EXHIBIT 10.22
LOAN AGRLOAN AND SECURITY AGREEMENT
Agreement No. ________________ Dated as of June 30, 1998
between
MMC/GATX PARTNERSHIP NO. 1
and
TRANSAMERICA BUSINESS CREDIT CORPORATION
as Lenders
and
PILOT NETWORK SERVICES, INC.
a California corporation
▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
as Borrower
CREDIT AMOUNT: 6,000,000
Initial Commitments: MMC/GATX Partnership No. 1: $3,000,000
Transamerica Business Credit Corporation $3,000,000
Repayment Period: 12 months
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Treasury Note Maturity: 12 months
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Loan Rate: 13.5 %
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Commitment Termination Date: June 30, 1998
The defined terms and information set forth on this cover page are a part
of the LOAN AND SECURITY AGREEMENT, dated as of the date first written above
(this "Agreement"), entered into by and among MMC/GATX PARTNERSHIP NO. 1 and
TRANSAMERICA BUSINESS CREDIT CORPORATION (each individually a "Lender" and
collectively, "Lenders") and the borrower ("Borrower") set forth above. The
terms and conditions of this Agreement agreed to between Lenders and Borrower
are as follows:
ARTICLE I
INTERPRETATION
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1.01. Certain Definitions. Unless otherwise indicated in this Agreement or any
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other Operative Document, the following terms, when used in this Agreement or
any other Operative Document, shall have the following respective meanings:
"Application Fee" has the meaning given to that term in Section
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2.04(a).
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"Borrower's Home State" shall mean the state in which Borrower's
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principal place of business is located.
"Business Day" shall mean any day other than a Saturday, Sunday or
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public holiday under the laws of California, Illinois or Borrower's Home State
or other day on which banking institutions are authorized or obligated to close
in California, Illinois or Borrower's Home State.
"Claim" has the meaning given to that term in Section 10.03.
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"Collateral" has the meaning given to that term in Section 5.01.
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"Commitment" means, with respect to each Lender, the amount set forth
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following such term on the cover page of this Agreement and "Commitments" means
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all such amounts collectively.
"Commitment Fee" has the meaning given to that term in Section 2.04(b).
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"Commitment Termination Date" shall mean the date specified on the
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cover page of this Agreement.
"Credit Amount" shall mean the maximum aggregate amount of the Loans
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under this Agreement (if the conditions specified in Schedule 3 are satisfied),
which amount is set forth following such term on the cover page of this
Agreement.
"Default" shall mean any event which with the passing of time or the
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giving of notice or both would become an Event of Default hereunder.
"Default Rate" shall mean the per annum rate of interest equal to the
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higher of (i) 18% or (ii) the Prime Rate plus 6%, but such rate shall in no
event be more than the highest rate permitted by applicable law.
"Disclosure Schedule" has the meaning set forth in the definition of
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the term "Permitted Liens."
"Environmental Law" shall mean the Resource Conservation and Recovery
-----------------
Act of 1987, the Comprehensive Environmental Response, Compensation and
Liability Act, and any other federal, state or local statute, law, ordinance,
code, rule, regulation, order or decree (in each case having the force of law)
regulating or imposing liability or standards of conduct concerning any
Hazardous Material, as now or at any time hereafter in effect.
"Equity Securities" of any Person shall mean (a) all common stock,
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preferred stock, participations, shares, partnership interests or other equity
interests in and of such Person (regardless of how designated and whether or not
voting or non-voting) and (b) all warrants, options and other rights to acquire
any of the foregoing.
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"Event of Default" has the meaning given to that term in Section 9.01.
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"Funding Date" shall mean a date on which a Loan is made to or on
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account of Borrower under this Agreement.
"GAAP" shall mean generally accepted accounting principles and
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practices as in effect in the United States of America from time to time,
consistently applied.
"Hazardous Material" means any hazardous, dangerous or toxic
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constituent material, pollutant, waste or other substance, whether solid, liquid
or gaseous, which is regulated by any federal, state or local governmental
authority.
"Indebtedness" shall mean, with respect to Borrower or any Subsidiary,
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the aggregate amount of, without duplication, (a) all obligations of such Person
for borrowed money, (b) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (c) all obligations of such
Person to pay the deferred purchase price of property or services (excluding
trade payables aged less than 180 days), (d) all capital lease obligations of
such Person, (e) all obligations or liabilities of others secured by a lien on
any asset of such Person, whether or not such obligation or liability is
assumed, and (f) all obligations or liabilities of others guaranteed by such
Person. Unless otherwise indicated, the term "Indebtedness" shall include all
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Indebtedness of Borrower and the Subsidiaries.
"Intellectual Property" shall mean all of Borrower's right, title and
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interest in and to patents, patent rights (and applications therefor),
trademarks and service marks (and applications and registrations therefor),
inventions, copyrights, mask works (and applications and registrations
therefor), trade names, trade styles, software and computer programs, trade
secrets, methods, processes, know how, drawings, specifications, descriptions,
and all memoranda, notes, and records with respect to any research and
development, all whether now owned or subsequently acquired or developed by
Borrower and whether in tangible or intangible form or contained on magnetic
media readable by machine together with all such magnetic media.
"Lien" shall mean any pledge, bailment, lease, mortgage, hypothecation,
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conditional sales and title retention agreements, charge, claim, encumbrance or
other lien in favor of any Person.
"Loan" means a Loan advanced by a Lender to Borrower under this
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Agreement according to the Commitment of such Lender.
"Loan Rate" shall mean, with respect to each Loan, an interest rate of
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13.5% per annum.
"Note" shall mean one of the secured promissory notes of Borrower
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substantially in the form of Exhibit A.
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"Obligations" has the meaning given to that term in Section 5.01.
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"Operative Documents" shall mean this Agreement, the Notes and the
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Warrants and all other documents, instruments and agreements executed and
delivered in connection herewith or therewith or in respect of the closing of
the transactions contemplated hereby or thereby.
"Payment Date" means the first day of each calendar month.
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2
"Permitted Indebtedness" shall mean and include:
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(a) Indebtedness of Borrower to Lenders;
(b) Indebtedness of Borrower secured by Liens permitted under
clause (e) of the definition of Permitted Liens;
(c) Indebtedness arising from the endorsement of instruments in
the ordinary course of business;
(d) Indebtedness existing on the date hereof and set forth on
the Disclosure Schedule; and
(e) Subordinated Indebtedness.
"Permitted Investments" shall mean and include:
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(a) Deposits with commercial banks organized under the laws of
the United States or a state thereof to the extent such deposits are fully
insured by the Federal Deposit Insurance Corporation;
(b) Investments in marketable obligations issued or fully
guaranteed by the United States and maturing not more than one (1) year
from the date of issuance; an d
(c) Investments in open market commercial paper rated at least
"A1" or "P1" or higher by a national credit rating agency and maturing not
more than one (1) year from the creation thereof.
(d) Investments pursuant to or arising under currency agreements
or interest rate agreements entered into in the ordinary course of
business;
(e) Investments consisting of deposit accounts of Borrower in
which Lenders have a perfected security interest;
(f) Investments not to exceed $500,000 in a subsidiary of
Borrower located in the United Kingdom; and
(g) Other Investments aggregating not in excess of Two Hundred
Fifty Thousand Dollars ($250,000) at any time.
"Permitted Liens" shall mean (a) the Lien created by this Agreement,
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(b) Liens for fees, taxes, levies, imposts, duties or other governmental charges
of any kind which are not yet delinquent or which are being contested in good
faith by appropriate proceedings which suspend the collection thereof (provided,
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however, that such proceedings do not involve any substantial danger of the
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sale, forfeiture or loss of any item of equipment and that Borrower has
adequately bonded such Lien or reserves sufficient to discharge such Lien have
been provided on the books of Borrower), (c) Liens identified on the disclosure
schedule attached hereto as Schedule 2 ("Disclosure Schedule"), (d) Liens to
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secure payment of worker's compensation, employment insurance, old age pensions
or other social security obligations of Borrower in the ordinary course of
business of Borrower, (e) Liens upon any equipment or other personal property
acquired by Borrower after the date hereof to secure (i) the purchase price of
such equipment or other personal property or (ii) lease obligations or
indebtedness incurred solely for the purpose of financing the acquisition of
such equipment or other personal property; provided that
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(A) such Liens are confined solely to the equipment or other personal property
so acquired and the amount secured does not exceed the acquisition price
thereof, and (B) no such Lien shall be created, incurred, assumed or suffered to
exist in favor of Borrower's officers, directors or shareholders holding five
percent (5%) or more of Borrower's Equity Securities, (f) carriers',
warehousemen's, mechanics', landlords', materialmen's, repairmen's or other
similar Liens arising in the ordinary course of business which are not
delinquent or remain payable without penalty or which are being contested in
good faith and by appropriate proceedings; and (g) non-exclusive licenses of
Intellectual Property entered into in the ordinary course of business and
licenses, Liens or similar arrangements entered into in connection with joint
ventures and corporate collaborations.
"Person" shall mean and include an individual, a partnership, a
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corporation, a business trust, a joint stock company, a limited liability
company, an unincorporated association or other entity and any domestic or
foreign national, state or local government, any political subdivision thereof,
and any department, agency, authority or bureau of any of the foregoing.
"Prime Rate" shall mean the interest rate per annum specified in the
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"Money Rates" column of The Wall Street Journal, but such rate shall in no event
be more than the highest interest rate permitted by applicable law.
"Subordinated Indebtedness" shall mean Indebtedness subordinated to the
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Obligations on terms and conditions acceptable to Lenders in their sole
discretion.
"Subsidiary" shall mean any corporation of which a majority of the
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outstanding capital stock entitled to vote for the election of directors
(otherwise than as the result of a default) is owned by Borrower directly or
indirectly through Subsidiaries.
"Term" shall mean the period from and after the date hereof until the
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payment or satisfaction in full of all Obligations under this Agreement and the
other Operative Documents.
"Treasury Note Maturity" shall mean the period of months set forth
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following such term on the cover page of this Agreement.
"Warrants" shall mean separate warrants to be issued at the direction
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of the Lenders to purchase securities of Borrower substantially in the form of
Exhibit B.
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1.02. Headings. Headings in this Agreement and each of the other
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Operative Documents are for convenience of reference only and are not part of
the substance hereof or thereof.
1.03. Plural Terms. All terms defined in this Agreement or any other
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Operative Document in the singular form shall have comparable meanings when used
in the plural form and vice versa.
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1.04. Construction. This Agreement is the result of negotiations
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among, and has been reviewed by, Borrower and Lenders and their respective
counsel. Accordingly, this Agreement shall be deemed to be the product of all
parties hereto, and no ambiguity shall be construed in favor of or against
Borrower or Lenders.
1.05. Entire Agreement. This Agreement, together with the terms set
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forth in each of the other Operative Documents, taken together, constitute and,
contain the entire agreement of Borrower and Lenders and, with regard to their
respective subject matters, supersede any and all prior agreements, term sheets,
negotiations,
4
correspondence, understandings and communications among the parties, whether
written or oral, with respect to their respective subject matters.
1.06. Other Interpretive Provisions. References in this Agreement to
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"Articles," "Sections," "Exhibits," "Schedules" and "Annexes" are to articles,
sections, exhibits, schedules and annexes herein and hereto unless otherwise
indicated. References in this Agreement and each of the other Operative
Documents to any document, instrument or agreement shall include (a) all
exhibits, schedules, annexes and other attachments thereto, (b) all documents,
instruments or agreements issued or executed in replacement thereof, and (c)
such document, instrument or agreement, or replacement or predecessor thereto,
as amended, modified and supplemented from time to time and in effect at any
given time. The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement or any other Operative Document shall refer
to this Agreement or such other Operative Document, as the case may be, as a
whole and not to any particular provision of this Agreement or such other
Operative Document, as the case may be. The words "include" and "including" and
words of similar import when used in this Agreement or any other Operative
Document shall not be construed to be limiting or exclusive. Unless otherwise
indicated in this Agreement or any other Operative Document, all accounting
terms used in this Agreement or any other Operative Document shall be construed,
and all accounting and financial computations hereunder or thereunder shall be
computed, in accordance with generally accepted accounting principles as in
effect in the United States of America from time to time.
ARTICLE II
THE CREDIT
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2.01. Credit Facility.
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(a) The Credit Amount. Subject to the terms and conditions of this
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Agreement and relying upon the representations and warranties herein set forth
as and when made or deemed to be made, each Lender severally agrees to lend to
Borrower a Loan in the amount of such Lender's Commitment. No Lender shall be
required to make a Loan in an amount in excess of its Commitment. The Loans may
be prepaid only as set forth in Section 2.01(d).
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(b) Interest Rates. Borrower shall pay interest on the unpaid
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principal amount of each Loan from the date of such Loan until such Loan is paid
in full, at a per annum rate of interest equal to the Loan Rate. All
computations of interest on a Loan shall be based on a year of twelve 30 day
months. If Borrower pays interest on a Loan which is determined to be in excess
of the then legal maximum rate, then that portion of each interest payment
representing an amount in excess of the then legal maximum rate shall be deemed
a payment of principal and applied against the principal of such Loan.
(c) Payments of Principal and Interest. Borrower shall make payments
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of accrued interest only on the outstanding principal amount of each Loan on
each Payment Date, commencing August 1, 1998, through and including June 1,
1999. All principal, accrued and unpaid interest and other amounts due under
this Agreement shall be payable on June 30, 1999; provided, however, that, at
the option of Borrower, Borrower may make a payment of accrued interest only on
July 1, 1999 and all principal, accrued and unpaid interest and other amounts
due under this Agreement may be paid on July 30, 1999 and during such one month
extension period, the Loans shall accrue interest at a rate of seventeen and
one-half percent (17.5%) per annum.
5
(d) Prepayment.
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(i) Mandatory Prepayment. After the closing of an initial
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public offering of Borrower's common stock, each Lender may require
prepayment of its Loan, without premium or penalty, by giving notice of
such requirement within thirty (30) days after the closing of such initial
public offering. The prepayment shall occur within ten (10) days of receipt
by Borrower of such notice of prepayment and shall be in the principal
amount of such Loan then outstanding together with accrued and unpaid
interest and all other amounts due hereunder including the Commitment Fee
due under Section 2.04(b).
(ii) Optional Prepayment. If (A) Borrower has made six (6)
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timely payments of interest to each Lender, (B) the initial public offering
of Borrower's common stock has closed, and (iii) the fair market value (as
defined in the Warrants) of Borrower's common stock is greater than the
Warrant Price (as defined in the Warrants), then upon three (3) Business
Days' prior written notice to Lenders, Borrower may, at its option, at any
time, prepay all, and not less than all, of the Loans in full at prepayment
prices equal to the principal amount of each Loan, plus interest accrued on
each Loan through and including the date of such prepayment, plus a premium
on each Loan equal to one and one-half percent (1.5%) of the principal
amount of and any then unpaid interest on such Loan.
2.02. Use of Proceeds; the Loan and the Notes; Disbursement.
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(a) Use of Proceeds. The proceeds of the Loans shall be used solely
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for working capital or general corporate purposes of Borrower.
(b) The Loans and the Notes. The obligation of Borrower to repay the
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unpaid principal amount of and interest on each Lender's Loan shall be evidenced
by a Note issued to each Lender and each Lender is authorized to endorse on a
grid annexed to its Note appropriate notations regarding payments made on the
Note; provided, however, that the failure to make, or an error in making, any
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such notation shall not limit or otherwise affect the obligations of Borrower
hereunder or thereunder.
(c) Disbursement. Each Lender shall disburse its Loan by wire
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transfer to Borrower unless otherwise directed in writing by Borrower.
Notwithstanding anything stated herein to the contrary, no Lender shall have any
obligation to advance funds on behalf of the another Lender.
(d) Termination of Commitment to Lend. Notwithstanding anything to
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the contrary in the Operative Documents, Lenders' obligations to advance the
Loans hereunder shall terminate on the earliest of (i) the occurrence of any
Event of Default hereunder and (ii) the Commitment Termination Date.
2.03. Other Payment Terms.
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(a) Place and Manner. Borrower shall make all payments due to Lenders
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in lawful money of the United States, in immediately available funds, at the
address for payments and in the manner specified in Section 10.05(b).
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(b) Date. Whenever any payment due hereunder shall fall due on a day
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other than a Business Day, such payment shall be made on the next succeeding
Business Day.
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(c) Default Rate. If either (i) any amounts required to be paid by
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Borrower under this Agreement or the other Operative Documents (including
principal or interest payable on the Loan, any fees or other amounts) remain
unpaid after such amounts are due, or (ii) an Event of Default has occurred and
is continuing, Borrower shall pay interest on the outstanding principal balance
hereunder from the date due or from the date of the Event of Default, as
applicable, until such past due amounts are paid in full or until all Events of
Defaults are cured, as applicable, at a per annum rate equal to the Default
Rate, such rate to change from time to time as the Prime Rate shall change. All
computations of such interest at the Default Rate shall be based on a year of
360 days and twelve 30 day months.
2.04. Fees.
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(a) Application Fee. Borrower has paid an Application Fee in the
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aggregate amount of $30,000 (the "Application Fee"). Any portion of the
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Application Fee not utilized to pay Lenders' expenses in connection with the
negotiation, documentation and funding of the Loans will be applied pro rata to
the first principal amounts due under the Notes. If the Loans are not made, any
remaining balance of the Application Fee shall be retained by and divided among
the Lenders as they shall determine.
(b) Commitment Fee. A Commitment Fee in the aggregate amount of
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$37,500 shall be payable to each Lender upon the earlier to occur of (i) June
30, 1999 or (ii) the date of any prepayment of the Loans.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
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3.01. Representations and Warranties. Except as set forth in the
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Disclosure Schedule, Borrower makes the following representations and warranties
to Lenders as of the date hereof and again on the Funding Date:
(a) Organization and Qualification. Borrower is a corporation duly
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organized, validly existing and in good standing under the laws of its state of
incorporation and is duly qualified to do business in Borrower's Home State.
Borrower has no Subsidiaries.
(b) Authority. Borrower has all necessary corporate power, authority
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and legal right and has obtained all approvals and consents and has given all
notices necessary to execute and deliver this Agreement and the other Operative
Documents and to perform the terms hereof and thereof. Borrower has all
requisite corporate power and authority to own and operate its properties and to
carry on its businesses as now conducted.
(c) Conflict with Other Instruments, etc. Neither the execution and
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delivery of any Operative Document to which Borrower is a party nor the
consummation of the transactions therein contemplated nor compliance with the
terms, conditions and provisions thereof will conflict with or result in a
breach of any of the terms, conditions or provisions of the charter or the
bylaws of Borrower or, to its knowledge, any law or any regulation, order, writ,
injunction or decree of any court or governmental instrumentality or any
material agreement or instrument to which Borrower is a party or by which it or
any of its properties is bound or to which it or any of its properties is
subject, or constitute a default thereunder or result in the creation or
imposition of any Lien, other than Permitted Liens.
(d) Properties. Borrower has good and marketable title to the
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Collateral, free and clear of all Liens, other than Permitted Liens. Borrower
has title and ownership of, or is licensed under, all current Intellectual
Property,
7
with no known infringement of the rights of others. Borrower has not received
any communications alleging that Borrower has violated, or by conducting its
business as proposed, would violate any proprietary rights of any other Person.
Borrower has no knowledge of any infringement or violation by it of the
intellectual property rights of any third party and has no knowledge of any
violation or infringement by a third party of any of its Intellectual Property.
The Collateral and the Intellectual Property constitute substantially all of the
assets and property of Borrower.
(e) Authorization, Governmental Approvals, etc. The execution and
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delivery by Borrower of each Operative Document, the granting of the security
interest in the Collateral, the issuance of the Warrants, the issuance of the
securities into which the Warrants are exercisable, and the performance of the
obligations herein and therein contemplated have each been duly authorized by
all necessary action on the part of Borrower. No authorization, consent,
approval, license or exemption of, and no registration, qualification,
designation, declaration or filing with, or notice to, any Person is, was or
will be necessary to (i) the valid execution and delivery of any Operative
Document to which Borrower is a party, (ii) the performance of Borrower's
obligations under any Operative Document, or (iii) the granting of the security
interest in the Collateral, except for filings in connection with the
perfection of the security interest in any of the Collateral or the issuance of
the Warrants and the securities to be issued pursuant to the Warrants. The
Operative Documents have been or will be duly executed and delivered and
constitute or will constitute legal, valid and binding obligations of Borrower,
enforceable in accordance with their respective terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency or other
similar laws of general application relating to or affecting the enforcement of
creditors' rights or by general principles of equity.
(f) Litigation. There are no actions, suits, proceedings or
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investigations pending or, to the knowledge of Borrower, threatened against or
affecting Borrower, or the business or any property or asset owned by it, before
any court or governmental department, agency or instrumentality which, if
adversely determined, could reasonably be expected to have a material adverse
effect on the financial condition, business or operations of Borrower.
(g) Security Interest. Assuming the proper filing of one or more
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financing statement(s) identifying the Collateral with the proper state and/or
local authorities, the security interests in the Collateral granted to Lenders
pursuant to this Agreement (i) constitute and will continue to constitute first
priority security interests (except to the extent any other Permitted Lien may
create any priority to Lenders' Lien under this Agreement) and (ii) are and will
continue to be superior and prior to the rights in the Collateral of all other
creditors of Borrower (except to the extent of such Permitted Liens). Except as
set forth in the Disclosure Schedule, Borrower does not own any right, title or
interest in or to any real property (other than leasehold interests), motor
vehicles, promissory notes, or other property (excluding Intellectual Property)
with respect to which a security interest must be perfected by a method other
than the filing of a UCC-1 financing statement.
(h) Executive Offices. The principal place of business and chief
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executive office of Borrower, and the office where Borrower will keep all
records and files regarding the Collateral, is set forth on the cover page of
this Agreement.
(i) Catastrophic Events; Labor Disputes. None of Borrower or its
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properties is or has been affected by any fire, explosion, accident, strike,
lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act
of God or other casualty that could reasonably be expected to have a material
adverse effect on the financial condition, business or operations of Borrower.
There are no disputes presently subject to grievance procedure, arbitration or
litigation under any of the collective bargaining agreements, employment
contracts or employee
8
welfare or incentive plans to which Borrower is a party, and there are no
strikes, lockouts, work stoppages or slowdowns, or, to the knowledge of
Borrower, jurisdictional disputes or organizing activity occurring or threatened
which could reasonably be expected to have a material adverse effect on the
financial condition, business or operations of Borrower.
(j) No Material Adverse Effect. No event has occurred and no
--------------------------
condition exists which could reasonably be expected to have a material adverse
effect on the financial condition, business or operations of Borrower since
December 31, 1997.
(k) Accuracy of Information Furnished. None of the Operative
---------------------------------
Documents and none of the other certificates, statements or information
furnished to Lenders by or on behalf of Borrower in connection with the
Operative Documents or the transactions contemplated thereby contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Lenders recognize that
all financial projections furnished to Lenders by or on behalf of Borrower in
connection with the Operative Documents or the transactions contemplated thereby
are not to be viewed as facts and that actual results during the period or
periods covered by such projections may differ from the projected or forecasted
results .
(l) Certain Agreements of Officers, Employees and Consultants.
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(i) To the knowledge of Borrower, no officer, employee or
consultant of Borrower is, or is now expected to be, in violation of any term of
any employment contract, proprietary information agreement, nondisclosure
agreement, noncompetition agreement, or any other material contract or agreement
or any restrictive covenant relating to the right of any such officer, employee
or consultant to be employed by Borrower because of the nature of the business
conducted or to be conducted by Borrower or relating to the use of trade secrets
or proprietary information of others, and to Borrower's knowledge, the continued
employment of Borrower's officers, employees and consultants does not subject
Borrower to any material liability for any claim or claims arising out of or in
connection with any such contract, agreement, or covenant.
(ii) To the knowledge of Borrower, no officers of Borrower, and
no employee or consultant of Borrower whose termination, either individually or
in the aggregate, could reasonably be expected to have a material adverse effect
on the financial condition, business or operations of Borrower, has any present
intention of terminating his or her employment or consulting relationship with
Borrower.
ARTICLE IV
REPORTING REQUIREMENTS
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4.01. Furnishing Reports. Borrower shall furnish to Lenders:
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(a) Financial Statements. So long as Borrower is not subject to the
--------------------
reporting requirements of Section 12 or Section 15 of the Securities and
Exchange Act of 1934, as amended, promptly as they are available, unaudited
monthly and audited annual financial statements of Borrower and such other
financial information as Lenders may reasonably request from time to time. From
and after such time as Borrower becomes a publicly reporting company, promptly
as they are available and in any event: (i) at the time of filing of Borrower's
Form 10-K with the Securities and Exchange Commission after the end of each
fiscal year of Borrower, the financial statements of Borrower filed with such
Form 10-K; and (ii) at the time of filing of Borrower's Form 10-Q with
9
the Securities and Exchange Commission after the end of each of the first three
fiscal quarters of Borrower, the financial statements of Borrower filed with
such Form 10-Q.
(b) Notice of Defaults. As soon as possible, and in any event within
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five (5) Business Days after the discovery of a Default or Event of Default
provide Lenders with an Officer's Certificate of Borrower setting forth the
facts relating to or giving rise to such Default or Event of Default and the
action which Borrower proposes to take with respect thereto.
(c) Miscellaneous. Such other information as Lenders may reasonably
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request from time to time.
ARTICLE V
GRANT OF SECURITY INTEREST
GENERAL PROVISIONS CONCERNING SECURITY
--------------------------------------
5.01. Grant of Security Interest. Borrower, in order to secure the
--------------------------
payment of the principal and interest with respect to the Loans made pursuant to
this Agreement, all other sums due under and in respect hereof and of the other
Operative Documents, including fees, charges, expenses and attorneys' fees and
costs and the performance and observance by Borrower of all other terms,
conditions, covenants and agreements herein and in the other Operative Documents
(all such amounts and obligations being herein sometimes called the
"Obligations"), does hereby grant to Lenders and their successors and assigns, a
-----------
security interest in and to the following property (collectively, the
"Collateral"): All right, title, interest, claims and demands of Borrower in
----------
and to:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all laboratory equipment, computer equipment,
office equipment, machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's books relating to any of the foregoing;
(c) All contract rights and general intangibles (except to the extent
included within the definition of Intellectual Property), now owned or hereafter
acquired, including, without limitation, goodwill, license agreements in which
Borrower is the licensor, franchise agreements, blueprints, purchase orders,
customer lists, route lists, infringements, claims, literature, catalogs, income
tax refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights, in which Borrower is the licensor, and all other
forms of obligations owing to Borrower arising out of the sale or lease of
goods, the licensing of technology or the rendering of services by Borrower
(subject, in each case, to the contractual rights of third parties to require
funds received by Borrower to be expended in a particular manner), whether or
not earned by performance, and any and all credit insurance, guaranties, and
other security therefor,
10
as well as all merchandise returned to or reclaimed by Borrower and Borrower's
books relating to any of the foregoing;
(e) All documents, cash, deposit accounts, letters of credit,
certificates of deposit, instruments, chattel paper and investment property,
including, without limitation, all securities, whether certificated or
uncertificated, security entitlements, securities accounts, commodity contracts
and commodity accounts, and all financial assets held in any securities account
or otherwise, wherever located, now owned or hereafter acquired and Borrower's
books relating to the foregoing; and
(f) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof,
including, without limitation, insurance, condemnation, requisition or similar
payments and proceeds of the sale or licensing of Intellectual Property to the
extent such proceeds no longer constitute Intellectual Property; but
(g) Excluding, all Intellectual Property.
---------
5.02. Duration of Security Interest. Lenders' security interest in the
-----------------------------
Collateral shall continue until the payment in full and the satisfaction of all
Obligations, whereupon such security interest shall terminate. Lenders, upon
payment in full and the satisfaction of the Obligations, shall execute such
further documents and take such further actions as may be necessary to effect
the release and/or termination contemplated by this Section 5.02, including duly
------------
executing and delivering termination statements for filing in all relevant
jurisdictions.
5.03. Possession of Collateral. Except as set forth in Section 5.04,
------------------------
so long as no Event of Default has occurred and is continuing, Borrower shall
remain in full possession, enjoyment and control of the Collateral (except only
as may be otherwise required by Lenders for perfection of its security interest
therein; provided that unless requested by Lenders, Borrower shall not be
required to deliver to Lenders a promissory note in the amount of approximately
$30,000 executed by Borrower's Chief Executive Officer in favor of Borrower) and
to manage, operate and use the same and each part thereof with the rights and
franchises appertaining thereto; provided, however, that the possession,
-------- -------
enjoyment, control and use of the Collateral shall at all times be subject to
the observance and performance of the terms of this Agreement.
5.04. Location of Collateral. The Collateral is and shall be located
----------------------
at Borrower's address stated on the cover page of this Agreement, at the
locations set forth in the Disclosure Schedule, at such other locations as
Borrower may give Lenders' thirty (30) days prior written notice of from time to
time or at the premises of Borrower's customers.
5.05. Lien Subordination. Lenders agree that the Liens granted to it
------------------
hereunder shall be subject to a separate Intercreditor Agreement between
Lenders, and shall be subordinate to the Liens of existing and future lenders
providing equipment financing and equipment lessors; provided, that such Liens
--------
are confined solely to the equipment so financed and the proceeds thereof; and
provided, further, that the Obligations hereunder shall not be subordinate in
-------- -------
right of payment to any obligations to equipment lenders or equipment lessors
and Lenders' remedies hereunder shall not in any way be subordinate to the
remedies of any such lenders or equipment lessors. Lenders agree to execute and
deliver such agreements and documents as may be reasonably requested by Borrower
from time to time which set forth the lien subordination described in this
Section 5.05 and are reasonably acceptable to Lenders. Lenders shall have no
------------
obligation to execute any agreement or document which would impose obligations,
restrictions or lien priority on Lenders which are less favorable to Lenders
than those described in this Section 5.05.
------------
11
ARTICLE VI
AFFIRMATIVE COVENANTS
---------------------
6.01. Affirmative Covenants.
---------------------
(a) Payment of Taxes, etc. Borrower shall pay and discharge all taxes,
----------------------
assessments and governmental charges or levies imposed upon it or upon its
income or profits, or upon any properties belonging to it, prior to the date on
which penalties attach thereto, and all lawful claims which, if unpaid, might
become a Lien upon any of its properties; provided that there shall be no
--------
requirement to pay any such tax, assessment, charge, levy or claim (i) which is
being contested in good faith and by appropriate proceedings or which presents
no risk of seizure, forfeiture, levy or other event which could jeopardize any
Collateral or (ii) for which payment in full is bonded or reserved in Borrower's
financial statements.
(b) Inspection Rights. Borrower shall, at any reasonable time and from time
-----------------
to time, permit Lenders or any of its agents or representatives to inspect the
Collateral, to examine and make copies of and abstracts from the records and
books of account of, and visit the properties of, Borrower and to discuss the
affairs, finances and accounts of Borrower with any of its officers or directors
relating in each case to Lenders' capacity as lenders and secured party
hereunder and with respect to the Collateral.
(c) Maintenance of Equipment and Similar Assets. Borrower shall keep and
-------------------------------------------
maintain all items of equipment and other similar types of personal property
that form any significant portion or portions of the Collateral in good
operating condition and repair and shall make all necessary replacements thereof
and renewals thereto so that the value and operating efficiency thereof shall at
all times be maintained and preserved. Borrower shall not permit any such
material item of Collateral to become a fixture to real estate or an accession
to other personal property, without the prior written consent of Lenders.
Borrower shall not permit any such material item of Collateral to be operated or
maintained in violation of any applicable law, statute, rule or regulation.
With respect to items of leased equipment (to the extent Lenders have any
security interest in any residual Borrower's interest in such equipment under
the lease), Borrower shall keep, maintain, repair, replace and operate such
leased equipment in accordance with the terms of the applicable lease.
(d) Insurance.
---------
(i) Borrower shall, obtain and maintain for the Term, at its own
expense, (x) "all risk" insurance against loss or damage to the Collateral, (y)
commercial general liability insurance (including contractual liability,
products liability and completed operations coverages) reasonably satisfactory
to Lenders, and (z) such other insurance against such other risks of loss and
with such terms, as shall in each case be reasonably satisfactory to or
reasonably required by Lenders (as to carriers, amounts and otherwise). The
amount of the "all risk" insurance shall be determined to Lenders' reasonable
satisfaction as of each anniversary date of this Agreement and the appropriate
amount of coverage shall be put in effect on the next succeeding renewal or
inception date of such insurance.
(ii) The deductible with respect to "all-risk" insurance required by
clause (x) above and product liability insurance required by clause (y) above
shall not exceed $25,000; otherwise there shall be no deductible with respect to
any insurance required to be maintained hereunder. The amount of commercial
general liability insurance (other than products liability coverage and
completed operations insurance) required by clause (y) above shall be at least
$2,000,000 per occurrence. The amount of the products liability and completed
operations
12
insurance required by clause (y) above shall be at least $2,000,000 per
occurrence. Each "all risk" policy shall: (x) name Lenders as loss payees, (y)
provide for each insurer's waiver of its right of subrogation against Lenders,
and (z) provide that such insurance (A) shall not be invalidated by any action
of, or breach of warranty by, Borrower of a provision of any of its insurance
policies, and (B) shall waive set-off, counterclaim or offset against Lenders.
Each liability policy shall (w) name Lenders as additional insureds in the full
amount of Borrower's liability coverage limits (or the coverage limits of any
successor to Borrower or such successor's parent which is providing coverage)
and (x) provide that such insurance shall have cross-liability and severability
of interest endorsements (which shall not increase the aggregate policy limits
of Borrower's insurance). All insurance policies shall (y) provide that
Borrower's insurance shall be primary without a right of contribution of
Lenders' insurance, if any, or any obligation on the part of Lenders to pay
premiums of Borrower, and (z) shall contain a clause requiring the insurer to
give Lenders at least 30 days' prior written notice of its cancellation (other
than cancellation for non-payment for which 10 days' notice shall be
sufficient). Borrower shall on or prior to the first Funding Date and prior to
each policy renewal, furnish to Lenders certificates of insurance or other
evidence satisfactory to Lenders that such insurance coverage is in effect.
ARTICLE VII
NEGATIVE COVENANTS
------------------
7.01. Negative Covenants. So long as the Obligations remain outstanding,
------------------
Borrower shall not:
(a) Name; Location of Chief Executive Office and Collateral. Without thirty
-------------------------------------------------------
(30) days prior written notice to Lenders, change its chief executive office or
principal place of business or remove or cause to be removed from or locate any
material items of Collateral at any locations other than a location specified in
Section 5.04.
(b) Liens on Collateral. Create, incur, assume or suffer to exist any Lien
-------------------
of any kind upon any Collateral, whether now owned or hereafter acquired, except
Permitted Liens.
(c) Negative Pledge Regarding Intellectual Property. Create, incur, assume
-----------------------------------------------
or suffer to exist any Lien of any kind upon any Intellectual Property, whether
now owned or hereafter acquired, except Permitted Liens.
(d) Dispositions of Collateral or Intellectual Property. Convey, sell, offer
---------------------------------------------------
to sell, lease, transfer, exchange or otherwise dispose of (collectively, a
"Transfer") all or any material part of the Collateral or Intellectual Property
--------
to any Person, other than: (i) transfers of inventory in the ordinary course of
business; (ii) transfers which would constitute Permitted Liens under clause (g)
of the definition of Permitted Liens; or (iii) transfers of worn-out or obsolete
equipment.
(e) Distributions. (i) Pay any dividends or make any distributions on its
-------------
Equity Securities; (ii) purchase, redeem, retire, defease or otherwise acquire
for value any of its Equity Securities (other than repurchases by cancellation
of indebtedness pursuant to the terms of employee stock purchase plans, employee
restricted stock agreements or similar arrangements in an aggregate amount not
to exceed $100,000); (iii) return any capital to any holder of its Equity
Securities as such; (iv) make any distribution of assets, Equity Securities,
obligations or securities to any holder of its Equity Securities as such; or (v)
set apart any sum for any such purpose; provided, however, that Borrower may pay
dividends payable solely in Common Stock.
13
(f) Mergers or Acquisitions. Merge or consolidate with or into any other
-----------------------
Person or acquire or all or substantially all of the capital stock or assets of
another Person.
(g) Transactions With Affiliates. Enter into any contractual obligation with
----------------------------
any affiliate or engage in any other transaction with any affiliate except upon
terms at least as favorable to Borrower as an arms-length transaction with
unaffiliated Persons, excluding transactions with employees in connection with
the purchase of the Company's securities in connection with stock option or
stock purchase plans or agreements.
(h) Maintenance of Accounts. Maintain any deposit accounts or accounts
-----------------------
holding securities owned by Borrower except (i) accounts located at Trans
Pacific National Bank and (ii) other accounts with respect to which Lenders take
such action as they deem necessary to obtain a perfected security interest in
such account.
(i) Indebtedness Payments. Prepay, redeem, purchase, defease or otherwise
---------------------
satisfy in any manner prior to the scheduled repayment thereof any Indebtedness
for borrowed money (other than amounts due under this Loan Agreement or the
Notes or under any revolving credit agreement constituting Permitted
Indebtedness hereunder) or lease obligations, (ii) amend, modify or otherwise
change the terms of any Indebtedness for borrowed money or lease obligations so
as to accelerate the scheduled repayment thereof or (iii) repay any notes to
officers, directors or shareholders.
(j) Subsidiaries. Without the prior written consent of Lenders, form any
------------
Subsidiary, other than a subsidiary in the United Kingdom.
(k) Indebtedness. Create, incur, assume or permit to exist any Indebtedness
------------
except Permitted Indebtedness.
(l) Investments. Make any Investment except for Permitted Investments.
-----------
ARTICLE VIII
CONDITIONS PRECEDENT
--------------------
8.01. Closing. At the time of execution and delivery of this Agreement,
-------
Borrower shall have duly executed and/or delivered to Lenders the items set
forth in Part I of Schedule 3.
--------------------
8.02. Other Conditions. The obligation of the Lenders to make the Loans
----------------
shall be subject to the execution and/or delivery to such Lenders of each of the
items set forth in Part I of Schedule 3 and the satisfaction of by Borrower of
--------------------
each condition set forth in Part II of Schedule 3.
---------------------
8.03. Covenant to Deliver. Borrower agrees (not as a condition but as a
-------------------
covenant) to deliver to Lenders each item required to be delivered to Lenders as
a condition to a Loan, if the Loan is advanced. Borrower expressly agrees that
the extension of a Loan prior to the receipt by Lenders of any such item shall
not constitute a waiver by Lenders of Borrower's obligation to deliver such
item.
ARTICLE IX
DEFAULT AND REMEDIES
--------------------
14
9.01. Events of Default. An "Event of Default" shall mean the occurrence of
-----------------
one or more of the following described events:
(a) Borrower shall (i) default in the payment of principal of or interest on
any Loan when the same is due, or (ii) default in the payment of any expense or
other amount payable hereunder or thereunder for five (5) days after receipt of
written notice from a Lender that the same is due; or
(b) Borrower shall breach any provision of Section 7.01; or
------------
(c) Borrower shall default in the performance of any covenant, agreement or
obligation (other than a covenant, agreement or obligation referred to in,
Section 9.01(a) or Section 9.01(b)) contained in any Operative Document (other
--------------- ---------------
than the Warrants) and Borrower shall fail to cure within thirty (30) days after
receipt of written notice from Lenders any default in the performance of any
such covenant, agreement or obligation contained therein; or
(d) Borrower shall have breached any material term of a Warrant; or
(e) Any representation or warranty made herein or on the Funding Date by
Borrower in any Operative Document, or any certificate or financial statement
furnished pursuant to the provisions of any Operative Document, shall prove to
have been false or misleading in any material respect as of the time made or
furnished; or
(f) Any Operative Document (other than a Warrant which has expired or a Note
which has been repaid in full) shall in any material respect cease to be, or
Borrower shall assert that any Operative Document is not, a legal, valid and
binding obligation of Borrower enforceable in accordance with its terms; or
(g) A default shall exist under any agreement of Borrower which consists of
the failure to pay any Indebtedness at maturity or which results in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness of Borrower in an amount in excess of Two Hundred
Fifty Thousand Dollars ($250,000) or a default shall exist under any financing
agreement with a Lender or any of such Lender's affiliates; or
(h) A proceeding shall have been instituted in a court of competent
jurisdiction seeking a decree or order for relief in respect of Borrower in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or for the appointment of a receiver,
liquidator, assignee, custodian, trustee (or similar official) of Borrower or
for any substantial part of its property, or for the winding-up or liquidation
of its affairs, and such proceeding shall remain undismissed or unstayed and in
effect for a period of thirty (30) consecutive days or such court shall enter a
decree or order granting the relief sought in such proceeding; or
(i) Borrower shall commence a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, shall
consent to the entry of an order for relief in an involuntary case under any
such law, or shall consent to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custodian (or other similar official)
of Borrower or for any substantial part of its property, or shall make a general
assignment for the benefit of creditors, or shall fail generally to pay its
debts as they become due, or shall take any corporate action in furtherance of
any of the foregoing; or
15
(j) A final judgment or order for the payment of money in excess of Two
Hundred Fifty Thousand Dollars ($250,000) (exclusive of amounts covered by
insurance issued by an insurer not an affiliate of Borrower) shall be rendered
against Borrower and the same shall remain undischarged for a period of thirty
(30) days during which execution shall not be effectively stayed, or any
judgment, writ, assessment, warrant of attachment, or execution or similar
process shall be issued or levied against a substantial part of the property of
Borrower and such judgment, writ, or similar process shall not be released,
stayed, vacated or otherwise dismissed within thirty (30) days after issue or
levy.
9.02. Consequences of Event of Default.
--------------------------------
(a) If an Event of Default specified under any of clauses (a) through (g) or
--------------------------
(j) of Section 9.01 shall occur and be continuing, Lenders may (i) declare all
--- ------------
of the Loans, together with interest thereon, plus any premium and all other
liabilities of Borrower hereunder and under the other Operative Documents to be
immediately due and payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived, and (ii) terminate
any commitment to make the Loans and terminate any commitment to advance money
or extend credit to or for the benefit of Borrower pursuant to any other
agreement or commitment extended by a Lender to Borrower.
(b) If an Event of Default specified under clause (h) or (i) of Section 9.01
---------------------------------
shall occur, then immediately and without notice (i) the Loans, together with
interest thereon, plus premium, if any, and all other liabilities of Borrower
hereunder and under the other Operative Documents shall automatically become due
and payable, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived, and (ii) Lenders' commitments hereunder to
make the Loans and any other commitment of Lenders to Borrower to advance money
or extend credit pursuant to any other agreement or commitment shall be
terminated.
9.03. Rights Regarding Collateral. Borrower agrees that when any Event of
---------------------------
Default has occurred and is continuing, Lenders shall have the rights, options,
duties and remedies of a secured party as permitted by law and, in addition to
and without limiting the foregoing, Lenders may exercise any one or more or all,
and in any order, of the remedies herein set forth, including the following:
(a) Lenders, personally or by agents or attorneys, shall have the right
(subject to compliance with any applicable mandatory legal requirements) to
require Borrower to assemble the Collateral and make it available to Lenders at
a place to be designated by Lenders or to take immediate possession of the
Collateral, or any portion thereof, and for that purpose may pursue the same
wherever it may be found, and may enter any of premises of Borrower, with or
without notice, demand, process of law or legal procedure, to the extent
permitted by applicable law, and search for, take possession of, remove, keep
and store the same, or use and operate or lease the same until sold.
(b) Lenders may, if at the time such action may be lawful and always subject
to compliance with any mandatory legal requirements, either with or without
taking possession and either before or after taking possession, without
instituting any legal proceedings whatsoever, having first given notice of such
sale by registered or certified mail to Borrower once at least ten (10) days
prior to the date of such sale, and having first given any other notice which
may be required by law, sell and dispose of the Collateral, or any part thereof,
at a private sale or at public auction, to the highest bidder, in one lot as an
entirety or in separate lots, and either for cash or on credit and on such terms
as Lenders may determine, and at any place (whether or not it be the location of
the Collateral or any part thereof) designated in the notice referred to above.
To the extent permitted by applicable law, any such sale or sales may be
adjourned from time to time by announcement at the time and
16
place appointed for such sale or sales, or for any such adjourned sale or sales,
without further published notice, and Borrower, Lenders or the holder or holders
of the Notes, or of any interest therein, may bid and become the purchaser at
any such sale.
(c) Lenders may proceed to protect and enforce this Agreement and the other
Operative Documents by suit or suits or proceedings in equity, at law or in
bankruptcy, and whether for the specific performance of any covenant or
agreement herein contained or in execution or aid of any power herein granted;
or for foreclosure hereunder, or for the appointment of a receiver or receivers
for any real property security or any part thereof, or for the recovery of
judgment for the Obligations or for the enforcement of any other proper, legal
or equitable remedy available under applicable law.
9.04. Waiver by Borrower. Upon the occurrence of an Event of Default, to
------------------
the extent permitted by law, Borrower covenants that it will not at any time
insist upon or plead, or in any manner whatsoever claim or take any benefit or
advantage of, any stay or extension law now or at any time hereafter in force,
nor claim, take nor insist upon any benefit or advantage of or from any law now
or hereafter in force providing for the valuation or appraisement of the
Collateral or any part thereof prior to any sale or sales thereof to be made
pursuant to any provision herein contained, or to the decree, judgment or order
of any court of competent jurisdiction; nor, after such sale or sales, claim or
exercise any right under any statute now or hereafter made or enacted by any
state or otherwise to redeem the property so sold or any part thereof, and, to
the full extent legally permitted, except as to rights expressly provided
herein, hereby expressly waives for itself and on behalf of each and every
Person, except decree or judgment creditors of Borrower, acquiring any interest
in or title to the Collateral or any part thereof subsequent to the date of this
Agreement, all benefit and advantage of any such law or laws, and covenants that
it will not invoke or utilize any such law or laws or otherwise hinder, delay or
impede the execution of any power herein granted and delegated to Lenders, but
will suffer and permit the execution of every such power as though no such
power, law or laws had been made or enacted.
9.05. Effect of Sale. Any sale, whether under any power of sale available to
--------------
Lenders or by virtue of judicial proceedings, shall operate to divest all right,
title, interest, claim and demand whatsoever, either at law or in equity, of
Borrower in and to the property sold, and shall be a perpetual bar, both at law
and in equity, against Borrower, its successors and assigns, and against any and
all persons claiming the property sold or any part thereof under, by or through
Borrower, its successors or assigns.
9.06. Application of Collateral Proceeds. The proceeds and/or avails of the
----------------------------------
Collateral, or any part thereof, and the proceeds and the avails of any remedy
hereunder (as well as any other amounts of any kind held by Lenders at the time
of, or received by Lenders after, the occurrence of an Event of Default
hereunder) shall be paid to and applied as follows:
(a) First, to the payment of reasonable costs and expenses, including all
-----
amounts expended to preserve the value of the Collateral, of foreclosure or
suit, if any, and of such sale and the exercise of any other rights or remedies,
and of all proper fees, expenses, liability and advances, including reasonable
legal expenses and attorneys' fees, incurred or made hereunder by Lenders;
(b) Second, to the payment to Lenders of the amount then owing or unpaid on
------
the Notes, and in case such proceeds shall be insufficient to pay in full the
whole amount so due, owing or unpaid upon the Notes, then first, to the unpaid
-----
interest thereon, second, to unpaid principal thereof and third to the remaining
------ -----
balance of the Obligations under the Notes; such application to be made upon
presentation of the Notes, and the notation thereon of the payment, if partially
paid, or the surrender and cancellation thereof, if fully paid;
17
(c) Third, to the payment of other amounts then payable to Lenders under
-----
any of the Operative Documents; and
(d) Fourth, to the payment of the surplus, if any, to Borrower, its
------
successors and assigns, or to whomsoever may be lawfully entitled to receive the
same.
9.07. Reinstatement of Rights. If Lenders shall have proceeded to enforce
-----------------------
any right under this Agreement or any other Operative Document by foreclosure,
sale, entry or otherwise, and such proceedings shall have been discontinued or
abandoned for any reason or shall have been determined adversely to Lenders,
then and in every such case (unless otherwise ordered by a court of competent
jurisdiction), Lenders shall be restored to their former position and rights
hereunder with respect to the property subject to the security interest created
under this Agreement.
ARTICLE X
MISCELLANEOUS
-------------
10.01. Modifications, Amendments or Waivers. The provisions of any
------------------------------------
Operative Document may be modified, amended or waived only by a written
instrument signed by the parties thereto.
10.02. No Implied Waivers; Cumulative Remedies; Writing Required. No delay
---------------------------------------------------------
or failure of Lenders in exercising any right, power or remedy hereunder shall
affect or operate as a waiver thereof; nor shall any single or partial exercise
thereof or any abandonment or discontinuance of steps to enforce such a right,
power or remedy preclude any further exercise thereof or of any other right,
power or remedy. The rights and remedies hereunder of Lenders are cumulative
and not exclusive of any rights or remedies which it would otherwise have. Any
waiver, permit, consent or approval of any kind or character on the part of
Lenders of any breach or default under this Agreement or any such waiver of any
provision or condition of this Agreement must be in writing and shall be
effective only in the specified instance and to the extent specifically set
forth in such writing.
10.03. Expenses; Indemnification. Borrower agrees upon demand to pay or
-------------------------
reimburse Lenders for all liabilities, obligations and out-of-pocket expenses,
including reasonable fees and expenses of counsel for Lenders, from time to time
arising in connection with (i) the negotiation, documentation and funding of
this Agreement, the Loans and the other Operative Documents and any amendments
thereto, and (ii) the enforcement or collection of sums due under the Operative
Documents. Borrower shall indemnify, reimburse and hold Lenders, each of
Lenders' partners, and each of their respective successors, assigns, agents,
officers, directors, shareholders, servants, agents and employees harmless from
and against all liabilities, losses, damages, actions, suits, demands, claims of
any kind and nature (including claims relating to environmental discharge,
cleanup or compliance), all costs and expenses whatsoever to the extent they may
be incurred or suffered by such indemnified party in connection therewith
(including reasonable attorneys' fees and expenses), fines, penalties (and other
charges of applicable governmental authorities), licensing fees relating to any
item of Collateral, damage to or loss of use of property (including
consequential or special damages to third parties or damages to Borrower's
property), or bodily injury to or death of any person (including any agent or
employee of Borrower) (each, a "Claim"), directly or indirectly relating to or
-----
arising out of the use of the proceeds of the Loans or otherwise, the falsity of
any representation or warranty of Borrower or Borrower's failure to comply with
the terms of this Agreement or any other Operative Document during the Term.
The foregoing indemnity shall cover, without limitation, (i) any Claim in
connection with a design or other defect (latent or patent) in any item of
equipment included in the Collateral, (ii) any Claim for infringement of any
patent, copyright, trademark or
18
other intellectual property right, (iii) any Claim resulting from the presence
on or under or the escape, seepage, leakage, spillage, discharge, emission or
release of any Hazardous Materials on the premises of Borrower, including any
Claims asserted or arising under any Environmental Law, or (iv) any Claim for
negligence or strict or absolute liability in tort; provided, however, that
-----------------
Borrower shall not indemnify Lenders for any liability incurred by Lenders as a
direct result of Lenders' gross negligence or willful misconduct. Such
indemnities shall continue in full force and effect, notwithstanding the
expiration or termination of this Agreement. Upon Lenders' written demand,
Borrower shall assume and diligently conduct, at its sole cost and expense, the
entire defense of Lenders, each of its partners, and each of their respective,
agents, employees, directors, officers, shareholders, successors and assigns
against any indemnified Claim described in this Section 10.03. Borrower shall
-------------
not settle or compromise any Claim against or involving Lenders without first
obtaining Lenders' written consent thereto, which consent shall not be
unreasonably withheld.
10.04. Damages. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS
-------
AGREEMENT OR ANYWHERE ELSE, EACH PARTY HERETO AGREES THAT IT SHALL NOT SEEK FROM
ANY OTHER PARTY UNDER ANY THEORY OF LIABILITY (INCLUDING ANY THEORY IN TORTS),
ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES.
10.05. Notices; Payments.
-----------------
(a) All notices and other communications given to or made upon any party
hereto in connection with this Agreement shall be in writing (including telexed,
telecopied or telegraphic communication) and mailed (by certified or registered
mail), telexed, telegraphed, telecopied or delivered to the respective parties,
as follows:
Borrower: At the address set forth on the cover page of this Agreement.
Lenders: MMC/GATX PARTNERSHIP NO. 1
c/o GATX Capital Corporation
Four ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Telephone No.: ▇▇▇-▇▇▇-▇▇▇▇
Telecopier No.: ▇▇▇-▇▇▇-▇▇▇▇
Attention: Contract Administration
with a copy of all financial information to:
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & COMPANY
▇ ▇▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
and
TRANSAMERICA BUSINESS CREDIT CORPORATION
▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇-▇▇▇▇
19
or in accordance with any subsequent written direction from either party to the
other. All such notices and other communications shall, except as otherwise
expressly herein provided, be effective when received; or in the case of
delivery by messenger or overnight delivery service, when left at the
appropriate address.
(b) Unless Lenders specify otherwise in writing, all payments shall be made
by wire transfer to:
GATX Capital Corporation
Bank Name: NationsBank
Bank Address: ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Account No.: 3750878673
ABA Routing No.: 111-000012
Reference: Pilot Network Services Invoice #______
and
Transamerica Business Credit Corporation
Bank Name: The First National Bank of Chicago
Bank Address: ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇ ▇▇▇▇▇
Account No.: 55-75427
ABA Routing No.: ▇▇▇-▇▇▇-▇▇▇
Reference: PILOT NETWORK SERVICES, INC.
Customer No. ____________
Account Name: Transamerica Technology Finance
10.06. Termination. This Agreement shall terminate at the end of the Term;
-----------
provided, however, that the termination of this Agreement shall not affect any
-------- -------
of the rights and remedies of Lenders hereunder, it being understood and agreed
that all such rights and remedies shall continue in full force and effect until
payment of all amounts owed to Lenders under or in connection with the Operative
Documents, whether on account of principal, interest, fees or otherwise.
10.07. Severability. If any provision of any Operative Document is held
------------
invalid or unenforceable to any extent or in any application, the remainder of
such Operative Document and all other Operative Documents, or the application of
such provision to different Persons or circumstances or in different
jurisdictions, shall not be affected thereby.
10.08. Survival. All representations, warranties, covenants and agreements
--------
of Borrower contained herein or made in writing in connection herewith shall
survive the execution and delivery of the Operative Documents, the making of the
Loans hereunder, the granting of security and the issuance of the Notes.
10.09. Relationship of Parties. Subject to a separate Intercreditor
-----------------------
Agreement between the Lenders, Borrower and each Lender acknowledge, understand
and agree that:
(a) The relationship between the Borrower, on the one hand, and Lenders, on
the other, is, and at all time shall remain solely that of a borrower and
lenders. Lenders shall not under any circumstances be construed to
20
be partners or joint venturers of Borrower or any of its Affiliates; nor shall
Lenders under any circumstances be deemed to be in a relationship of confidence
or trust or a fiduciary relationship with Borrower or any of its Affiliates, or
to owe any fiduciary duty to Borrower or any of its Affiliates. Lenders do not
undertake or assume any responsibility or duty to Borrower or any of its
Affiliates to select, review, inspect, supervise, pass judgment upon or
otherwise inform the Borrower or any of its Affiliates of any matter in
connection with its or their Property, any Collateral held by any Lender or the
operations of Borrower or any of its Affiliates. Borrower and each of its
Affiliates shall rely entirely on their own judgment with respect to such
matters, and any review, inspection, supervision, exercise of judgment or supply
of information undertaken or assumed by any Lender in connection with such
matters is solely for the protection of Lenders and neither Borrower nor any
Affiliate is entitled to rely thereon.
(b) The relationship between the Lenders is, and at all time shall remain
solely that of co-lenders. Lenders shall not under any circumstances be
construed to be partners or joint venturers of each other; nor shall the Lenders
under any circumstances be deemed to be in a relationship of confidence or trust
or a fiduciary relationship with each other, or to owe any fiduciary duty to
each other. Lenders do not undertake or assume any responsibility or duty to
each other to select, review, inspect, supervise, pass judgment upon or
otherwise inform each other of any matter in connection with Borrower or
Borrower's Property, any Collateral held by any Lender or the operations of
Borrower. Each Lender shall rely entirely on its own judgment with respect to
such matters, and any review, inspection, supervision, exercise of judgment or
supply of information undertaken or assumed by any Lender in connection with
such matters is solely for the protection of such Lender.
10.10. Governing Law. This Agreement, the other Operative Documents and the
-------------
rights and obligations of the parties hereto and thereto shall be governed by
and construed and enforced in accordance with the laws of the State of
California. Any action to enforce this Agreement against Borrower may be
brought in California or, with regard to Collateral, may also be brought
wherever such Collateral is located.
10.11. Successors and Assigns. This Agreement and the other Operative
----------------------
Documents shall be binding upon and inure to the benefit of Lenders, all future
holders of the Notes, Borrower and their respective successors and permitted
assigns, except that Borrower may not assign or transfer its rights hereunder or
any interest herein without the prior written consent of Lenders; provided,
however, that this Agreement may be assigned in connection with the
reincorporation of Borrower in the State of Delaware so long as the new
corporation expressly assumes the obligations of Borrower hereunder. Each
Lender may sell to any other financial entity (a "Participant") participation
-----------
interests in Lender's rights under this Agreement and the other Operative
Documents; provided that notwithstanding the sale of participations, such Lender
shall remain solely responsible for the performance of its obligations under
this Agreement, such Lenders shall remain the holder of its Note for all
purposes under this Agreement and Borrower shall continue to deal solely and
directly with such Lender in connection with this Agreement and the other Loan
Documents. Lenders may disclose the Operative Documents and any other financial
or other information relating to Borrower or any Subsidiary to any potential
Participant, provided that such Participant agrees to protect the
confidentiality of such documents and information using the same measures that
it uses to protect its own confidential information.
10.12. Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties hereto on separate counterparts, each of
which, when so executed and delivered, shall be an original, but all such
counterparts shall together constitute one and the same instrument.
21
10.13. Further Assurances. Borrower will, at its own expense, from time
------------------
to time do, execute, acknowledge and deliver all further acts, deeds,
conveyances, transfers and assurances, and all financing and continuation
statements and similar notices, reasonably necessary or proper for the
perfection of the security interest being herein provided for in the Collateral,
whether now owned or hereafter acquired.
10.14. Power of Attorney in Respect of the Collateral. Borrower does
----------------------------------------------
hereby irrevocably appoint Lenders (which appointment is coupled with an
interest), the true and lawful attorney-in-fact of Borrower with full power of
substitution, for it and in its name (a) to perform (but Lenders shall not be
obligated to and shall incur no liability to Borrower or any third party for
failure to perform) any act which Borrower is obligated by this Agreement to
perform, (b) to ask, demand, collect, receive, receipt for, ▇▇▇ for, compound
and give acquittance for any and all rents, issues, profits, avails,
distributions, income, payment draws and other sums in which a security interest
is granted under Section 5.01 with full power to settle, adjust or compromise
------------
any claim thereunder as fully as if Lenders were Borrower itself, (c) to receive
payment of and to endorse the name of Borrower to any items of Collateral
(including checks, drafts and other orders for the payment of money) that come
into Lenders' possession or under Lenders' control, (d) to make all demands,
consents and waivers, or take any other action with respect to, the Collateral,
(e) in Lenders' discretion, to file any claim or take any other action or
institute proceedings, either in its own name or in the name of Borrower or
otherwise, which Lenders may reasonably deem necessary or appropriate to protect
and preserve the right, title and interest of Lenders in and to the Collateral,
and (f) to otherwise act with respect thereto as though Lenders were the
outright owner of the Collateral; provided, however, that the power of attorney
-------- -------
herein granted shall be exercisable only upon the occurrence and during the
continuation of an Event of Default unless in Lenders' reasonable opinion
immediate action is necessary to preserve or protect the Collateral. Borrower
agrees to reimburse Lenders upon demand for all reasonable costs and expenses,
including attorneys' fees and expenses, which Lenders may incur while acting as
Borrower's attorney in fact hereunder, all of which costs and expenses are
included within the Obligations.
10.15. Confidentiality. All information (other than periodic reports
---------------
filed by Borrower with the Securities and Exchange Commission) disclosed by
Borrower to Lenders in writing or through inspection pursuant to this Agreement
shall be considered confidential. Lenders agree to use the same degree of care
to safeguard and prevent disclosure of such confidential information as Lenders
uses with its own confidential information, but in any event no less than a
reasonable degree of care. Lenders shall not disclose such information to any
third party (other than Lenders' or Lenders' partner's attorneys and auditors
subject to the same confidentiality obligation set forth herein) and shall use
such information only for purposes of evaluation of its investment in Borrower
and the exercise of Lenders' rights and the enforcement of their remedies under
this Agreement and the other Operative Agreements. The obligations of
confidentiality shall not apply to any information that (a) was known to the
public prior to disclosure by Borrower under this Agreement, (b) becomes known
to the public through no fault of Lenders, (c) is disclosed to Lenders by a
third party' having a legal right to make such disclosure, or (d) is
independently developed by Lenders.
10.16 Consent. Transamerica Business Credit Corporation ("TBCC")
-------
hereby consents and agrees that the execution, delivery and performance of this
Agreement and the other Operative Documents by Borrower will not result in or
constitute (i) a breach or violation of any representation, warranty or covenant
of Borrower contained in that certain Loan and Security Agreement dated as of
May 11, 1998 or that certain Master Loan and Security Agreement dated as of
September 1, 1997, each between Borrower and TBCC (collectively, the "Prior
Documents"), or (ii) an "Event of Default" (as such term is defined under each
of the Prior Documents) under any of the Prior Documents, and such Prior
Documents shall be deemed amended and modified to reflect such consent and
agreement.
22
23
SCHEDULES
1 Funding Certificate
2 Disclosure Schedule
3 Conditions Precedent
EXHIBITS
A Form of Secured Promissory Note
B Form of Warrant
C Form of Opinion of Counsel
SCHEDULE 1
FUNDING CERTIFICATE
The undersigned, ___________________, being the duly elected and acting
______________ of PILOT NETWORK SERVICES, INC., a California corporation
("Borrower"), does hereby certify to the Lenders (as defined in the Loan
Agreement defined below) in connection with that certain Loan and Security
Agreement dated as of June 30, 1998, among Borrower and certain Lenders named
therein (the "Loan Agreement"; with other capitalized terms used below having
the meanings ascribed thereto in the Loan Agreement) that:
1. The representations and warranties made by Borrower in Article III of
-----------
the Loan Agreement and in the other Operative Documents are true and
correct as of the date hereof.
2. No event or condition has occurred and is continuing that would
constitute a Default or an Event of Default under the Loan Agreement or
any other Operative Document.
3. Borrower is in compliance with the covenants and requirements contained
in Articles IV, VI and VII of the Loan Agreement.
-----------------------
4. All conditions referred to in Article VIII of the Loan Agreement to the
------------
making of the Loan to be made on or about the date hereof been
satisfied.
5. No material adverse change in the general affairs, management, results
of operations, condition (financial or otherwise) or prospects of
Borrower, whether or not arising from transactions in the ordinary
course of business, has occurred.
Dated: _________, 199__
PILOT NETWORK SERVICES, INC.
By:__________________________
Name:________________________
Title:_______________________
SCHEDULE 2
DISCLOSURE SCHEDULE
SCHEDULE 2
DISCLOSURE SCHEDULE
SCHEDULE 3
CONDITIONS PRECEDENT
PART I:
------
At the time of execution and delivery of this Agreement, there shall also
have been duly executed and delivered to Lenders:
(a) The Warrants executed in favor of Lenders;
(b) A favorable opinion of counsel for Borrower, dated as of the closing
date, in the form attached hereto as Exhibit C or such other form or
---------
forms as Lenders may accept;
(c) Copies, certified by the Secretary, Assistant Secretary or Chief
Financial Officer of Borrower as of the closing date, of Borrower's
charter documents and bylaws and of all documents evidencing corporate
action taken by Borrower authorizing the execution, delivery and
performance of the Operative Documents to which Borrower is a party,
in form and substance satisfactory to Lenders and its counsel;
(d) Good standing certificate from Borrower's state of incorporation and
the state in which Borrower's principal place of business is located,
together with certificates of the applicable governmental authorities
that Borrower is in compliance with the franchise tax laws of each
such state, each dated as of a recent date;
(e) Evidence of the insurance coverage required by Section 6.01(d) of this
---------------
Agreement;
(f) All necessary consents of shareholders and other third parties with
respect to the execution, delivery and performance of this Agreement,
the Warrants, the Notes and the other Operative Documents;
(g) Form UCC-1 Financing Statements, duly executed by Borrower, or other
documents, and Borrower shall have taken such actions, if any, as
Lenders shall reasonably determine are necessary or desirable to
perfect and protect its security interest in the Collateral;
(h) Notices of Security Interest to Depository Banks in the forms provided
by Lenders; and
(i) All other documents as Lenders shall have reasonably requested.
PART II
-------
On or prior to the Funding Date of the Loans, each of the items set forth
in Part I of this Schedule 3 shall have been delivered to such Lenders and the
-------------------------
following conditions shall have been satisfied or waived by such Lenders:
(a) Borrower shall have provided to Lenders such documents, instruments
and agreements as Lenders shall reasonably request to evidence the
perfection and priority of the security interests granted to Lenders
pursuant to Article V;
---------
(b) No Event of Default or Default shall have occurred and be continuing;
(c) Borrower shall have duly executed and delivered to each Lender a Note
in the amount of such Lender's Loan;
(d) In Lenders' sole discretion, there shall not have occurred any
material adverse change in the general affairs, management, results of
operations, condition (financial or otherwise) or prospects of
Borrower, whether or not arising from transactions in the ordinary
course of business, and there shall not have occurred since the date
first written on the cover page of this Agreement any material adverse
deviation by Borrower from the business plan of Borrower presented to
and not disapproved by Lenders;
(e) The representations and warranties contained in this Agreement and the
other Operative Documents to which Borrower is a party shall be true
and correct in all material respects as if made on such Funding Date;
(f) Each of the Operative Documents remains in full force and effect; and
(g) The Funding Date of the Loans shall not be later than the Commitment
Termination Date.
EXHIBIT A
SECURED PROMISSORY NOTE
$3,000,000 Dated: June 30, 1998
FOR VALUE RECEIVED, the undersigned, PILOT NETWORK SERVICES, INC., a
California corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of
--------
[LENDER] ("Lender") the principal amount of Three Million Dollars ($3,000,000)
------
or such lesser amount as shall equal the outstanding principal balance of the
Loan made to Borrower by Lender pursuant to the Loan and Security Agreement
referred to below (the "Loan Agreement"), and to pay all other amounts due with
--------------
respect to the Loan on the dates and in the amounts set forth in the Loan
Agreement.
Interest on the principal amount of this Note from the date of this
Note shall accrue at the Loan Rate or, if applicable, the Default Rate. The
Loan Rate for this Note is 13.5% per annum based on a year of twelve 30 day
months. Borrower shall make payments of accrued interest only on the
outstanding principal amount of the Loan on each Payment Date, commencing August
1, 1998, through and including June 1, 1999. All principal, accrued and unpaid
interest and other amounts due under the Loan Agreement shall be payable on June
30, 1999; provided, however, that, at the option of Borrower, Borrower may make
a payment of accrued interest only on July 1, 1999 and all principal, accrued
and unpaid interest and other amounts due under the Loan Agreement may be paid
on July 30, 1999 and during such one month extension period, the Loan shall
accrue interest at a rate of seventeen and one-half percent (17.5%) per annum.
Principal, interest and all other amounts due with respect to the
Loan, are payable in lawful money of the United States of America to Lender by
wire transfer according to the wire transfer instructions set forth in the Loan
Agreement. The principal amount of this Note and the interest rate applicable
thereto, and all payments made with respect thereto, shall be recorded by Lender
and, prior to any transfer hereof, endorsed on the grid attached hereto which is
part of this Note.
This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Loan and Security Agreement, dated as of June 30, 1998, to
which Borrower and Lender are parties. The Loan Agreement, among other things,
(a) provides for the making of a secured Loan to Borrower, and (b) contains
provisions for acceleration of the maturity hereof upon the happening of certain
stated events.
This Note may be not be prepaid except as set forth in Section 2.01(d)
of the Loan Agreement.
This Note and the obligation of Borrower to repay the unpaid principal
amount of the Loan, any premium thereon, interest on the Loan and all other
amounts due Lenders under the Loan Agreement is secured under the Loan
Agreement.
Presentment for payment, demand, notice of protest and all other
demands and notices of any kind in connection with the execution, delivery,
performance and enforcement of this Note are hereby waived.
Borrower shall pay all reasonable fees and expenses, including,
without limitation, reasonable attorneys' fees and costs, incurred by Lenders in
the enforcement or attempt to enforce any of Borrower's obligations hereunder
not performed when due. This Note shall be governed by, and construed and
interpreted in accordance with, the laws of the State of California.
A-1
LOAN INTEREST RATE AND PAYMENTS OF PRINCIPAL
Principal Scheduled
Date Amount Interest Rate Payment Amount Notation By
---- ------ ------------- -------------- -----------
A-3
LOAN INTEREST RATE AND PAYMENTS OF PRINCIPAL
Principal Scheduled
Date Amount Interest Rate Payment Amount Notation By
---- ------ ------------- -------------- -----------
A-3
EXHIBIT B
FORM OF WARRANT
EXHIBIT C
FORM OF OPINION OF COUNSEL
June 30, 1998
MMC/GATX PARTNERSHIP NO. 1
c/o GATX Capital Corporation, Agent
Four ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
and
TRANSAMERICA BUSINESS CREDIT CORPORATION
▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇-▇▇▇▇
Ladies and Gentlemen:
We have acted as counsel for PILOT NETWORK SERVICES, INC. (the
"Borrower") in connection with (i) the execution of the Loan and Security
Agreement of even date herewith (the "Loan Agreement") among Borrower, MMC/GATX
PARTNERSHIP NO. 1 and TRANSAMERICA BUSINESS CREDIT CORPORATION ("Lenders"), (ii)
the issuance of warrants to purchase Borrower's Common Stock (the "Warrants")
and (iii) the transactions contemplated thereby. This opinion is being rendered
to you pursuant to Section 8.01 of the Loan Agreement. Capitalized terms not
otherwise defined in this opinion have the meaning given them in the Loan
Agreement.
In connection with this opinion and our representation, we have
examined originals, or copies certified or otherwise identified to our
satisfaction, of the following:
(i) The Loan Agreement;
(ii) The Warrants;
(iii) The Notes dated as of June 30, 1998;
(iv) The Restated Articles of Incorporation and the Bylaws of Borrower,
each as in effect on the date hereof;
(v) The certificate of an officer of Borrower as to certain factual
matters ("Officer Certificate");
(vi) Certificates issued by the Secretary of State of the State of
California dated _______________________, 1998, certifying the good
standing of Borrower;
(vi) Such other documents, records, and certificates as we have deemed
necessary or appropriate as a basis for the opinions hereafter
expressed.
C-1
The Loan Agreement, the Notes and the Warrants are hereinafter referred to
as the "Transaction Documents."
In such examinations we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
originals of all documents submitted to us as certified, facsimile, telecopied
or photostatic copies thereof. As to certain matters of fact material to our
opinion, we have relied upon the Officer Certificate and upon your
representations in the Transaction Documents.
As used in this opinion, the expression "to the best of our knowledge,"
means the actual present knowledge or belief of those attorneys in our firm who
have or who are currently representing Borrower. We have not undertaken any
independent investigation to determine the existence or nonexistence of other
facts, and no inference as to our knowledge of the existence or nonexistence of
other facts should be drawn from the fact of this firm's representation of
Borrower in connection with the Transaction Documents.
Based upon and subject to the foregoing and subject to the qualifications
contained herein, we are of the opinion that:
(a) Borrower is a corporation duly organized, validly existing and in
good standing under the laws of the State of California.
(b) Borrower has the requisite corporate power and authority to
execute, deliver and perform the Transaction Documents and to issue the
Warrants. All action on the part of Borrower, its directors and its
shareholders necessary for the authorization, execution, delivery and
performance of the Transaction Documents, has been taken. The Transaction
Documents have been duly executed and delivered by an authorized officer of
Borrower.
(c) The execution, delivery and performance of the Transaction
Documents do not conflict with or violate any provision of Borrower's Restated
Articles of Incorporation or Bylaws or of applicable law and, to the best of our
knowledge, do not conflict with or constitute a default under any provision of
any judgment, writ, decree, order or material agreement, indenture, or
instrument to which Borrower is a party or by which it is bound.
(d) The Transaction Documents constitute legal, valid and binding
obligations of Borrower, enforceable in accordance with their respective terms.
To our knowledge, no filing need be made with any governmental authority with
respect to the Transaction Documents in connection with an exemption from state
usury laws or in connection with any other matter.
(e) The shares of Common Stock issuable upon exercise of the Warrants
have been duly authorized and reserved for issuance upon such exercise, and when
issued in accordance with the terms of the Warrants, will be duly authorized,
validly issued, fully paid and non-assessable.
The opinions set forth above are subject to the following additional
qualifications, assumptions, limitations and exceptions:
(A) The effect of bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium and other similar laws relating to or affecting the
rights and remedies of creditors generally.
(B) Limitations imposed by general equitable principles upon the
specific enforceability of any of the provisions of the Transaction Documents
and upon the availability of injunctive relief or other equitable remedies.
C-2
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION
OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.
PILOT NETWORK SERVICES, INC.
WARRANT TO PURCHASE 37,500 SHARES
OF COMMON STOCK
THIS CERTIFIES THAT, for value received, TRANSAMERICA BUSINESS CREDIT
CORPORATION and its assignees are entitled to subscribe for and purchase 37,500
shares of the fully paid and nonassessable Common Stock (as adjusted pursuant to
Section 4 hereof, the "Shares") of PILOT NETWORK SERVICES, INC., a California
corporation (the "Company"), at the price per share determined as set forth in
the next paragraph (such price and such other price as shall result, from time
to time, from the adjustments specified in Section 4 hereof is herein referred
to as the "Warrant Price"), subject to the provisions and upon the terms and
conditions hereinafter set forth. As used herein, (a) the term "Date of Grant"
shall mean June 30, 1998, and (b) the term "Other Warrants" shall mean any other
warrants issued by the Company in connection with the transaction with respect
to which this Warrant was issued, and any warrant issued upon transfer or
partial exercise of this Warrant. The term "Warrant" as used herein shall be
deemed to include Other Warrants unless the context clearly requires otherwise.
The Warrant Price per share shall be equal to the lesser of (i) eighty
percent (80%) of the "price to the public" in an initial public offering of
Common Stock (an "Initial Public Offering") effected pursuant to a Registration
Statement on Form S-1 (or its successor) filed under the Securities Act of 1933,
as amended (the "Act"), or (ii) $30.00 (as such price may be adjusted as
specified in paragraph 4); provided, however, that if the Company's next
offering of its equity securities is not an Initial Public Offering but has net
proceeds to the Company of at least $5,000,000, then the Warrant Price shall be
the effective price per share at which equity securities (on a Common Stock
equivalent basis) are sold in such offering; provided, further, however, that if
neither an Initial Public Offering nor a private offering meeting the
requirements of the first proviso to this sentence is closed prior to December
31, 1998 or if an Acquisition Transaction (as defined below) occurs prior to
such date, then the Warrant Price shall be $12.00 per share (as such price may
be adjusted as specified in paragraph 4).
1. Term. The purchase right represented by this Warrant is exercisable,
----
in whole or in part, at any time and from time to time from the Date of Grant
through four (4) years after the Date of Grant; provided, however, that if the
Company's next offering of equity securities is not an Initial Public Offering,
then this Warrant shall be exercisable through five (5) years after the Date of
Grant ; provided, however, that notwithstanding any other provision of this
Warrant, contemporaneously with the closing of a merger or consolidation of the
Company with or into another corporation, a sale of all or substantially all of
the assets of the Company or the purchase by a person or group of related
persons of all of the outstanding capital stock of the Company (each, an
"Acquisition Transaction"), the Company shall have the right to purchase or
cause to be purchased this Warrant at a purchase price for each Share then
issuable upon exercise of this Warrant equal to either (i) five times the then
applicable Warrant Price,
or (ii) three times the then applicable Warrant Price only if (A) the acquiror
in the Acquisition Transaction has a net worth as of the end of its most recent
fiscal year in excess of $100,000,000 and (B) the Company has certified in
writing to the holder that it has made a good faith effort to cause the acquiror
to issue a new warrant to the holder pursuant to the terms of Section 4(a) of
this Warrant and the acquiror has declined to do so.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
----------------------------------------------------
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part (but not with respect to
fewer than 100 shares at any one time) and from time to time, at the election of
the holder hereof, by (a) the surrender of this Warrant (with the notice of
exercise substantially in the form attached hereto as Exhibit A duly completed
and executed) at the principal office of the Company and by the payment to the
Company, by certified or bank check, or by wire transfer to an account
designated by the Company (a "Wire Transfer") of an amount equal to the then
applicable Warrant Price multiplied by the number of Shares then being
purchased, or (b) if in connection with a registered public offering of the
Company's securities, the surrender of this Warrant (with the notice of exercise
form attached hereto as Exhibit A-1 duly completed and executed) at the
principal office of the Company together with notice of arrangements reasonably
satisfactory to the Company for payment to the Company either by certified or
bank check or by Wire Transfer from the proceeds of the sale of shares to be
sold by the holder in such public offering of an amount equal to the then
applicable Warrant Price per share multiplied by the number of Shares then being
purchased or (c) exercise of the right provided for in Section 10.3 hereof. The
person or persons in whose name(s) any certificate(s) representing the Shares
shall be issuable upon exercise of this Warrant shall be deemed to have become
the holder(s) of record of, and shall be treated for all purposes as the record
holder(s) of, the shares represented thereby (and such shares shall be deemed to
have been issued) immediately prior to the close of business on the date or
dates upon which this Warrant is exercised. In the event of any exercise of the
rights represented by this Warrant, certificates for the shares of stock so
purchased shall be delivered to the holder hereof as soon as possible and in any
event within thirty (30) days after such exercise and, unless this Warrant has
been fully exercised or expired, a new Warrant representing the portion of the
Shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be issued to the holder hereof as soon as possible and in
any event within such thirty-day period.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued
---------------------------------------
upon the exercise of the rights represented by this Warrant will, upon issuance
pursuant to the terms and conditions herein, be fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof.
During the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized, and reserved for the
purpose of the issue upon exercise of the purchase rights evidenced by this
Warrant, a sufficient number of shares of its Common Stock to provide for the
exercise of the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and kind
------------------------------------------------
of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
(a) Reclassification or Merger. Except as set forth in Section 1, in
--------------------------
case of any reclassification or change of securities of the class issuable upon
exercise of this Warrant (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), or in case of any merger of the Company with or into another
corporation
2
(other than a merger with another corporation in which the Company is the
acquiring and the surviving corporation and which does not result in any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant), or in case of any sale of all or substantially all of the assets
of the Company, the Company, or such successor or purchasing corporation, as the
case may be, shall duly execute and deliver to the holder of this Warrant a new
Warrant (in form and substance satisfactory to the holder of this Warrant), so
that the holder of this Warrant shall have the right to receive, at a total
purchase price not to exceed that payable upon the exercise of the unexercised
portion of this Warrant, and in lieu of the shares of Common Stock theretofore
issuable upon exercise of this Warrant, the kind and amount of shares of stock,
other securities, money and property receivable upon such reclassification,
change or merger by a holder of the number of shares of Common Stock then
purchasable under this Warrant. Such new Warrant shall provide for adjustments
that shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 4. The provisions of this subparagraph (a) shall
similarly apply to successive reclassifications, changes, mergers and transfers.
(b) Subdivision or Combination of Shares. If the Company at any time
------------------------------------
while this Warrant remains outstanding and unexpired shall subdivide or combine
its outstanding shares of Common Stock, the Warrant Price shall be
proportionately decreased in the case of a subdivision or increased in the case
of a combination, effective at the close of business on the date the subdivision
or combination becomes effective.
(c) Stock Dividends and Other Distributions. If the Company at any
---------------------------------------
time while this Warrant is outstanding and unexpired shall (i) pay a dividend
with respect to Common Stock payable in Common Stock, or (ii) make any other
distribution of Common Stock with respect to Common Stock (except any
distribution specifically provided for in Sections 4(a) and 4(b)), then the
Warrant Price shall be adjusted, from and after the date of determination of
shareholders entitled to receive such dividend or distribution, to that price
determined by multiplying the Warrant Price in effect immediately prior to such
date of determination by a fraction (i) the numerator of which shall be the
total number of shares of Common Stock outstanding immediately prior to such
dividend or distribution, and (ii) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such dividend or
distribution.
(d) Adjustment of Number of Shares. Upon each adjustment in the
------------------------------
Warrant Price, the number of Shares purchasable hereunder shall be adjusted, to
the nearest whole share, to the product obtained by multiplying the number of
Shares purchasable immediately prior to such adjustment in the Warrant Price by
a fraction, the numerator of which shall be the Warrant Price immediately prior
to such adjustment and the denominator of which shall be the Warrant Price
immediately thereafter.
5. Notice of Adjustments. Whenever the Warrant Price or the number of
---------------------
Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the
Company shall make a certificate signed by its chief financial officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Warrant Price and the number of Shares purchasable hereunder after giving effect
to such adjustment, and shall cause copies of such certificate to be mailed
(without regard to Section 13 hereof, by first class mail, postage prepaid) to
the holder of this Warrant at such holder's last known address.
6. Fractional Shares. No fractional shares of Common Stock will be issued
-----------------
in connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment
3
therefor based on the fair market value of the Common Stock on the date of
exercise as reasonably determined in good faith by the Company's Board of
Directors.
7. Compliance with Act; Disposition of Warrant or Shares of Common Stock.
---------------------------------------------------------------------
(a) Compliance with Act. The holder of this Warrant, by acceptance
-------------------
hereof, agrees that this Warrant, and the Shares to be issued upon exercise
hereof are being acquired for investment and that such holder will not offer,
sell or otherwise dispose of this Warrant, or any Shares except under
circumstances which will not result in a violation of the Act or any applicable
state securities laws. Upon exercise of this Warrant, unless the Shares being
acquired are registered under the Act and any applicable state securities laws
or an exemption from such registration is available, the holder hereof shall
confirm in writing that the Shares so purchased are being acquired for
investment and not with a view toward distribution or resale in violation of the
Act and shall confirm such other matters related thereto as may be reasonably
requested by the Company. This Warrant and all Shares issued upon exercise of
this Warrant (unless registered under the Act and any applicable state
securities laws) shall be stamped or imprinted with a legend in substantially
the following form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION
MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO,
(ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION
LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE
COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE
SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY."
Said legend shall be removed by the Company, upon the request of a holder,
at such time as the restrictions on the transfer of the applicable security
shall have terminated. In addition, in connection with the issuance of this
Warrant, the holder specifically represents to the Company by acceptance of this
Warrant as follows:
(1) The holder is aware of the Company's business affairs and financial
condition, and has acquired information about the Company sufficient to reach an
informed and knowledgeable decision to acquire this Warrant. The holder is
acquiring this Warrant for its own account for investment purposes only and not
with a view to, or for the resale in connection with, any "distribution" thereof
in violation of the Act.
(2) The holder understands that this Warrant has not been registered under
the Act in reliance upon a specific exemption therefrom, which exemption depends
upon, among other things, the bona fide nature of the holder's investment intent
as expressed herein.
(3) The holder further understands that this Warrant must be held
indefinitely unless subsequently registered under the Act and qualified under
any applicable state securities laws, or unless exemptions from registration and
qualification are otherwise available. The holder is aware of the provisions of
Rule 144, promulgated under the Act.
4
(4) The holder of this Warrant is an institutional "accredited investor"
within the meaning of Rule 501 of Regulation D promulgated under the Act.
(b) Disposition of Warrant or Shares. With respect to any offer,
--------------------------------
sale or other disposition of this Warrant or any Shares acquired pursuant to the
exercise of this Warrant prior to registration of such Warrant or Shares, the
holder hereof agrees to give written notice to the Company prior thereto,
describing briefly the manner thereof, together with a written opinion of such
holder's counsel, or other evidence, if reasonably requested by the Company, to
the effect that such offer, sale or other disposition may be effected without
registration or qualification (under the Act as then in effect or any federal or
state securities law then in effect) of this Warrant or the Shares and
indicating whether or not under the Act certificates for this Warrant or the
Shares to be sold or otherwise disposed of require any restrictive legend as to
applicable restrictions on transferability in order to ensure compliance with
such law. Promptly upon receiving such written notice and reasonably
satisfactory opinion or other evidence, if so requested, the Company, as
promptly as practicable but no later than fifteen (15) days after receipt of the
written notice, shall notify such holder that such holder may sell or otherwise
dispose of this Warrant or such Shares, all in accordance with the terms of the
notice delivered to the Company. If a determination has been made pursuant to
this Section 7(b) that the opinion of counsel for the holder or other evidence
is not reasonably satisfactory to the Company, the Company shall so notify the
holder promptly with details thereof after such determination has been made.
Notwithstanding the foregoing, this Warrant or such Shares may, as to such
federal laws, be offered, sold or otherwise disposed of in accordance with Rule
144 or 144A under the Act, provided that the Company shall have been furnished
with such information as the Company may reasonably request to provide a
reasonable assurance that the provisions of Rule 144 or 144A have been
satisfied. Each certificate representing this Warrant or the Shares thus
transferred (except a transfer pursuant to Rule 144 or 144A) shall bear a legend
as to the applicable restrictions on transferability in order to ensure
compliance with such laws, unless in the aforesaid opinion of counsel for the
holder, such legend is not required in order to ensure compliance with such
laws. The Company may issue stop transfer instructions to its transfer agent in
connection with such restrictions.
(c) Applicability of Restrictions. Neither any restrictions of any
-----------------------------
legend described in this Warrant nor the requirements of Section 7(b) above
shall apply to any transfer or grant of a security interest in, this Warrant (or
the Common Stock obtainable upon exercise thereof) or any part hereof in
compliance with applicable securities laws (i) to a partner of the holder if the
holder is a partnership, (ii) to a partnership of which the holder is a partner,
or (iii) to any affiliate of the holder if the holder is a corporation;
provided, however, in any such transfer, if applicable, the transferee shall on
-------- -------
the Company's request agree in writing to be bound by the terms of this Warrant
as if an original signatory hereto.
8. Rights as Shareholders; Information. No holder of this Warrant, as
-----------------------------------
such, shall be entitled to vote or receive dividends or be deemed the holder of
Shares, nor shall anything contained herein be construed to confer upon the
holder of this Warrant, as such, any of the rights of a shareholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to shareholders at any meeting thereof, or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until this
Warrant shall have been exercised and the Shares purchasable upon the exercise
hereof shall have become deliverable, as provided herein. Notwithstanding the
foregoing, the Company will transmit to the holder of this Warrant such
information, documents and reports as are generally distributed to the holders
of any class or series of the securities of the Company concurrently with the
distribution thereof to the shareholders.
5
9. Registration Rights.
-------------------
(a) Registration.
(i) Upon a request by the holder of this Warrant which is
delivered to the Company in writing not less than 150 days and not
more than 240 days after the closing of an Initial Public Offering ,
the Company shall prepare and file with the Securities and Exchange
Commission ("SEC") within 30 days of such notice a registration
statement under Rule 415 of the Act to register the Shares for sale by
the holder of this Warrant and shall thereafter use all reasonable
efforts to cause such registration statement to become effective as
promptly as possible thereafter.
(ii) The Company shall, until the first anniversary of the Date
of Grant, keep such registration statement for the Shares in effect
and current and from time to time amend or supplement the registration
statement and the prospectus in connection therewith in compliance
with the Act to permit the sale or distribution of the Shares with
respect to which such registration statement shall have become
effective. If at any time the SEC should institute or threaten to
institute any proceedings for the purpose of issuing, or should issue
a stop order suspending the effectiveness of any such registration
statement, the Company will promptly notify the initial holder of this
Warrant and will use its reasonable best efforts to prevent the
issuance of any such stop order or to obtain the withdrawal thereof as
soon as possible. The Company will advise the initial holder of this
Warrant promptly of any order or communication of any public board or
body addressed to the Company suspending or threatening to suspend the
registration or qualification of any of the Shares for sale in any
jurisdiction.
(iii) The holder agrees, by acceptance of this Warrant, that,
upon receipt of any notice from the Company of (A) the happening of
any event which makes any statements made in the registration
statement or related prospectus filed pursuant to this Section 9, or
any document incorporated or deemed to be incorporated therein by
reference, untrue in any material respect or which requires the making
of any changes in such registration statement or prospectus so that,
in the case of such registration statement, it will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the prospectus, it
will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading or (B) that, in the judgment of the
Company's Board of Directors, it is advisable to suspend use of the
prospectus for a discrete period of time due to pending corporate
developments, public filings with the SEC or similar events, the
holder of this Warrant will forthwith discontinue, for a period not to
exceed thirty (30) days, disposition of such Shares covered by such
registration statement or prospectus until it is advised in writing by
the Company that use of the applicable prospectus may be resumed, and
has received copies of any additional or supplemented filings that are
incorporated or deemed to be incorporated by reference in such
prospectus. The Company shall use all reasonable efforts to insure
that the use of the prospectus may be resumed as soon as practicable,
and in any event shall not
6
be entitled to require the holder of this Warrant to suspend use of
any prospectus for more than forty-five (45) days in any twelve month
period.
(b) Company Obligations. Whenever any Shares become subject to a
-------------------
registration statement pursuant to this Section 9, the Company shall:
(i) Promptly notify the holder of this Warrant and confirm
such advice in writing (A) when such registration statement becomes
effective, (B) when any post-effective amendment to any such
registration statement becomes effective and (C) of any request by the
SEC for any amendment or supplement to such registration statement or
any prospectus relating thereto or for additional information;
(ii) Furnish to the holder of this Warrant such number of
copies of any registration statement or any amendment or supplement
thereto, and any prospectus (including any preliminary prospectus)
contained therein in conformity with the requirements of the Act as
the holder of this Warrant may reasonably request in order to effect
the offering and sale of the Shares being offered and sold by the
holder of this Warrant, but only while the Company is required under
the provisions hereof to cause the registration statement to remain
current;
(iii) Use its reasonable best efforts to register or qualify not
later than the effective date of such registration statement the
Shares registered thereunder under the "blue sky" laws of such states
as the holder of this Warrant may reasonably request; provided,
--------
however, that the Company shall not be obligated to qualify as a
-------
foreign corporation or as a dealer in securities or to execute or file
any general consent to service of process under the laws of any such
state where it is not at such time so qualified or subject;
(iv) Immediately notify the holder of this Warrant, at any time
when a prospectus relating to a sale of Shares is required by law to
be delivered in connection with sales thereof, of the occurrence of an
event requiring the preparation of a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Shares, such prospectus will not contain an untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and promptly
make available to the holder of this Warrant and to the underwriters
any such amendment or supplement;
(v) The Company and the holder of this Warrant will enter into
customary agreements (including an underwriting or indemnity agreement
in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the sale of the Shares;
(vi) In the event of an underwritten offering (in the Company's
sole discretion), the Company will use its reasonable best efforts to
cause to be furnished to the holder of this Warrant a signed
counterpart, addressed to the holder of this Warrant or such
underwriter, of (i) an opinion or opinions of counsel to the Company
and (ii) a comfort
7
letter or comfort letters from the Company's independent accountants,
each in customary form and covering such matters of the type
customarily covered by opinions or comfort letters as the case may be,
as the holder of this Warrant reasonably requests;
(vii) In the event of an underwritten offering (in the
Company's sole discretion), the Company will make generally available
to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of twelve months, beginning
within three months after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Act; and
(viii) The Company will use its reasonably best efforts to cause
all Common Stock to be listed on each securities exchange (or the
Nasdaq National Market System) on which similar securities issued by
the Company are then listed.
(c) Expenses. The Company shall bear the out-of-pocket costs and
--------
expenses incurred in connection with any registration pursuant to this
Section 9. The costs and expenses of any such registration shall include,
without limitation, the reasonable fees and expenses of the Company's
counsel and its accountants and all other out-of-pocket costs and expenses
of the Company incident to the preparation, printing and filing under the
Act of the registration statement and all amendments and supplements
thereto and the cost of furnishing copies of each preliminary prospectus,
each final prospectus and each amendment or supplement thereto to
underwriters, dealers and other purchasers of the securities so registered,
the costs and expenses incurred in connection with the qualification of
such securities so registered under the "blue sky" laws of various
jurisdictions, the fees and expenses of the Company's transfer agent and
all other costs and expenses of complying with the foregoing provisions of
this Section 9. The holder of this Warrant shall pay any underwriting
fees, discounts or commissions attributable to the sale of Shares. The
Company shall pay internal Company expenses (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties). The Company shall reimburse the holder of this Warrant
for costs incurred by it in connection with any hedging strategy permitted
by the securities laws during the period beginning upon the later to occur
of (i) the date on which the notice requiring the filing of a registration
statement pursuant to this Section 9 is delivered to the Company and (ii)
the date 180 days after the closing of the Initial Public Offering, and
continuing until the earlier to occur of (x) the date upon which such
registration statement becomes effective and (y) the first anniversary of
the Grant Date.
(d) Indemnification.
---------------
(i) In the case of any offering registered pursuant to
Section 9(a), the Company hereby indemnifies and agrees to hold
harmless the holder of this Warrant and each person, if any, who
controls the holder of this Warrant within the meaning of either
Section 15 of the Act or Section 20 of the Securities and Exchange Act
of 1934, as amended. (the "Exchange Act") from and against any losses,
claims, damages or liabilities, joint or several, to which any such
persons may be subject, under the Act, the Exchange Act or otherwise,
and to reimburse any of such persons for any legal or other expenses
reasonably incurred by them in connection with investigating any
claims or defending against any actions, insofar as such losses,
claims, damages or liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact
contained in
8
the registration statement under which such Shares were registered
under the Act pursuant to this Section 9, any prospectus (including
any preliminary prospectus) contained therein, if used during the
period appropriate for such prospectus, or any amendment or supplement
thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were
made, not misleading; provided that the indemnification agreement
--------
contained in this Section 9(d)(i) shall not apply to such losses,
claims, damages or liabilities which shall arise out of the sale of
Shares to any person to the extent such losses, claims, damages or
liabilities arise out of or are based upon any such untrue statement
or omission or alleged untrue statement or omission if such statement
or omission shall have been made (A) in reliance upon information
furnished to the Company in writing by the holder of this Warrant
specifically for use therein, or (B) in any preliminary prospectus,
and the prospectus contained in the registration statement as declared
effective or in the form filed by the Company with the SEC pursuant to
Rule 424 under the Act corrected such statement or omission and a copy
of such final prospectus shall not have been sent or otherwise
delivered to such person at or prior to the confirmation of such sale
to such person or to the holder of this Warrant for delivery to such
person. The Company also agrees to indemnify the underwriters (as
defined in the Act) of the Shares, their officers and directors and
each person who controls such underwriters on substantially the same
basis as that of the indemnification of the holder of this Warrant
provided in this Section 9(d)(i).
(ii) By acceptance of this Warrant, the holder agrees, in the
same manner and to the same extent as set forth in the preceding
paragraph, to indemnify and to hold harmless the Company and its
directors and officers against any losses, claims, damages or
liabilities, joint or several, to which any of such persons may be
subject under the Act, the Exchange Act or otherwise, and to reimburse
any of such persons for any legal or other expenses incurred in
connection with investigating or defending against any such losses,
claims, damages or liabilities, but only to the extent it arises out
of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission of a material fact in any registration
statement under which the Shares were registered under the Act
pursuant to this Section 9, any prospectus contained therein, or any
amendment or supplement thereto, which was based upon and made in
conformity with information furnished to the Company in writing by the
holder of this Warrant expressly for use therein. The holder of this
Warrant also agrees to indemnify and hold harmless any underwriter (as
defined in the Act) of the Shares, its officers and directors and each
person who controls such underwriter on substantially the same basis
as that of the indemnification of the Company provided in this Section
9(d)(ii).
(iii) Each party indemnified under this Section 9 shall,
promptly after receipt of notice of the commencement of any action
against such indemnified party in respect of which indemnity may be
sought, notify the indemnifying party in writing of the commencement
thereof. The omission of any indemnified party so to notify an
indemnifying party of any such action shall not relieve the
indemnifying party from any liability in respect of such action which
it may have to such indemnified party on account of the indemnity
agreement contained in this Section 9, unless the indemnifying party
was materially prejudiced by such omission, and in no event shall
relieve the indemnifying party from any other liability which it may
have to such indemnified party. In case any
9
such action shall be brought against any indemnified party and it
shall notify an indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
reasonably satisfactory to the indemnified party. In any such action,
any indemnified party shall have the right to retain its own counsel,
but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (A) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such
counsel or (B) the named parties to any such action (including any
impleaded parties) include both the indemnified party and the
indemnifying party and representation of both parties by the same
counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party
shall not, in connection with any proceeding in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) at any time for all such
indemnified parties, and that all such fees and expenses shall be
reimbursed as they are incurred.
(iv) If the indemnification provided for in this Section 9 as
between the holder of this Warrant and the Company is unavailable to
the holder of this Warrant and each person, if any, who controls the
holder of this Warrant within the meaning of either Section 15 of the
Act or Section 20 of the Exchange Act or to the Company and its
officers and directors in respect of any losses, claims, damages or
liabilities referred to herein, then each indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities in such proportion as is appropriate to
reflect the relative fault of the Company and of the holder of this
Warrant in connection with such statements or omissions, as well as
other relevant equitable considerations. The relative fault of the
Company on the one hand and of the holder of this Warrant on the other
shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of material fact or the omission or
alleged omission to state a material fact relates to information
supplied by such party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission.
The Company and holder of this Warrant agree that it would not be just
and equitable if contribution pursuant to this Section 9(d)(iv) were
determined by pro rata allocation (even if the underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. The amount paid
or payable by an indemnified party as a result of the losses, claims,
damages or liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section
9(d)(iv), the holder of this Warrant shall not be required to
contribute any amount in excess of the amount by which the net
proceeds of the offering (before deducting expenses) received by the
holder of this Warrant exceeds the amount of any damages which the
holder of this Warrant has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent
10
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.
10. Additional Rights.
-----------------
10.1 Secondary Sales. The Company agrees that it will not interfere with
---------------
the holder of this Warrant in obtaining liquidity if opportunities to make
secondary sales of the Company's securities become available.
10.2 Mergers. The Company shall provide the holder of this Warrant with
-------
at least twenty (20) days' notice of the terms and conditions of any of the
following potential transactions: (i) the sale, lease, exchange, conveyance or
other disposition of all or substantially all of the Company's property or
business, or (ii) its merger into or consolidation with any other corporation
(other than a wholly-owned subsidiary of the Company), or any transaction
(including a merger or other reorganization) or series of related transactions,
in which more than 50% of the voting power of the Company is disposed of.
Subject to the provisions in Section 1, the Company will cooperate with the
holder in arranging the sale of this Warrant in connection with any such
transaction.
10.3 Right to Convert Warrant into Stock: Net Issuance.
--------------------------------------------------
(a) Right to Convert. In addition to and without limiting the
----------------
rights of the holder under the terms of this Warrant, the holder shall have the
right to convert this Warrant or any portion thereof (the "Conversion Right")
into shares of Common Stock as provided in this Section 10.3 at any time or from
time to time during the term of this Warrant. Upon exercise of the Conversion
Right with respect to a particular number of shares subject to this Warrant (the
"Converted Warrant Shares"), the Company shall deliver to the holder (without
payment by the holder of any exercise price or any cash or other consideration)
(X) that number of shares of fully paid and nonassessable Common Stock equal to
the quotient obtained by dividing the value of this Warrant (or the specified
portion hereof) on the Conversion Date (as defined in subsection (b) hereof),
which value shall be determined by subtracting (A) the aggregate Warrant Price
of the Converted Warrant Shares immediately prior to the exercise of the
Conversion Right from (B) the aggregate fair market value of the Converted
Warrant Shares issuable upon exercise of this Warrant (or the specified portion
hereof) on the Conversion Date (as herein defined) by (Y) the fair market value
of one share of Common Stock on the Conversion Date (as herein defined).
Expressed as a formula, such conversion shall be computed as follows:
11
X = B - A
------
Y
Where: X = the number of shares of Common Stock that may
be issued to holder
Y = the fair market value (FMV) of one share of
Common Stock
A = the aggregate Warrant Price (i.e., Converted
Warrant Shares x Warrant Price)
B = the aggregate FMV per share (i.e., FMV x Converted
Warrant Shares)
No fractional shares shall be issuable upon exercise of the Conversion
Right, and, if the number of shares to be issued determined in accordance with
the foregoing formula is other than a whole number, the Company shall pay to the
holder an amount in cash equal to the fair market value of the resulting
fractional share on the Conversion Date (as hereinafter defined). For purposes
of Section 9 of this Warrant, shares issued pursuant to the Conversion Right
shall be treated as if they were issued upon the exercise of this Warrant.
(b) Method of Exercise. The Conversion Right may be exercised
------------------
by the holder by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of shares
subject to this Warrant which are being surrendered (referred to in Section
10.3(a) hereof as the Converted Warrant Shares) in exercise of the Conversion
Right. Such conversion shall be effective upon receipt by the Company of this
Warrant together with the aforesaid written statement, or on such later date as
is specified therein (the "Conversion Date"), and, at the election of the holder
hereof, may be made contingent upon the closing of the sale of the Company's
Common Stock to the public in a public offering pursuant to a Registration
Statement under the Act (a "Public Offering"). Certificates for the shares
issuable upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the holder within
thirty (30) days following the Conversion Date.
(c) Determination of Fair Market Value. For purposes of this
----------------------------------
Section 10.3, "fair market value" of a share of Common Stock as of a particular
date (the "Determination Date") shall mean:
(i) If the Conversion Right is exercised in connection
with and contingent upon a Public Offering, and if the Company's Registration
Statement relating to such Public Offering ("Registration Statement") has been
declared effective by the SEC, then the initial "Price to Public" specified in
the final prospectus with respect to such offering.
(ii) If the Conversion Right is not exercised in
connection with and contingent upon a Public Offering, then as follows:
12
(A) If traded on a securities exchange or the Nasdaq National Market,
the fair market value of the Common Stock shall be deemed to be the average
of the closing sale prices of the Common Stock on such exchange over the 30
trading day period ending five business days prior to the Determination
Date;
(B) If traded over-the-counter, the fair market value of the Common
Stock shall be deemed to be the average of the closing bid prices of the
Common Stock over the 30-day period ending five business days prior to the
Determination Date; and
(C) If there is no public market for the Common Stock, then fair
market value shall be determined by mutual agreement of the holder of this
Warrant and the Company.
10.4 Exercise Prior to Expiration. To the extent this Warrant is
-----------------------------
not previously exercised as to all of the Shares subject hereto, and if the fair
market value of one share of the Common Stock is greater than the Warrant Price
then in effect, this Warrant shall be deemed automatically exercised pursuant to
Section 10.3 above (even if not surrendered) immediately before its expiration.
For purposes of such automatic exercise, the fair market value of one share of
the Series Preferred upon such expiration shall be determined pursuant to
Section 10.3(c). To the extent this Warrant or any portion thereof is deemed
automatically exercised pursuant to this Section 10.4, the Company agrees to
promptly notify the holder hereof of the number of Shares, if any, the holder
hereof is to receive by reason of such automatic exercise.
10.5. Market Stand-off. In consideration of the issuance of this
----------------
Warrant, Holder agrees for a period of time (not to exceed one hundred eighty
(180) days) from the effective date of the initial registration of securities of
the Company (upon request of the Company or of the underwriters managing any
underwritten offering of the Company's securities) not to sell, make any short
sale of, loan, grant any option for the purchase of, or otherwise dispose of any
Shares, other than Shares included in the registration, without the prior
written consent of the Company or such underwriters, as the case may be,
provided that all officers and directors of the Company and each holder of more
than 5% of the outstanding Common Stock of the Company shall enter into similar
agreements.
11. Representations and Warranties. The Company represents and warrants
------------------------------
to the holder of this Warrant as follows:
(a) This Warrant has been duly authorized and executed by the Company
and is a valid and binding obligation of the Company enforceable in accordance
with its terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and the rules of law or principles at
equity governing specific performance, injunctive relief and other equitable
remedies;
(b) The Shares have been duly authorized and reserved for issuance by
the Company and, when issued in accordance with the terms hereof will be validly
issued, fully paid and non-assessable;
(c) The rights, preferences, privileges and restrictions granted to
or imposed upon the classes and series of the Company's capital stock and the
holders thereof are as set forth in the Company's Articles of Incorporation, as
amended to date (the "Charter");
13
(d) The execution and delivery of this Warrant are not, and the
issuance of the Shares upon exercise of this Warrant in accordance with the
terms hereof will not be, inconsistent with the Company's Charter or by-laws, do
not and will not contravene any law, governmental rule or regulation, judgment
or order applicable to the Company, and do not and will not conflict with or
contravene any provision of, or constitute a default under, any indenture,
mortgage, contract or other instrument of which the Company is a party or by
which it is bound or require the consent or approval of, the giving of notice
to, the registration or filing with or the taking of any action in respect of or
by, any Federal, state or local government authority or agency or other person,
except for the filing of notices pursuant to federal and state securities laws,
which filings will be effected by the time required thereby or approvals,
waivers or consents which have been obtained; and
(e) There are no actions, suits, tax audits, investigations or
proceedings pending or, to the knowledge of the Company, threatened against the
Company in any court or before any governmental commission, board or authority
which, if adversely determined, will have a material adverse effect on the
ability of the Company to perform its obligations under this Warrant.
12. Modification; Waiver Assignment. This Warrant and any provision
-------------------------------
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
Upon any reincorporation of the Company in Delaware, this Warrant shall become a
warrant to purchase securities of the new corporation.
13. Notices. Any notice, request, communication or other document
-------
required or permitted to be given or delivered to the holder hereof or the
Company shall be delivered, or shall be sent by certified or registered mail,
postage prepaid, to each such holder at its address as shown on the books of the
Company or to the Company at the address indicated therefor on the signature
page of this Warrant.
14. Binding Effect on Successors. Except as provided under Section 1,
----------------------------
this Warrant shall be binding upon any corporation succeeding the Company by
merger, consolidation or acquisition of all or substantially all of the
Company's assets, and all of the obligations of the Company relating to the
Shares issuable upon the exercise or conversion of this Warrant shall survive
the exercise, conversion and termination of this Warrant and all of the
covenants and agreements of the Company shall inure to the benefit of the
successors and assigns of the holder hereof. The Company will, at the time of
the exercise or conversion of this Warrant, in whole or in part, upon request of
the holder hereof but at the Company's expense, acknowledge in writing its
continuing obligation to the holder hereof in respect of any rights (including,
without limitation, any right to registration of the Shares) to which the holder
hereof shall continue to be entitled after such exercise or conversion in
accordance with this Warrant; provided, that the failure of the holder hereof to
--------
make any such request shall not affect the continuing obligation of the Company
to the holder hereof in respect of such rights.
15. Lost Warrants or Stock Certificates. The Company covenants to the
-----------------------------------
holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant or stock certificate.
14
16. Descriptive Headings. The descriptive headings of the several
--------------------
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The language in this Warrant shall be
construed as to its fair meaning without regard to which party drafted this
Warrant.
17. Governing Law. This Warrant shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws of
the State of California.
18. Survival of Representations, Warranties and Agreements. All
------------------------------------------------------
representations and warranties of the Company and the holder hereof contained
herein shall survive the Date of Grant, the exercise or conversion of this
Warrant (or any part hereof) or the termination or expiration of rights
hereunder. All agreements of the Company and the holder hereof contained herein
shall survive indefinitely until, by their respective terms, they are no longer
operative.
19. Remedies. In case any one or more of the covenants and agreements
--------
contained in this Warrant shall have been breached, the holders hereof (in the
case of a breach by the Company), or the Company (in the case of a breach by a
holder), may proceed to protect and enforce their or its rights either by suit
in equity and/or by action at law, including, but not limited to, an action for
damages as a result of any such breach and/or an action for specific performance
of any such covenant or agreement contained in this Warrant.
20. No Impairment of Rights. The Company will not, by amendment of its
-----------------------
Charter or through any other means, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holder of this Warrant against impairment.
21. Severability. The invalidity or unenforceability of any provision of
------------
this Warrant in any jurisdiction shall not affect the validity or enforceability
of such provision in any other jurisdiction, or affect any other provision of
this Warrant, which shall remain in full force and effect.
22. Recovery of Litigation Costs. If any legal action or other proceeding
----------------------------
is brought for the enforcement of this Warrant, or because of an alleged
dispute, breach, default, or misrepresentation in connection with any of the
provisions of this Warrant, the successful or prevailing party or parties shall
be entitled to recover reasonable attorneys' fees and other costs incurred in
that action or proceeding, in addition to any other relief to which it or they
may be entitled.
15
23. Entire Agreement; Modification. This Warrant constitutes the entire
------------------------------
agreement between the parties pertaining to the subject matter contained in it
and supersedes all prior and contemporaneous agreements, representations, and
undertakings of the parties, whether oral or written, with respect to such
subject matter.
PILOT NETWORK SERVICES, INC.
By________________________________
Title_____________________________
Address: ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
16
EXHIBIT A
NOTICE OF EXERCISE
To: PILOT NETWORK SERVICES, INC. (the "Company")
1. The undersigned hereby:
[_] elects to purchase ____ shares of Common Stock of the Company
pursuant to the terms of the attached Warrant, and tenders herewith payment
of the purchase price of such shares in full, or
[_] elects to exercise its net issuance rights pursuant to Section
10.3 of the attached Warrant with respect to ____ shares of Common Stock.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name or names as are specified
below:
________________________________
(Name)
________________________________
________________________________
(Address)
3. The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares,
all except as in compliance with applicable securities laws.
_________________________
(Signature)
________________
(Date)
17
EXHIBIT A-1
NOTICE OF EXERCISE
To: PILOT NETWORK SERVICES, INC. (the "Company")
1. Contingent upon and effective immediately prior to the closing
(the "Closing") of the Company's public offering contemplated by the
Registration Statement on Form S______, filed ___________,_______, 19____, the
undersigned hereby:
[_] elects to purchase ____ shares of Common Stock of the Company (or
such lesser number of shares as may be sold on behalf of the undersigned at
the Closing) pursuant to the terms of the attached Warrant, or
[_] elects to exercise its net issuance rights pursuant to Section
10.3 of the attached Warrant with respect to ____ Shares of Common Stock.
2. Please deliver to the custodian for the selling shareholders a stock
certificate representing such _____________ shares.
3. The undersigned has instructed the custodian for the selling
shareholders to deliver to the Company $_________________ or, if less, the net
proceeds due the undersigned from the sale of shares in the aforesaid public
offering. If such net proceeds are less than the purchase price for such
shares, the undersigned agrees to deliver the difference to the Company prior to
the Closing.
____________________________
(Signature)
________________
(Date)
18
EXHIBIT B
CHARTER
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION
OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.
PILOT NETWORK SERVICES, INC.
WARRANT TO PURCHASE 37,500 SHARES
OF COMMON STOCK
THIS CERTIFIES THAT, for value received, MMC/GATX PARTNERSHIP NO. 1 and its
assignees are entitled to subscribe for and purchase 37,500 shares of the fully
paid and nonassessable Common Stock (as adjusted pursuant to Section 4 hereof,
the "Shares") of PILOT NETWORK SERVICES, INC., a California corporation (the
"Company"), at the price per share determined as set forth in the next paragraph
(such price and such other price as shall result, from time to time, from the
adjustments specified in Section 4 hereof is herein referred to as the "Warrant
Price"), subject to the provisions and upon the terms and conditions hereinafter
set forth. As used herein, (a) the term "Date of Grant" shall mean June 30,
1998, and (b) the term "Other Warrants" shall mean any other warrants issued by
the Company in connection with the transaction with respect to which this
Warrant was issued, and any warrant issued upon transfer or partial exercise of
this Warrant. The term "Warrant" as used herein shall be deemed to include Other
Warrants unless the context clearly requires otherwise.
The Warrant Price per share shall be equal to the lesser of (i) eighty
percent (80%) of the "price to the public" in an initial public offering of
Common Stock (an "Initial Public Offering") effected pursuant to a Registration
Statement on Form S-1 (or its successor) filed under the Securities Act of 1933,
as amended (the "Act"), or (ii) $30.00 (as such price may be adjusted as
specified in paragraph 4); provided, however, that if the Company's next
offering of its equity securities is not an Initial Public Offering but has net
proceeds to the Company of at least $5,000,000, then the Warrant Price shall be
the effective price per share at which equity securities (on a Common Stock
equivalent basis) are sold in such offering; provided, further, however, that if
neither an Initial Public Offering nor a private offering meeting the
requirements of the first proviso to this sentence is closed prior to December
31, 1998 or if an Acquisition Transaction (as defined below) occurs prior to
such date, then the Warrant Price shall be $12.00 per share (as such price may
be adjusted as specified in paragraph 4).
1. Term. The purchase right represented by this Warrant is exercisable,
----
in whole or in part, at any time and from time to time from the Date of Grant
through four (4) years after the Date of Grant; provided, however, that if the
Company's next offering of equity securities is not an Initial Public Offering,
then this Warrant shall be exercisable through five (5) years after the Date of
Grant ; provided, however, that notwithstanding any other provision of this
Warrant, contemporaneously with the closing of a merger or consolidation of the
Company with or into another corporation, a sale of all or substantially all of
the assets of the Company or the purchase by a person or group of related
persons of all of the outstanding capital stock of the Company (each, an
"Acquisition Transaction"), the Company shall have the right to purchase or
cause to be purchased this Warrant at a purchase price for each Share then
issuable upon exercise of this Warrant equal to either (i) five times the then
applicable Warrant Price,
or (ii) three times the then applicable Warrant Price only if (A) the acquiror
in the Acquisition Transaction has a net worth as of the end of its most recent
fiscal year in excess of $100,000,000 and (B) the Company has certified in
writing to the holder that it has made a good faith effort to cause the acquiror
to issue a new warrant to the holder pursuant to the terms of Section 4(a) of
this Warrant and the acquiror has declined to do so.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
----------------------------------------------------
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part (but not with respect to
fewer than 100 shares at any one time) and from time to time, at the election of
the holder hereof, by (a) the surrender of this Warrant (with the notice of
exercise substantially in the form attached hereto as Exhibit A duly completed
and executed) at the principal office of the Company and by the payment to the
Company, by certified or bank check, or by wire transfer to an account
designated by the Company (a "Wire Transfer") of an amount equal to the then
applicable Warrant Price multiplied by the number of Shares then being
purchased, or (b) if in connection with a registered public offering of the
Company's securities, the surrender of this Warrant (with the notice of exercise
form attached hereto as Exhibit A-1 duly completed and executed) at the
principal office of the Company together with notice of arrangements reasonably
satisfactory to the Company for payment to the Company either by certified or
bank check or by Wire Transfer from the proceeds of the sale of shares to be
sold by the holder in such public offering of an amount equal to the then
applicable Warrant Price per share multiplied by the number of Shares then being
purchased or (c) exercise of the right provided for in Section 10.3 hereof. The
person or persons in whose name(s) any certificate(s) representing the Shares
shall be issuable upon exercise of this Warrant shall be deemed to have become
the holder(s) of record of, and shall be treated for all purposes as the record
holder(s) of, the shares represented thereby (and such shares shall be deemed to
have been issued) immediately prior to the close of business on the date or
dates upon which this Warrant is exercised. In the event of any exercise of the
rights represented by this Warrant, certificates for the shares of stock so
purchased shall be delivered to the holder hereof as soon as possible and in any
event within thirty (30) days after such exercise and, unless this Warrant has
been fully exercised or expired, a new Warrant representing the portion of the
Shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be issued to the holder hereof as soon as possible and in
any event within such thirty-day period.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued
---------------------------------------
upon the exercise of the rights represented by this Warrant will, upon issuance
pursuant to the terms and conditions herein, be fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof.
During the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized, and reserved for the
purpose of the issue upon exercise of the purchase rights evidenced by this
Warrant, a sufficient number of shares of its Common Stock to provide for the
exercise of the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and kind
------------------------------------------------
of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
(a) Reclassification or Merger. Except as set forth in Section 1, in
--------------------------
case of any reclassification or change of securities of the class issuable upon
exercise of this Warrant (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), or in case of any merger of the Company with or into another
corporation
2
(other than a merger with another corporation in which the Company is the
acquiring and the surviving corporation and which does not result in any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant), or in case of any sale of all or substantially all of the assets
of the Company, the Company, or such successor or purchasing corporation, as the
case may be, shall duly execute and deliver to the holder of this Warrant a new
Warrant (in form and substance satisfactory to the holder of this Warrant), so
that the holder of this Warrant shall have the right to receive, at a total
purchase price not to exceed that payable upon the exercise of the unexercised
portion of this Warrant, and in lieu of the shares of Common Stock theretofore
issuable upon exercise of this Warrant, the kind and amount of shares of stock,
other securities, money and property receivable upon such reclassification,
change or merger by a holder of the number of shares of Common Stock then
purchasable under this Warrant. Such new Warrant shall provide for adjustments
that shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 4. The provisions of this subparagraph (a) shall
similarly apply to successive reclassifications, changes, mergers and transfers.
(b) Subdivision or Combination of Shares. If the Company at any time
------------------------------------
while this Warrant remains outstanding and unexpired shall subdivide or combine
its outstanding shares of Common Stock, the Warrant Price shall be
proportionately decreased in the case of a subdivision or increased in the case
of a combination, effective at the close of business on the date the subdivision
or combination becomes effective.
(c) Stock Dividends and Other Distributions. If the Company at any
---------------------------------------
time while this Warrant is outstanding and unexpired shall (i) pay a dividend
with respect to Common Stock payable in Common Stock, or (ii) make any other
distribution of Common Stock with respect to Common Stock (except any
distribution specifically provided for in Sections 4(a) and 4(b)), then the
Warrant Price shall be adjusted, from and after the date of determination of
shareholders entitled to receive such dividend or distribution, to that price
determined by multiplying the Warrant Price in effect immediately prior to such
date of determination by a fraction (i) the numerator of which shall be the
total number of shares of Common Stock outstanding immediately prior to such
dividend or distribution, and (ii) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such dividend or
distribution.
(d) Adjustment of Number of Shares. Upon each adjustment in the
------------------------------
Warrant Price, the number of Shares purchasable hereunder shall be adjusted, to
the nearest whole share, to the product obtained by multiplying the number of
Shares purchasable immediately prior to such adjustment in the Warrant Price by
a fraction, the numerator of which shall be the Warrant Price immediately prior
to such adjustment and the denominator of which shall be the Warrant Price
immediately thereafter.
5. Notice of Adjustments. Whenever the Warrant Price or the number of
---------------------
Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the
Company shall make a certificate signed by its chief financial officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Warrant Price and the number of Shares purchasable hereunder after giving effect
to such adjustment, and shall cause copies of such certificate to be mailed
(without regard to Section 13 hereof, by first class mail, postage prepaid) to
the holder of this Warrant at such holder's last known address.
6. Fractional Shares. No fractional shares of Common Stock will be
-----------------
issued in connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment
3
therefor based on the fair market value of the Common Stock on the date of
exercise as reasonably determined in good faith by the Company's Board of
Directors.
7. Compliance with Act; Disposition of Warrant or Shares of Common Stock.
---------------------------------------------------------------------
(a) Compliance with Act. The holder of this Warrant, by acceptance
-------------------
hereof, agrees that this Warrant, and the Shares to be issued upon exercise
hereof are being acquired for investment and that such holder will not offer,
sell or otherwise dispose of this Warrant, or any Shares except under
circumstances which will not result in a violation of the Act or any applicable
state securities laws. Upon exercise of this Warrant, unless the Shares being
acquired are registered under the Act and any applicable state securities laws
or an exemption from such registration is available, the holder hereof shall
confirm in writing that the Shares so purchased are being acquired for
investment and not with a view toward distribution or resale in violation of the
Act and shall confirm such other matters related thereto as may be reasonably
requested by the Company. This Warrant and all Shares issued upon exercise of
this Warrant (unless registered under the Act and any applicable state
securities laws) shall be stamped or imprinted with a legend in substantially
the following form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION
MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO,
(ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION
LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE
COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE
SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY."
Said legend shall be removed by the Company, upon the request of a holder,
at such time as the restrictions on the transfer of the applicable security
shall have terminated. In addition, in connection with the issuance of this
Warrant, the holder specifically represents to the Company by acceptance of this
Warrant as follows:
(1) The holder is aware of the Company's business affairs and financial
condition, and has acquired information about the Company sufficient to reach an
informed and knowledgeable decision to acquire this Warrant. The holder is
acquiring this Warrant for its own account for investment purposes only and not
with a view to, or for the resale in connection with, any "distribution" thereof
in violation of the Act.
(2) The holder understands that this Warrant has not been registered under
the Act in reliance upon a specific exemption therefrom, which exemption depends
upon, among other things, the bona fide nature of the holder's investment intent
as expressed herein.
(3) The holder further understands that this Warrant must be held
indefinitely unless subsequently registered under the Act and qualified under
any applicable state securities laws, or unless exemptions from registration and
qualification are otherwise available. The holder is aware of the provisions of
Rule 144, promulgated under the Act.
4
(4) The holder of this Warrant is an institutional "accredited investor"
within the meaning of Rule 501 of Regulation D promulgated under the Act.
(b) Disposition of Warrant or Shares. With respect to any offer, sale
--------------------------------
or other disposition of this Warrant or any Shares acquired pursuant to the
exercise of this Warrant prior to registration of such Warrant or Shares, the
holder hereof agrees to give written notice to the Company prior thereto,
describing briefly the manner thereof, together with a written opinion of such
holder's counsel, or other evidence, if reasonably requested by the Company, to
the effect that such offer, sale or other disposition may be effected without
registration or qualification (under the Act as then in effect or any federal or
state securities law then in effect) of this Warrant or the Shares and
indicating whether or not under the Act certificates for this Warrant or the
Shares to be sold or otherwise disposed of require any restrictive legend as to
applicable restrictions on transferability in order to ensure compliance with
such law. Promptly upon receiving such written notice and reasonably
satisfactory opinion or other evidence, if so requested, the Company, as
promptly as practicable but no later than fifteen (15) days after receipt of the
written notice, shall notify such holder that such holder may sell or otherwise
dispose of this Warrant or such Shares, all in accordance with the terms of the
notice delivered to the Company. If a determination has been made pursuant to
this Section 7(b) that the opinion of counsel for the holder or other evidence
is not reasonably satisfactory to the Company, the Company shall so notify the
holder promptly with details thereof after such determination has been made.
Notwithstanding the foregoing, this Warrant or such Shares may, as to such
federal laws, be offered, sold or otherwise disposed of in accordance with Rule
144 or 144A under the Act, provided that the Company shall have been furnished
with such information as the Company may reasonably request to provide a
reasonable assurance that the provisions of Rule 144 or 144A have been
satisfied. Each certificate representing this Warrant or the Shares thus
transferred (except a transfer pursuant to Rule 144 or 144A) shall bear a legend
as to the applicable restrictions on transferability in order to ensure
compliance with such laws, unless in the aforesaid opinion of counsel for the
holder, such legend is not required in order to ensure compliance with such
laws. The Company may issue stop transfer instructions to its transfer agent in
connection with such restrictions.
(c) Applicability of Restrictions. Neither any restrictions of any
-----------------------------
legend described in this Warrant nor the requirements of Section 7(b) above
shall apply to any transfer or grant of a security interest in, this Warrant (or
the Common Stock obtainable upon exercise thereof) or any part hereof in
compliance with applicable securities laws (i) to a partner of the holder if the
holder is a partnership, (ii) to a partnership of which the holder is a partner,
or (iii) to any affiliate of the holder if the holder is a corporation;
provided, however, in any such transfer, if applicable, the transferee shall on
-------- -------
the Company's request agree in writing to be bound by the terms of this Warrant
as if an original signatory hereto.
8. Rights as Shareholders; Information. No holder of this Warrant, as
-----------------------------------
such, shall be entitled to vote or receive dividends or be deemed the holder of
Shares, nor shall anything contained herein be construed to confer upon the
holder of this Warrant, as such, any of the rights of a shareholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to shareholders at any meeting thereof, or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until this
Warrant shall have been exercised and the Shares purchasable upon the exercise
hereof shall have become deliverable, as provided herein. Notwithstanding the
foregoing, the Company will transmit to the holder of this Warrant such
information, documents and reports as are generally distributed to the holders
of any class or series of the securities of the Company concurrently with the
distribution thereof to the shareholders.
5
9. Registration Rights.
-------------------
(a) Registration.
(i) Upon a request by the holder of this Warrant which is
delivered to the Company in writing not less than 150 days and not
more than 240 days after the closing of an Initial Public Offering,
the Company shall prepare and file with the Securities and Exchange
Commission ("SEC") within 30 days of such notice a registration
statement under Rule 415 of the Act to register the Shares for sale by
the holder of this Warrant and shall thereafter use all reasonable
efforts to cause such registration statement to become effective as
promptly as possible thereafter.
(ii) The Company shall, until the first anniversary of the
Date of Grant, keep such registration statement for the Shares in
effect and current and from time to time amend or supplement the
registration statement and the prospectus in connection therewith in
compliance with the Act to permit the sale or distribution of the
Shares with respect to which such registration statement shall have
become effective. If at any time the SEC should institute or threaten
to institute any proceedings for the purpose of issuing, or should
issue a stop order suspending the effectiveness of any such
registration statement, the Company will promptly notify the initial
holder of this Warrant and will use its reasonable best efforts to
prevent the issuance of any such stop order or to obtain the
withdrawal thereof as soon as possible. The Company will advise the
initial holder of this Warrant promptly of any order or communication
of any public board or body addressed to the Company suspending or
threatening to suspend the registration or qualification of any of the
Shares for sale in any jurisdiction.
(iii) The holder agrees, by acceptance of this Warrant, that,
upon receipt of any notice from the Company of (A) the happening of
any event which makes any statements made in the registration
statement or related prospectus filed pursuant to this Section 9, or
any document incorporated or deemed to be incorporated therein by
reference, untrue in any material respect or which requires the making
of any changes in such registration statement or prospectus so that,
in the case of such registration statement, it will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the prospectus, it
will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading or (B) that, in the judgment of the
Company's Board of Directors, it is advisable to suspend use of the
prospectus for a discrete period of time due to pending corporate
developments, public filings with the SEC or similar events, the
holder of this Warrant will forthwith discontinue, for a period not to
exceed thirty (30) days, disposition of such Shares covered by such
registration statement or prospectus until it is advised in writing by
the Company that use of the applicable prospectus may be resumed, and
has received copies of any additional or supplemented filings that are
incorporated or deemed to be incorporated by reference in such
prospectus. The Company shall use all reasonable efforts to insure
that the use of the prospectus may be resumed as soon as practicable,
and in any event shall not
6
be entitled to require the holder of this Warrant to suspend use of
any prospectus for more than forty-five (45) days in any twelve month
period.
(b) Company Obligations. Whenever any Shares become subject to a
-------------------
registration statement pursuant to this Section 9, the Company shall:
(i) Promptly notify the holder of this Warrant and confirm
such advice in writing (A) when such registration statement becomes
effective, (B) when any post-effective amendment to any such
registration statement becomes effective and (C) of any request by the
SEC for any amendment or supplement to such registration statement or
any prospectus relating thereto or for additional information;
(ii) Furnish to the holder of this Warrant such number of
copies of any registration statement or any amendment or supplement
thereto, and any prospectus (including any preliminary prospectus)
contained therein in conformity with the requirements of the Act as
the holder of this Warrant may reasonably request in order to effect
the offering and sale of the Shares being offered and sold by the
holder of this Warrant, but only while the Company is required under
the provisions hereof to cause the registration statement to remain
current;
(iii) Use its reasonable best efforts to register or qualify
not later than the effective date of such registration statement the
Shares registered thereunder under the "blue sky" laws of such states
as the holder of this Warrant may reasonably request; provided,
--------
however, that the Company shall not be obligated to qualify as a
-------
foreign corporation or as a dealer in securities or to execute or file
any general consent to service of process under the laws of any such
state where it is not at such time so qualified or subject;
(iv) Immediately notify the holder of this Warrant, at any
time when a prospectus relating to a sale of Shares is required by law
to be delivered in connection with sales thereof, of the occurrence of
an event requiring the preparation of a supplement or amendment to
such prospectus so that, as thereafter delivered to the purchasers of
such Shares, such prospectus will not contain an untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and promptly
make available to the holder of this Warrant and to the underwriters
any such amendment or supplement;
(v) The Company and the holder of this Warrant will enter
into customary agreements (including an underwriting or indemnity
agreement in customary form) and take such other actions as are
reasonably required in order to expedite or facilitate the sale of the
Shares;
(vi) In the event of an underwritten offering (in the
Company's sole discretion), the Company will use its reasonable best
efforts to cause to be furnished to the holder of this Warrant a
signed counterpart, addressed to the holder of this Warrant or such
underwriter, of (i) an opinion or opinions of counsel to the Company
and (ii) a comfort
7
letter or comfort letters from the Company's independent accountants,
each in customary form and covering such matters of the type
customarily covered by opinions or comfort letters as the case may be,
as the holder of this Warrant reasonably requests;
(vii) In the event of an underwritten offering (in the
Company's sole discretion), the Company will make generally available
to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of twelve months, beginning
within three months after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Act; and
(viii) The Company will use its reasonably best efforts to cause
all Common Stock to be listed on each securities exchange (or the
Nasdaq National Market System) on which similar securities issued by
the Company are then listed.
(c) Expenses. The Company shall bear the out-of-pocket costs and
--------
expenses incurred in connection with any registration pursuant to this
Section 9. The costs and expenses of any such registration shall include,
without limitation, the reasonable fees and expenses of the Company's
counsel and its accountants and all other out-of-pocket costs and expenses
of the Company incident to the preparation, printing and filing under the
Act of the registration statement and all amendments and supplements
thereto and the cost of furnishing copies of each preliminary prospectus,
each final prospectus and each amendment or supplement thereto to
underwriters, dealers and other purchasers of the securities so registered,
the costs and expenses incurred in connection with the qualification of
such securities so registered under the "blue sky" laws of various
jurisdictions, the fees and expenses of the Company's transfer agent and
all other costs and expenses of complying with the foregoing provisions of
this Section 9. The holder of this Warrant shall pay any underwriting fees,
discounts or commissions attributable to the sale of Shares. The Company
shall pay internal Company expenses (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties). The Company shall reimburse the holder of this Warrant
for costs incurred by it in connection with any hedging strategy permitted
by the securities laws during the period beginning upon the later to occur
of (i) the date on which the notice requiring the filing of a registration
statement pursuant to this Section 9 is delivered to the Company and (ii)
the date 180 days after the closing of the Initial Public Offering, and
continuing until the earlier to occur of (x) the date upon which such
registration statement becomes effective and (y) the first anniversary of
the Grant Date.
(d) Indemnification.
---------------
(i) In the case of any offering registered pursuant to
Section 9(a), the Company hereby indemnifies and agrees to hold
harmless the holder of this Warrant and each person, if any, who
controls the holder of this Warrant within the meaning of either
Section 15 of the Act or Section 20 of the Securities and Exchange Act
of 1934, as amended. (the "Exchange Act") from and against any losses,
claims, damages or liabilities, joint or several, to which any such
persons may be subject, under the Act, the Exchange Act or otherwise,
and to reimburse any of such persons for any legal or other expenses
reasonably incurred by them in connection with investigating any
claims or defending against any actions, insofar as such losses,
claims, damages or liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact
contained in
8
SECURED PROMISSORY NOTE
$3,000,000 Dated: June 30, 1998
FOR VALUE RECEIVED, the undersigned, PILOT NETWORK SERVICES, INC., a
California corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of
--------
TRANSAMERICA BUSINESS CREDIT CORPORATION ("Lender") the principal amount of
------
Three Million Dollars ($3,000,000) or such lesser amount as shall equal the
outstanding principal balance of the Loan made to Borrower by Lender pursuant to
the Loan and Security Agreement referred to below (the "Loan Agreement"), and to
--------------
pay all other amounts due with respect to the Loan on the dates and in the
amounts set forth in the Loan Agreement.
Interest on the principal amount of this Note from the date of this
Note shall accrue at the Loan Rate or, if applicable, the Default Rate. The
Loan Rate for this Note is 13.5% per annum based on a year of twelve 30 day
months. Borrower shall make payments of accrued interest only on the
outstanding principal amount of the Loan on each Payment Date, commencing
August 1, 1998, through and including June 1, 1999. All principal, accrued and
unpaid interest and other amounts due under the Loan Agreement shall be payable
on June 30, 1999; provided, however, that, at the option of Borrower, Borrower
may make a payment of accrued interest only on July 1, 1999 and all principal,
accrued and unpaid interest and other amounts due under the Loan Agreement may
be paid on July 30, 1999 and during such one month extension period, the Loan
shall accrue interest at a rate of seventeen and one-half percent (17.5%) per
annum.
Principal, interest and all other amounts due with respect to the
Loan, are payable in lawful money of the United States of America to Lender by
wire transfer according to the wire transfer instructions set forth in the Loan
Agreement. The principal amount of this Note and the interest rate applicable
thereto, and all payments made with respect thereto, shall be recorded by Lender
and, prior to any transfer hereof, endorsed on the grid attached hereto which is
part of this Note.
This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Loan and Security Agreement, dated as of June 30, 1998, to
which Borrower and Lender are parties. The Loan Agreement, among other things,
(a) provides for the making of a secured Loan to Borrower, and (b) contains
provisions for acceleration of the maturity hereof upon the happening of certain
stated events.
This Note may be not be prepaid except as set forth in Section 2.01(d)
of the Loan Agreement.
This Note and the obligation of Borrower to repay the unpaid principal
amount of the Loan, any premium thereon, interest on the Loan and all other
amounts due Lenders under the Loan Agreement is secured under the Loan
Agreement.
Presentment for payment, demand, notice of protest and all other
demands and notices of any kind in connection with the execution, delivery,
performance and enforcement of this Note are hereby waived.
Borrower shall pay all reasonable fees and expenses, including,
without limitation, reasonable attorneys' fees and costs, incurred by Lenders in
the enforcement or attempt to enforce any of Borrower's
obligations hereunder not performed when due. This Note shall be governed by,
and construed and interpreted in accordance with, the laws of the State of
California.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed
by one of its officers thereunto duly authorized on the date hereof.
PILOT NETWORK SERVICES, INC.
By:________________________________________
Name:______________________________________
Title:_____________________________________
SECURED PROMISSORY NOTE
$3,000,000 Dated: June 30, 1998
FOR VALUE RECEIVED, the undersigned, PILOT NETWORK SERVICES, INC., a
California corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of
--------
MMC/GATX PARTNERSHIP NO. 1 ("Lender") the principal amount of Three Million
------
Dollars ($3,000,000) or such lesser amount as shall equal the outstanding
principal balance of the Loan made to Borrower by Lender pursuant to the Loan
and Security Agreement referred to below (the "Loan Agreement"), and to pay all
--------------
other amounts due with respect to the Loan on the dates and in the amounts set
forth in the Loan Agreement.
Interest on the principal amount of this Note from the date of this
Note shall accrue at the Loan Rate or, if applicable, the Default Rate. The
Loan Rate for this Note is 13.5% per annum based on a year of twelve 30 day
months. Borrower shall make payments of accrued interest only on the
outstanding principal amount of the Loan on each Payment Date, commencing
August 1, 1998, through and including June 1, 1999. All principal, accrued and
unpaid interest and other amounts due under the Loan Agreement shall be payable
on June 30, 1999; provided, however, that, at the option of Borrower, Borrower
may make a payment of accrued interest only on July 1, 1999 and all principal,
accrued and unpaid interest and other amounts due under the Loan Agreement may
be paid on July 30, 1999 and during such one month extension period, the Loan
shall accrue interest at a rate of seventeen and one-half percent (17.5%) per
annum.
Principal, interest and all other amounts due with respect to the
Loan, are payable in lawful money of the United States of America to Lender by
wire transfer according to the wire transfer instructions set forth in the Loan
Agreement. The principal amount of this Note and the interest rate applicable
thereto, and all payments made with respect thereto, shall be recorded by Lender
and, prior to any transfer hereof, endorsed on the grid attached hereto which is
part of this Note.
This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Loan and Security Agreement, dated as of June 30, 1998, to
which Borrower and Lender are parties. The Loan Agreement, among other things,
(a) provides for the making of a secured Loan to Borrower, and (b) contains
provisions for acceleration of the maturity hereof upon the happening of certain
stated events.
This Note may be not be prepaid except as set forth in Section 2.01(d)
of the Loan Agreement.
This Note and the obligation of Borrower to repay the unpaid principal
amount of the Loan, any premium thereon, interest on the Loan and all other
amounts due Lenders under the Loan Agreement is secured under the Loan
Agreement.
Presentment for payment, demand, notice of protest and all other
demands and notices of any kind in connection with the execution, delivery,
performance and enforcement of this Note are hereby waived.
Borrower shall pay all reasonable fees and expenses, including,
without limitation, reasonable attorneys' fees and costs, incurred by Lenders in
the enforcement or attempt to enforce any of Borrower's obligations hereunder
not performed when due. This Note shall be governed by, and construed and
interpreted in accordance with, the laws of the State of California.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed
by one of its officers thereunto duly authorized on the date hereof.
PILOT NETWORK SERVICES, INC.
By:___________________________________
Name:_________________________________
Title:________________________________