without notice, exercise all rights, privileges or - 10 - 11 options pertaining to any of the securities included in the Collateral, if appropriate, as if it were the absolute owner thereof, all without liability except to account for property actually received by it, and the Pledgor shall execute and deliver (or cause to be executed and delivered) to the Custodian all powers of attorney, interest coupons and other instruments for the purpose of enabling the Custodian to exercise the rights and powers which the Custodian is entitled to exercise pursuant to this Section. SECTION 9. Application of Collateral by Custodian Prior to an Event of Default. At the Maturity Date if the Lessee shall have elected to purchase the Property pursuant to the Lease, so long as no Event of Default or Default shall have occurred and be continuing the Custodian shall, upon 10 days written notice from the Lessee and the Pledgor, liquidate the Pledged Property in the Collateral Account and apply the proceeds to any purchase of the Property pursuant to the Lease; provided, however, that the Custodian shall transfer the proceeds of such Pledged Property only upon receipt of a certification of Lessor stating that the Lessor has received or has made arrangements satisfactory to it to receive in connection with any such purchase an amount which, together with the proceeds of the Pledged Property, will be sufficient to pay the Lease Balance. SECTION 10. Events of Default. Each of the following events shall constitute an event of default under this Agreement (each, an "Event of Default"): (a) The failure of Pledgor to pay, after three days prior written notice by means of invoice, the reasonable fees and expenses of the Custodian; (b) The failure of Pledgor to comply with any of the terms or provisions of this Agreement, which (except as provided in (a) above) failure shall have continued for a period of five (5) days after written notice to FORE or Pledgor; or (c) A Lease Event of Default, or Refinancing Loan Agreement Event of Default shall occur and be continuing. SECTION 11. Remedies upon Default. If an Event of Default - 11 - 12 shall have occurred and be continuing, then the Pledgee shall have all the rights and remedies of a secured party under the Uniform Commercial Code (the "UCC") and other applicable law, and, in addition, the Pledgee, upon written notice to FORE, may direct the Custodian from time to time to: (a) deliver and pay over all or any portion of the Collateral in the Collateral Account to the Pledgee, to be applied to satisfy accrued and unpaid Secured Obligations; (b) sell the Collateral, or any part thereof, at any public or private sale or on any securities exchange, for cash, upon credit or for future delivery, as the Pledgee shall deem appropriate. The Pledgee shall be authorized at any such sale to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing the Collateral for their own account for investment and not with a view to the distribution or sale thereof, and upon consummation of any such sale, the Pledgee shall have the right to assign and transfer and have the Custodian transfer and deliver to the purchaser or purchasers thereof the Collateral so sold. Each such purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of the Pledgor and FORE, and each of the Pledgor and FORE hereby waives (to the extent permitted by law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule or law or statute now existing or hereafter enacted. The Pledgee shall give the Pledgor at least ten (10) days' written notice of the Pledgee's intention to make any such public or private sale or sales at any broker's board or on any such securities exchange. Such notice, in case of public sale, shall state the time and place fixed for such sale. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places, as the Pledgee may fix in the notice of such sale. At any such sale, the Collateral, or portion thereof, to be sold may be sold in one sale as an entirety or in separate sales, as the Pledgee may (in its sole and absolute discretion) determine and the Pledgee may bid (which bid may be in whole or in part, in the form of cancellation of indebtedness) for and purchase for the account of the Pledgee the whole or any part of the - 12 - 13 Collateral. The Pledgee shall not be obligated to make any sale of Collateral if it shall determine not to do so, regardless of the fact that notice of sale of Collateral may have been given. The Pledgee may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case a sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Pledgee until the sale price is paid by the purchaser or purchasers thereof, but the Pledgee shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may be sold again upon like notice; or (c) proceed by a suit or suits at law or in equity to foreclose the security interest granted under this Agreement and to sell the Collateral, or any portion thereof, pursuant to a judgment or decree of a court or courts of competent jurisdiction. In addition, the Pledgee shall have all of the rights granted to the Pledgee under this Agreement upon the occurrence of an Event of Default. FORE (but not the Pledgor) shall be liable for the deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay all amounts to which the Pledgee is entitled, and the fees and disbursements of any attorneys employed by the Pledgee to collect such deficiency. SECTION 12. Application of Proceeds of a Sale. The cash or proceeds of sale of Collateral sold pursuant to Section 11 of this Agreement shall be paid to the Pledgee until the Secured Obligations are paid in full; thereafter all such proceeds shall be delivered to the Pledgor. SECTION 13. Conditions of Effectiveness. This Agreement shall become effective when the Pledgee shall have received a counterpart of this Agreement duly executed and delivered by - 13 - 14 Pledgor. SECTION 14. Disposition, etc. Without the prior written consent of the Pledgee, the Pledgor agrees not to sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Property held in the Collateral Account, except as provided in Section 4, and Sections 11 and 12, of this Agreement, nor will it create, incur or permit to exist any Lien with respect to any of the Pledged Property held in the Collateral Account, or any interest therein, or any proceeds thereof, except for the lien and security interest provided for by this Agreement. SECTION 15. Exoneration; Indemnity. Neither the Custodian, the Pledgee, nor any director, officer or employee of the Custodian or the Pledgee, shall be liable to the Pledgor or FORE for any action taken or omitted to be taken by them or any one of them, pursuant to this Agreement, except to the extent arising from its or their own gross negligence or willful misconduct; nor shall the Custodian or the Pledgee be responsible for the validity, effectiveness or sufficiency hereof or of any document or security furnished pursuant hereto or in connection herewith. The Custodian and the Pledgee shall be entitled to rely on any communication, instrument or document believed by them to be genuine and correct and to have been signed or sent by the proper person or persons. FORE agrees to indemnify and hold harmless the Custodian and the Pledgee, and/or the directors, officers, employees, agents or nominees of the Custodian or the Pledgee, from and against any and all liability incurred by the Custodian or the Pledgee (or such agent or nominee) hereunder or in connection herewith, except to the extent such liability shall be due to willful misconduct or gross negligence on the part of the Custodian or the Pledgee or such directors, officers, employees, agents or nominees. In furtherance hereof, FORE acknowledges and agrees that the Custodian and the Pledgee may act on the instructions of the Pledgor acting alone with respect to all matters related hereto, including the receipt, release, transfer, substitution or investment of any Collateral or the transfer of any amounts pursuant hereto. Any liability of the Custodian and the Pledgee under this Agreement shall be several and not joint. SECTION 16. The Pledgee Appointed Attorney-in-Fact. The Pledgor hereby appoints the Pledgee and the Custodian, acting - 14 - 15 either individually or jointly, as the Pledgor's attorney-in-fact for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instrument which they may deem necessary or advisable to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, both the Pledgee and the Custodian, acting either individually or jointly, shall have the right and power to receive, endorse and correct all checks, drafts and other orders for the payment of money made payable to the Pledgor representing any interest payment or other distribution payable or distributable in respect of the Collateral or any part thereof and to give full discharge for the same. SECTION 17. Change of Custodian. No change in Custodian may occur without the express written consent of the Pledgee and the Pledgor. The Custodian may resign by giving thirty (30) days' notice to the parties to this Agreement. The Pledgee may then appoint a successor Custodian with the prior written consent of the Pledgor, which shall not be unreasonably withheld or delayed, whereupon the successor Custodian shall succeed to the rights, powers and duties of the Custodian. SECTION 18. No Waiver; Cumulative Remedies. No failure on the part of Custodian or the Pledgee to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy by the Custodian or the Pledgee preclude any other further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law or in equity. SECTION 19. Termination. This Agreement shall terminate on the payment in full of the Secured Obligations or the exercise and consummation of the Remarketing Option by the Lessee pursuant to Article XX of the Lease, and the payment of all other amounts owing to the Tranche B Lender under the Refinancing Loan Documents, at which time the Pledgee shall execute and deliver to the Pledgor an appropriate release and shall reassign, retransfer and redeliver (or cause to be reassigned, retransferred and redelivered) to the Pledgor, or to such person or persons as the Pledgor shall designate, against receipt, such of the Collateral - 15 - 16 pledged by the Pledgor as shall have not been sold or otherwise applied pursuant to the terms hereof and shall still be held by the Custodian pursuant to this Agreement, together with proper instruments of reassignment and retransfer. Any such reassignment and retransfer shall be without recourse, representation or warranty by the Pledgee or the Custodian (except for the representation that the released Pledged Property is free and clear of all Liens created by, through or under the Pledgee or the Custodian) and shall be at the expense of the Pledgor. SECTION 20. Notices. All communications and notices hereunder shall be in writing, unless otherwise specifically provided herein, and delivered or mailed by first-class mail, postage prepaid, registered or certified, return receipt requested, by overnight courier, or by facsimile transmission, to the address of the Pledgor (which shall be the same address as the address of FORE) and Pledgee set forth in the Participation Agreement, or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties hereto complying as to delivery with the terms of this Section. All notices, requests, demands and other communications provided for hereunder shall be effective upon deposit in the United States mail or upon facsimile transmission during business hours. SECTION 21. Further Assurances; etc. Each of the Pledgor, Pledgee and Custodian agrees to do such further acts and things, and to execute and deliver such additional conveyances, assignments, agreements and instruments, including the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the security interests created hereby as may be reasonably required to effect the terms and provisions of this Agreement. The Pledgor also hereby irrevocably authorizes the Pledgee to file any such financing or continuation statement, without the signature of the Pledgor to the extent permitted by applicable law, as the Pledgee may at any time reasonably request in connection with the administration or enforcement of this Agreement in order better to assure and confirm unto the Pledgee its rights, powers and remedies hereunder. The Pledgor hereby consents and agrees that the issuers of or obligors in respect of the Collateral or any registrar or transfer agent or trustees for - 16 - 17 any of the Collateral shall be entitled to accept the provisions hereof as conclusive evidence of the right of the Pledgee to effect any transfer pursuant to this Agreement, notwithstanding any other notice or direction to the contrary heretofore or hereafter given by the Pledgor or any other person to any of such issuers or obligors or to any such registrar or transfer agent or trustees. The Pledgor further covenants that it will defend the Pledgee's right, title and interest in the Collateral, from time to time pledged by the Pledgor, against the claims and demands of all Persons. SECTION 22. Assignment. This Agreement, and the terms, covenants and conditions hereof, shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that neither Pledgor nor Pledgee shall be permitted to assign this Agreement except in connection with an assignment permitted under the Participation Agreement. SECTION 23. Amendments. Neither this Agreement nor any provisions hereof may be amended, modified, waived or terminated, except by an instrument in writing signed by a duly authorized officer of the Pledgee and the Pledgor. SECTION 24. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to conflicts of law principles. SECTION 25. Costs, Expenses and Taxes. FORE agrees to pay on demand all reasonable costs and expenses of, and all stamp and other taxes payable (including any penalties) incurred by the Custodian or the Pledgee in connection with the preparation, execution, delivery, administration and enforcement of this Agreement. SECTION 26. Fees and Expenses of Custodian. The fees and expenses of the Custodian shall be payable by FORE as set forth in a separate agreement between the Custodian and FORE, which fees shall be those fees customarily charged by custodians performing the foregoing services. SECTION 27. Headings. The headings in this Agreement are for convenience only and shall not be deemed or construed to - 17 - 18 affect the meaning or construction of any of the provisions of this Agreement. SECTION 28. Counterparts. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. SECTION 29. SUBMISSION OF JURISDICTION. TO THE FULLEST EXTENT PERMITTED BY LAW, THE PLEDGOR, PLEDGEE AND CUSTODIAN HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA AND ANY COURT OF THE COMMONWEALTH OF PENNSYLVANIA FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY. THE PLEDGOR, PLEDGEE AND CUSTODIAN IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBLIGATION WHICH SUCH PARTY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDINGS BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. - 18 - 19 IN WITNESS WHEREOF, the parties hereto have caused this PLEDGE AND SECURITY AGREEMENT-B (REFINANCING) to be duly executed by their duly authorized officers on the dates specified below with effect from the date first above written. FORE SYSTEMS HOLDING CORPORATION as Pledgor Attest: /s/ CHRISTOPHER H. GEBHARDT By: /s/ THOMAS J. GILL - --------------------------- ----------------------------------- Name: Thomas J. Gill Title: Treasurer FORE SYSTEMS, INC. Attest: /s/ CHRISTOPHER H. GEBHARDT By: /s/ THOMAS J. GILL - --------------------------- ----------------------------------- Name: Thomas J. Gill Title: Chief Operating Officer MELLON FINANCIAL SERVICES CORPORATION #4 as Pledgee Attest: /s/ MICHAEL J. TIESI By: /s/ STEPHEN R. VIEHE - --------------------------- ----------------------------------- Name: Stephen R. Viehe Title: Vice President MELLON BANK, N.A., as Custodian Attest: /s/ JEFFREY T. RECKER By: /s/ CHRISTINA HITCHINS - --------------------------- ----------------------------------- Name: Christina Hitchins Title: Officer - 19 - 20 TABLE OF CONTENTS
Page ---- SECTION 1. Pledge and Assignment..........................................................2 SECTION 2. Collateral Account; Transfer of Collateral; Definitions........................3 SECTION 3. Maintaining Pledged Property; Additional Deposits to Collateral Account...............................................................4 SECTION 4. Valuation; Required Collateral Level; Substitutions and Release................4 SECTION 5. The Custodian..................................................................6 SECTION 6. Interest, Distributions, etc. on Collateral....................................7 SECTION 7. Investment of Collateral.......................................................7 SECTION 8. Rights of the Custodian........................................................8 SECTION 9. Application of Collateral by Custodian Prior to an Event of Default............8 SECTION 10. Events of Default..............................................................8 SECTION 11. Remedies upon Default..........................................................9 SECTION 12. Application of Proceeds of a Sale.............................................10 SECTION 13. Conditions of Effectiveness...................................................10 SECTION 14. Disposition, etc..............................................................10 SECTION 15. Exoneration; Indemnity........................................................10
i 21
Page ---- SECTION 16. The Pledgee Appointed Attorney-in-Fact........................................11 SECTION 17. Change of Custodian...........................................................11 SECTION 18. No Waiver; Cumulative Remedies................................................12 SECTION 19. Termination...................................................................12 SECTION 20. Notices.......................................................................12 SECTION 21. Further Assurances; etc.......................................................12 SECTION 22. Assignment....................................................................13 SECTION 23. Amendments....................................................................13 SECTION 24. Governing Law.................................................................13 SECTION 25. Costs, Expenses and Taxes.....................................................13 SECTION 26. Fees and Expenses of Custodian................................................13 SECTION 27. Headings......................................................................13 SECTION 28. Counterparts..................................................................14 SECTION 29. SUBMISSION OF JURISDICTION....................................................14
ii EX-10.5 6 FORE SYSTEMS, INC. 1 Exhibit 10.5 CONFIRMATION OF GUARANTY This Confirmation of Guaranty dated as of October 31, 1997 (the "Confirmation") is given by FORE SYSTEMS, INC, a Delaware corporation (the "Guarantor") in favor of Mellon Bank, N.A., as the Tranche A Lender ("Mellon") and Mellon Financial Services Corporation #4, a Pennsylvania corporation, as the Tranche B Lender and the Certificate Purchaser ("Mellon #4"). Mellon and Mellon #4, together with each of their respective successors and permitted assigns, are referred to herein collectively as the "Funding Parties" and individually as a "Funding Party"). WHEREAS, pursuant to a Construction Loan Agreement dated as of December 13, 1995 (the "Construction Loan Agreement") between Wilmington Trust Company, not in its individual capacity except as expressly provided therein, but solely as Certificate Trustee (the "Certificate Trustee") of BRUSH CREEK BUSINESS TRUST, a Delaware business trust (the "Trust") and Mellon, as Construction Lender, Mellon made loans to the Trust for the purpose of constructing Improvements on the Property; and WHEREAS, the Construction Loan Agreement contemplates that the construction loans will be refinanced through a Refinancing made by the Tranche A Lender and Tranche B Lender; and WHEREAS, the Guarantor, as Lessee, entered into a Lease Agreement and Open End Mortgage dated as of December 13, 1995 (the "Lease") with the Trust, by which the Lessee leases the Improvements; and WHEREAS, the Guarantor, pursuant to a Guaranty dated as of December 13, 1995 (the "Guaranty") guarantied to the Funding Parties the Obligations (as defined in the Guaranty); and WHEREAS, the Tranche A Lender and Tranche B Lender are prepared to effect the Refinancing pursuant to an Amended and Restated Term Loan Agreement dated as of the date hereof amending and restating the Construction Loan Agreement (the "Term Loan Agreement"), and as a condition thereto, each Funding Party has requested that Guarantor confirm its guaranty of the Obligations under the Guaranty. NOW, THEREFORE, the Guarantor, intending to be legally bound hereby, affirms as follows: (i) the Guaranty remains in full force and effect, (ii) the Guarantor consents to the execution and delivery of the Term Loan Agreement and the other Refinancing Loan Documents by the Certificate Trustee on behalf of the Trust, (iii) the Tranche A Loan and the Tranche B Loan are included within the definition of Obligations under the Guaranty and (iv) the Guarantor recognizes each of the Tranche A Lender and the Tranche B Lender as a Lender under the Guaranty, entitled to the benefits thereof. Capitalized terms used herein but not otherwise defined herein have the meanings specified in the Term Loan Agreement; and the rules of interpretation set forth in the Term Loan Agreement shall apply to this Confirmation of Guaranty. 2 In witness whereof, the Guarantor has executed this Confirmation for Guaranty on the date and year first written above. ATTEST: FORE SYSTEMS, INC. By: /s/ CHRISTOPHER H. GEBHARDT By: /s/ THOMAS J. GILL --------------------------- -------------------------- Title: Secretary Title: Chief Operating Officer --------------------------- -------------------------- Name: Christopher H. Gebhardt Name: Thomas J. Gill --------------------------- -------------------------- EX-11.1 7 FORE SYSTEMS, INC. 1 Exhibit 11.1 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS PRIMARY EARNINGS PER SHARE
THREE MONTHS ENDED SIX MONTHS ENDED September 30, SEPTEMBER 30, --------------------------------- --------------------------- 1997 1996 1997 1996 ----------------- ------------ ------------ ----------- Weighted Average Common and Common Equivalent Shares: Weighted Average Common Stock Outstanding During the Period 99,111,609 89,848,965 98,717,903 89,309,000 Weighted Average Common Equivalent Shares 3,408,077 6,082,222 2,790,815 7,040,703 ----------------- ------------ ------------ ----------- 102,519,686 95,931,187 101,508,718 96,349,703 ================= ============ ============ =========== Net income $ 6,969,000 $ 13,351,000 $ 11,952,000 $24,744,000 ================= ============ ============ =========== Net income per common share $ 0.07 $ 0.14 $ 0.12 $ 0.26 ================= ============ ============ =========== FULLY DILUTED EARNINGS PER SHARE
THREE MONTHS ENDED SIX MONTHS ENDED September 30, SEPTEMBER 30, --------------------------------- --------------------------- 1997 1996 1997 1996 ----------------- ------------ ------------ ----------- Weighted Average Common and Common Equivalent Shares: Weighted Average Common Stock Outstanding During the Period 99,111,609 89,848,965 98,717,903 89,309,000 Weighted Average Common Equivalent Shares 4,297,429 7,730,058 3,236,962 7,765,491 ----------------- ------------ ------------ ----------- 103,409,038 97,579,023 101,954,865 97,074,491 ================= ============ ============ =========== Net income $ 6,969,000 $ 13,351,000 $ 11,952,000 $24,744,000 ================= ============ ============ =========== Net income per common share $ 0.07 $ 0.14 $ 0.12 $ 0.25 ================= ============ ============ ===========
EX-27 8 FORE SYSTEMS, INC.
5 1,000 6-MOS MAR-31-1998 APR-01-1997 SEP-30-1997 153,709 144,280 109,219 7,498 61,226 518,885 98,981 39,392 578,474 101,232 0 0 0 416,474 60,768 578,474 205,078 205,078 90,378 90,378 102,883 0 0 18,110 6,158 11,952 0 0 0 11,952 0.12 0.12
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