<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1998
REGISTRATION NO. 333-57453
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PILOT NETWORK SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7379 94-3164036
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION
INCORPORATION OR CLASSIFICATION CODE NUMBER)
ORGANIZATION) NUMBER)
1080 MARINA VILLAGE PARKWAY
ALAMEDA, CALIFORNIA 94501
(510) 433-7800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
M. MARKETTA SILVERA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1080 MARINA VILLAGE PARKWAY
ALAMEDA, CALIFORNIA 94501
(510) 433-7800
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
DONALD M. KELLER, JR. BROOKS STOUGH
JOHN V. BAUTISTA JAY K. HACHIGIAN
MICHAEL K. JUNG
CHRISTINE A. TOMOMATSU
STEPHEN J. VENUTO GUNDERSON DETTMER STOUGH VILLENUEVE
VENTURE LAW GROUP FRANKLIN & HACHIGIAN, LLP
A PROFESSIONAL CORPORATION 155 CONSTITUTION DRIVE
2800 SAND HILL ROAD MENLO PARK, CA 94025
MENLO PARK, CA 94025
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 16, 1998
3,250,000 Shares
[PILOT LOGO APPEARS HERE]
Common Stock
($0.001 par value)
--------
Of the 3,250,000 shares of Common Stock ("Common Stock") offered hereby (the
"Offering"), 3,110,000 shares are being sold by Pilot Network Services, Inc.
("Pilot" or the "Company") and 140,000 shares are being sold by the Selling
Stockholders named herein under "Selling Stockholders" (the "Selling
Stockholders"). The Company will not receive any of the proceeds of shares
sold by the Selling Stockholders. Prior to the Offering, there has been no
public market for the Common Stock. It is anticipated that the initial public
offering price will be between $13.00 and $15.00 per share. For information
relating to the factors to be considered in determining the initial public
offering price to the public, see "Underwriting." Application has been made
to list the Common Stock on The Nasdaq Stock Market's National Market under
the symbol "PILT."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 6 HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
------ ------------- ---------- ------------
<S> <C> <C> <C> <C>
Per Share.................................. $ $ $ $
Total(2)................................... $ $ $ $
</TABLE>
(1)Before deduction of expenses payable by the Company estimated at $1,000,000.
(2)The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 487,500 additional
shares of Common Stock to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $ , Underwriting
Discounts and Commissions will be $ , Proceeds to Company will be $ and
proceeds to Selling Stockholders will be $ .
The shares of Common Stock are offered by the several Underwriters when, as
and if issued by the Company, delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected
that the shares of Common Stock will be ready for delivery on or about ,
1998, against payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST
Prospectus dated , 1998
<PAGE>
[OUTSIDE FRONT COVER, INSIDE GATE FOLD]
PILOT'S SECURE INFRASTRUCTURE FOR ELECTRONIC COMMERCE
[Chart shows Pilot Dynamic Security Infrastructure, that allows Pilot to
provide Secure Access and Gateways, Secure Hosting and Electronic Commerce and
Secure Extranet and Virtual Private Networking services with continuous change
and action, that connects customer networks to the Internet.]
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SECURE ACCESS AND SECURE HOSTING AND SECURE EXTRANET AND
GATEWAY SERVICES: ELECTRONIC COMMERCE VIRTUAL PRIVATE
SERVICES: NETWORKING SERVICES
Secure Internet Services
Authentication Services Secure Hosting Services Secure Road Warrior
Secure Telecommuting Secure Commerce Web Corporate Partner
Services Secure Flex Web Privacy
Auxiliary Services
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE>
[INSIDE FRONT COVER, INSIDE GATE FOLD]
PILOT ENABLES SECURE ELECTRONIC COMMERCE OVER THE INTERNET
[Chart shows terminals connected to the Internet through Pilot's Network
Security Centers and terminals not connected through the Network Security
Centers that are subject to computer attacks.]
[The following text will be on the left of the illustration:]
Pilot offers services designed to combine the highest level of commercially
available security with high bandwidth connectivity to enable secure
electronic commerce over the Internet. The foundation of Pilot's solution is
its Dynamic Security Infrastructure, consisting of a multi-layered defensive
architecture and security operations 24 hours a day, 7 days a week, delivered
through geographically dispersed Network Security Centers. This infrastructure
allows Pilot to continuously manage and monitor Internet traffic to and from
customer networks in order to respond in real-time to security threats.
The Pilot solution aggregates the experience gained from protecting each
customer against attacks and leverages such experience for the collective
benefit of all customers. The Dynamic Security Infrastructure offers benefits
over other security approaches by eliminating single points of failure,
enhancing attack detection, delivering real-time defenses, and adapting
continuously to external conditions.
Pilot provides a broad range of security services for a fixed monthly fee on
an annual subscription basis, including secure access and gateway services,
secure hosting and electronic commerce services, and secure extranet and
virtual private networking services. The Company offers a scalable solution
that enables customers to quickly deploy and expand electronic commerce
capabilities by subscribing to Pilot's secure Internet services. As a result,
companies avoid costs associated with implementing an in-house solution,
including set-up costs for security and systems design, hardware, software,
ISP services and labor, and ongoing costs for telecommunications, staffing,
maintenance and upgrades. Pilot's services enable customers to concentrate on
their core business because the secure infrastructure for electronic commerce
is provided by Pilot.
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and Financial Statements and
Notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted
herein, information in this Prospectus assumes (i) no exercise of the
Underwriters' over-allotment option, (ii) the reincorporation of the Company in
Delaware prior to the effectiveness of this Offering, (iii) the automatic
conversion of all outstanding shares of Preferred Stock of the Company into
shares of Common Stock of the Company upon the closing of this Offering, (iv) a
two-for-one stock split of the Company's shares of Common Stock prior to the
closing of this Offering and (v) the exercise of warrants to purchase shares of
Series F Preferred Stock, which are convertible into an aggregate of 600,000
shares of Common Stock.
THE COMPANY
Pilot Network Services, Inc. ("Pilot" or the "Company") is the leading
provider of comprehensive security services that incorporate high-bandwidth
connectivity and enable secure electronic commerce over the Internet. The
Company provides a broad range of security services for a fixed monthly fee on
an annual subscription basis, including secure access and gateway services,
secure hosting and electronic commerce services and secure extranet and virtual
private networking services. The Company offers a scalable solution that
enables customers to quickly deploy and expand electronic commerce capabilities
by subscribing to Pilot's secure Internet services.
The Internet's promise of more cost-efficient and higher quality
communications has made it an increasingly attractive platform for complex
business applications such as marketing and sales, contract negotiations and
customer support. According to International Data Corporation, use of the
Internet for electronic commerce is expected to grow substantially from $12
billion in 1997 to $426 billion in 2002. Despite the advantages of conducting
business on the Internet, lack of Internet security is a significant inhibitor
to the adoption and growth of electronic commerce. Although losses due to
computer crime and security breaches are difficult to estimate, independent
industry sources estimate such losses to be between $3 billion and $5 billion
in 1997. Traditional approaches to Internet security, such as firewall
products, do not effectively meet the needs of businesses conducting electronic
commerce. Such products typically provide only a static, single point of
defense, are often difficult to configure adequately and maintain and can be
expensive to properly monitor and manage. For example, in a 1995 study
conducted by the FBI and the Computer Security Institute, 30 percent of all
reported successful break-ins involving the Internet took place despite the
presence of a firewall.
Pilot's subscription-based secure Internet services allow customers to avoid
the risks associated with traditional approaches to Internet security.
Customers can avoid extensive costs associated with implementing an in-house
solution, including set-up costs for security and systems design, hardware,
software, ISP services and labor, and ongoing costs for telecommunications,
staffing, maintenance and upgrades. The foundation of Pilot's solution is its
Dynamic Security Infrastructure, consisting of a multi-layered defensive
architecture and around-the-clock security operations delivered through
geographically dispersed Network Security Centers. This infrastructure allows
Pilot to continuously manage and monitor Internet traffic to and from customer
networks in order to respond in real-time to security threats. The Pilot
solution aggregates the experience gained from protecting each customer against
attacks and leverages such experience for the collective benefit of all
customers. The Dynamic Security Infrastructure offers benefits over other
security approaches by eliminating single points of failure, enhancing attack
detection, delivering real-time defenses and adapting continuously to external
conditions. Customers can concentrate on their core business because the secure
infrastructure for electronic commerce is provided by Pilot.
The Company's customers span a diverse range of industries and include 20th
Century Fox, Altera Corp., American Bar Association, American Medical
Association, American Stores, E-Stamp, Inc., First Data Corporation, The Good
Guys, Inc., Kaiser Aluminum and Chemical Corporation, Lucent Technologies,
PeopleSoft, Inc., Playboy Enterprises, Inc., PR Newswire, Wilson Sporting Goods
and Ziff-Davis Comdex & Forums.
3
<PAGE>
The Company was incorporated in California in August 1992. Prior to the
completion of this Offering, the Company intends to reincorporate under the
laws of the State of Delaware. Unless the context otherwise requires, the term
"Company" or "Pilot" refers to Pilot Network Services, Inc., a Delaware
corporation, and its California predecessor. The Company has federal trademark
applications pending for the Pilot logo, Pilot and Corporate Partner Privacy,
and Dynamic Security Infrastructure, Secure Commerce Web, Secure Flex Web and
Secure Road Warrior are trademarks of the Company. All other brand names or
trademarks appearing in this Prospectus are the property of their respective
holders.
The Company's executive offices are located at 1080 Marina Village Parkway,
Alameda, California 94501. Its telephone number at that location is (510) 433-
7800 and its Web site address is www.pilot.net. Information contained on the
Company's Web site is not part of this Prospectus.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered............................ 3,250,000 shares (including
3,110,000 shares by the
Company and 140,000 shares by
the Selling Stockholders)
Common Stock to be outstanding after the
Offering(1).................................... 13,745,686 shares
Use of proceeds................................. General corporate purposes,
including working capital,
capital expenditures and
repayment of certain
indebtedness. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.......... PILT
</TABLE>
SUMMARY FINANCIAL DATA
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------- ----------------
1996 1997 1998 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenues................. $ 2,525 $ 6,300 $11,317 $ 2,461 $ 3,720
Cost of service revenues......... 1,424 4,181 9,825 1,745 4,023
Gross margin..................... 1,101 2,119 1,492 716 (303)
Total operating expenses......... 2,720 4,448 6,656 1,351 3,121
Net loss......................... (1,750) (2,652) (5,635) (718) (3,632)
Accretion on redeemable
convertible preferred stock..... (263) (478) (1,069) (132) (337)
Net loss attributable to common
stockholders.................... (2,013) (3,130) (6,704) (850) (3,969)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)(2)
-------- -----------------
BALANCE SHEET DATA: (UNAUDITED)
<S> <C> <C>
Cash and cash
equivalents............ $ 6,176 $49,268
Total current assets.... 10,030 53,122
Current liabilities..... 15,760 15,760
Capital lease
obligations, net of
current portion........ 4,429 4,429
Total stockholders'
equity (deficit)....... (14,746) 40,826
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1998. Pro forma as
adjusted amounts include the number of shares to be issued upon the assumed
exercise of warrants outstanding as of June 30, 1998 to purchase Series F
Preferred Stock (the "Series F Warrants"), which are convertible into an
aggregate of 600,000 shares of Common Stock, and exclude (i) 1,756,940
shares issuable upon exercise of options outstanding as of June 30, 1998
with a weighted average exercise price of $1.99 per share, (ii) shares
issuable upon exercise of outstanding warrants as of June 30, 1998 to
purchase Series B Preferred Stock and Series D Preferred Stock, which are
convertible into an aggregate of 142,910 shares of Common Stock with a
weighted average exercise price of $1.31 per share, (iii) shares issuable
upon exercise of outstanding warrants as of June 30, 1998 to purchase an
aggregate of 150,000 shares of Common Stock at an exercise price of $11.20
per share (assuming an initial public offering price of $14.00 per share),
(iv) shares issuable upon exercise of options to purchase 20,000 shares of
Common Stock at an exercise price of $13.00 per share, and (v) 1,380,000
shares available for issuance under the Company's 1998 stock plans. See
"Management--Stock Plans" and Note 5 of Notes to Consolidated Financial
Statements.
(2) Adjusted to reflect the sale of 3,110,000 shares of Common Stock offered by
the Company at an assumed initial public offering price of $14.00 per share
and after deducting the estimated underwriting discount and offering
expenses, and the receipt and application of the net proceeds therefrom,
and the receipt of $3.6 million from the assumed exercise of the Series F
Warrants. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information in
this Prospectus, should be considered in evaluating the Company and its
business before purchasing the Common Stock offered hereby. This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such differences
include those discussed below and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as
those discussed elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company began operations in 1993, and has experienced operating losses
and negative cash flows from operations in each quarterly and annual period.
As of June 30, 1998, the Company had an accumulated deficit of approximately
$16.7 million. The revenue and income potential of the Company's business and
market is unproven, and the Company's limited operating history makes an
evaluation of the Company and its prospects difficult. The Company has
recently made and expects to continue making significant investments in new
and existing Network Security Centers, sales and marketing activities, and the
development of new services. As a result, the Company experienced a decline in
gross margin and an increase in net loss in fiscal 1997 and expects to
continue experiencing significant net losses on a quarterly and annual basis
for the foreseeable future, including a decline in its gross margin at least
through fiscal 1999. The Company and its prospects must be considered in light
of the risks, expenses and difficulties encountered by companies in the new
and rapidly evolving market for Internet system and network management
solutions. To address these risks, among other things, the Company must market
its brand name effectively, provide scaleable, reliable and cost-effective
services, continue to grow its infrastructure to accommodate new Network
Security Centers and increased bandwidth use of its network, expand its
channels of distribution, retain and motivate qualified personnel and continue
to respond to competitive developments. Failure of the Company's services to
achieve market acceptance would have a material adverse effect on the
Company's business, results of operations and financial condition. Although
the Company has experienced significant growth in revenues in recent periods,
the Company does not believe that this growth rate necessarily is indicative
of future operating results, and there can be no assurance that the Company
will ever achieve profitability on a quarterly or an annual basis or will
sustain profitability if achieved. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS
The Company derives revenue from its customers primarily through initial set
up fees and ongoing monthly service charges. For each new customer, the
Company must incur costs in anticipation of the customer's decision to use the
Company's services and in advance of the receipt of sufficient revenues to
repay these costs and provide a return on the Company's investment. As a
result, a relatively large portion of the Company's expenditures are fixed in
the short-term, and the Company's success is substantially dependent on the
continuous growth in its customer base and the retention of its customers for
sufficient periods to provide returns on the Company's investment. The
Company's customers generally enter into one year contracts with the Company,
with renewal periods, and there can be no assurance that the Company's
customers will maintain or renew their commitments to use the Company's
services. The Company typically experiences a lengthy sales cycle for its
services, particularly given the importance to customers of adequately
securing Internet connectivity for electronic commerce and the need to educate
them regarding the requirements for effective network security. Changes in the
rate of growth in the Company's customer base, customer renewal rates and the
sales cycle for the Company's services, have caused, or are expected in the
future to cause, significant fluctuations in the Company's results of
operations on a quarterly and an annual basis.
The Company expects to continue to experience significant fluctuations in
its future quarterly and annual results of operations due to a variety of
factors, many of which are outside the Company's control, including: demand
for and market acceptance of the Company's services and enhancements; the
timing of customer installations; provisions for customer discounts and
credits; the mix of services sold by the Company;
6
<PAGE>
introductions of services or enhancements by the Company and its competitors;
the length of sales cycles; customer retention; the timing and success of
marketing efforts and service introductions by the Company; the timely
expansion of existing Network Security Centers and completion of new Network
Security Centers; the timing and magnitude of capital expenditures, including
construction costs relating to the expansion of operations; capacity
utilization of its Network Security Centers; the introduction by third parties
of new security, Internet and networking technologies; increased competition
in the Company's markets; changes in the pricing policies of the Company and
its competitors; reliable security, continuity of service and network
availability; the ability to increase bandwidth as necessary; fluctuations in
bandwidth used by customers and fluctuations in the cost of such bandwidth;
the retention of key personnel; economic conditions specific to the Internet
and Internet security industries; and other general economic factors. In
addition, although the Company has not encountered significant difficulties in
collecting upon accounts receivable in the past, there can be no assurance
that the Company will be able to collect receivables on a timely basis.
For these and other reasons, in some future quarters, the Company's results
of operations may fall below the expectations of securities analysts or
investors, which could have a material adverse effect on the market price of
the Company's Common Stock. See "--Risks of Business Expansion and Management
of Growth" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RISKS ASSOCIATED WITH SECURITY BREACHES
The Company's success is substantially dependent on the continued confidence
of its current and future customers that the Company provides superior network
security protection. Despite the Company's focus on Internet security, there
can be no assurance that the Company will be able to stop unauthorized
attempts, whether made unintentionally or by computer "attackers," to gain
access to or disrupt the network operations of the Company's customers. The
Company's Network Security Centers are designed to prevent unauthorized access
to customers' networks from the Internet. Any failure by the Company to stop
unauthorized access from the Internet or disruptions to related Internet
operations of its customers could materially adversely affect such customers
and the Company. Although the Company generally limits warranties and
liabilities relating to security in its customer contracts, the Company's
customers may seek to hold the Company responsible for any losses suffered by
the customer as a result of unauthorized access to customers' network systems
from the Internet. This could result in liability to the Company, which could
have a material adverse effect upon its business, operating results and
financial condition. Moreover, computer attackers from the Internet could
infiltrate the Company's network and seek to sabotage its network or services
by creating bugs or viruses or through other means. In addition, any adverse
publicity resulting from any such unauthorized access could deter future
customers from using the Company's services and could cause current customers
to cease using the Company's services, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH THE EMERGING MARKET FOR OUTSOURCED NETWORK SECURITY
SERVICES
The market for Internet security monitoring, detection and defense services
in general is new and rapidly evolving. Growth of this market will depend, in
large part, upon the public recognition of the potential threat posed by
computer attackers and other unauthorized users, the increased use of the
Internet and corporate intranets for electronic commerce and business
communications, the ability of network infrastructures to support an
increasing number of users and services, and the continued development of new
and improved services for implementation across the Internet and between the
Internet and corporate intranets. If the necessary network infrastructure or
complementary products and services are not developed in a timely manner and,
consequently, the market for network security solutions fails to grow or grows
more slowly than the Company currently anticipates, the Company's business,
operating results and financial condition would be materially and adversely
affected. Moreover, to date, most businesses have purchased and managed their
own network security solutions and have not sought to outsource network
security to a third party service provider. As a result, customer acceptance
of outsourcing network security services is extremely limited. The Company has
spent, and intends to continue to spend, considerable resources educating
potential customers about the value of outsourcing services provided by
7
<PAGE>
the Company. To date, the Company has experienced lengthy sales cycles for its
services. There can be no assurance that such expenditures will increase
market acceptance of the Company's services, or that such sales cycles will
shorten. If the market for such services fails to grow or grows more slowly
than the Company currently anticipates, the Company's business, operating
results and financial condition would be materially and adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business--Industry Background," "--Sales, Marketing and
Customer Support" and "--Competition."
RISKS OF BUSINESS EXPANSION AND MANAGEMENT OF GROWTH
The Company intends to expand domestically and internationally by adding
Network Security Centers in new locations and expanding Network Security
Centers in existing locations. The Company is in the process of commencing
operations of four new Network Security Centers in the Boston, Minneapolis,
Washington, D.C. and London metropolitan areas and relocating Network Security
Centers in the Los Angeles and Chicago metropolitan areas to new facilities in
such areas. The Company intends to establish additional Network Security
Centers in the United States, Europe and Asia, although the Company has not
identified specific locations for expansion. In addition, there can be no
assurance with respect to the timing or extent of such expansion or that the
Company will be successful in expanding its operations. This expansion will
depend, among other things, on the Company's ability to hire qualified
personnel, install facilities and establish local peering interconnections
with Internet Service Providers (ISPs), all in a timely manner, at reasonable
costs and on terms and conditions acceptable to the Company. The Company's
ability to manage this expansion effectively will require it to continue to
implement and improve its operational and financial systems and to expand,
train and manage its employee base. The Company's inability to manage
effectively its expansion, including any disruption of service to current
customers, would have a material adverse effect upon the Company's business,
results of operations and financial condition. See "--Dependence on
Scalability of Company's Network."
In addition, the Company will be required to expend substantial resources
for leases and improvements of facilities, significant improvements of such
facilities, purchases of equipment, implementation of multiple
telecommunications connections and hiring of network, administrative, customer
support, and sales and marketing personnel. Furthermore, any problems
encountered in connection with the expansion of existing Network Security
Centers may cause the interruption of service to current customers.
In addition, from June 30, 1997 to June 30, 1998, the number of Company
employees increased from 55 to 116. Furthermore, more than half of the
Company's sales personnel have joined the Company since January 1998. This
growth has placed and may continue to place a significant strain on the
Company's financial, management, operational and other resources. The rapid
growth of the Company's sales team, in particular, may limit the effectiveness
of the Company's sales efforts in the immediate future. In addition, the
Company may be required to manage multiple relationships with third party
partners and vendors as it seeks to complement its service offerings. There
can be no assurance that the Company's financial, management, operational and
other systems, procedures and controls will be adequate to support the
Company's existing and future operations. The Company's ability to manage its
growth effectively will require it to continue to expand its operating and
financial procedures and controls, to replace or upgrade its financial,
management and operational systems and to attract, train, motivate, manage and
retain key employees. The Company has recently hired many key employees and
officers, including its Senior Vice President, Sales and Marketing, its Vice
President of Operations and Business Development, and its Chief Financial
Officer. As a result, the Company's entire management team has worked together
for only a brief time, which may limit their ability to operate effectively
together. The Company also has plans to hire a Vice President of Operations,
to allow the Company's current Vice President of Operations and Business
Development to focus solely on business development. If the Company's
executives are unable to manage growth effectively, the Company's business,
results of operations and financial condition would be materially adversely
affected. See "--Dependence on Key Personnel" and "Management."
COMPETITION
The market served by the Company is new, rapidly evolving, highly
competitive and largely undefined. There are few substantial barriers to
entry, and the Company expects that it will face additional competition from
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existing competitors and new market entrants in the future. The Company
believes that this market is characterized by a limited period of time during
which participants must grow rapidly and achieve a significant presence in the
market in order to compete effectively. The principal competitive factors in
this market include Internet system and security engineering expertise,
customer service, network and security capabilities, reliability, quality and
scalability of service, broad geographic presence, brand name, technical
expertise and functionality, the variety of services offered, the ability to
maintain and expand distribution channels, customer support, price, the timing
of introductions of new services, financial resources and conformity with
industry standards. There can be no assurance that the Company will have the
resources or expertise to compete successfully in the future.
The Company competes with a broad range of products and services. The
Company's competitors include companies providing security, electronic
commerce, and secure Internet networking products that are offered as stand-
alone point solutions. Companies offering stand-alone products include
providers of firewall software, such as Check Point Software Technologies and
AXENT Technologies (formerly Raptor Systems), security monitoring software,
such as ISS Group, and electronic commerce products. The security and
electronic commerce products provided by these companies are typically
implemented and managed by internal MIS departments of enterprises. In
addition, internal corporate MIS departments increasingly rely on third party
consultants or system integrators to manage the integration and implementation
of multiple stand-alone products from different vendors.
The Company also competes with third party service providers that offer
Internet hosting and access services, including (i) providers of server
hosting services, such as Exodus Communications and PSI Net; (ii) national and
regional ISPs such as Concentric Network Corp., UUNET Technologies ("UUNET"),
certain subsidiaries of GTE Corporation and Global Center, which was recently
acquired by Frontier Corporation; and (iii) global, regional and local
telecommunications companies such as MCI Communications Corporation ("MCI"),
Sprint Corporation ("Sprint"), WorldCom, and regional bell operating
companies. The Company also competes with information technology service firms
providing either outsourcing or systems integration services such as
International Business Machines Corporation and Electronic Data Systems.
Although these third party service providers often add security features to
their service offerings, either through internal development efforts or
through the incorporation of products purchased from vendors of stand-alone
point solutions, the Company believes that generally these competitors do not
offer the same level of security in their services as the Company. However,
the Company expects competition to intensify as third party service providers
incorporate a broader range of security, electronic commerce and secure
Internet networking services and products into their service offerings.
Furthermore, the Company may face competition from its vendors and other
partners. The Company's agreements with its vendors and other partners
generally do not limit or restrict those parties from selling similar products
and services directly to the Company's customers or its competitors, thereby
enabling such parties to compete against the Company. There can be no
assurance that such vendors or other partners will not compete with the
Company in the future.
Many of the Company's competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than the Company. As a result, certain of these competitors may be
able to develop and expand their network infrastructures and service offerings
more quickly, adapt to new or emerging technologies and changes in customer
requirements more quickly, take advantage of acquisition and other
opportunities more readily, devote greater resources to the marketing and sale
of their products and adopt more aggressive pricing policies than the Company.
In addition, these competitors have entered, and will likely continue to
enter, into joint ventures or consortiums to provide additional services
competitive with those provided by the Company. Certain of the Company's
competitors may be able to provide customers with additional benefits in
connection with their Internet system and network management solutions,
including reduced communications costs, which could reduce the overall costs
of their services relative to the Company's. There can be no assurance that
the Company will be able to offset the effects of any resulting price
reductions. In addition, the Company believes that the businesses in which the
Company competes are likely to encounter consolidation in the near future,
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which could result in increased price and other competition that could have a
material adverse effect on the Company's business, results of operations and
financial condition.
RISK OF SYSTEM FAILURE
The Company's success depends on the uninterrupted operation of its network
infrastructure. To maintain this uninterrupted operation, the Company must
protect its network infrastructure against damage and disruption from human
error, fire, earthquakes, floods, power loss, telecommunications failures,
sabotage, intentional acts of vandalism and similar events. Despite existing
and planned precautions by the Company, the occurrence of a natural disaster
or other unanticipated problems at one or more of the Company's Network
Security Centers could result in interruptions in the services provided by the
Company. In addition, the failure of any of the Company's telecommunications
providers to provide the data communications capacity required by the Company,
for any reason, could result in interruptions in the Company's services. Any
damage to or failure of the Company's systems or those of its service
providers could result in reductions in, or terminations of, services supplied
to the Company's customers. Such reductions or terminations in service could
materially and adversely impact the Company's customers, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company's reputation could be materially
adversely affected. Although the Company generally contractually limits its
liability for incidental, punitive, indirect and consequential damages and
personal injury resulting from disruption of service, there can be no
assurance that the Company would not be found liable for any such damages and
personal injury, or that the amount of any such liability would not exceed the
Company's liability insurance, if any. See "Business--Customers" and "--Pilot
Dynamic Security Infrastructure."
FUTURE CAPITAL NEEDS
The Company expects to incur significant expenditures as part of its planned
expansion, including expenditures for new and expanded Network Security
Centers, increases in sales and marketing activities and the development of
new services. The Company believes that the net proceeds from this offering,
together with existing cash balances, anticipated cash flows from operations
and anticipated borrowings to finance a portion of its capital expenditures,
should be sufficient to meet its capital requirements for at least the next
twelve months. However, there can be no assurance that the Company will be
successful in generating anticipated levels of cash from operations or
borrowings. If the Company is not successful, it may be required to sell
assets, scale down its operations and expansion plans, seek to refinance all
or a portion of its existing indebtedness or seek to obtain other financing
earlier than planned, any of which could have a material adverse effect on the
Company's business, results of operations and financial condition. There can
be no assurance that any such refinancing would be available on commercially
reasonable terms, or at all, or that any other financing could be obtained or
would not result in significant dilution to the Company's stockholders. See
"Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
Notes 3 and 6 of Notes to Financial Statements.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A key component of the Company's long-term strategy is to expand into
international markets. If revenue generated by any international Network
Security Center is not adequate to offset the expense of establishing and
maintaining any such international operation, the Company's business, results
of operations and financial condition could be materially adversely affected.
In addition, the Company faces certain risks inherent in conducting business
internationally, such as unexpected changes in regulatory requirements, export
restrictions, tariffs and other trade barriers, challenges in staffing and
managing foreign operations, differing technology standards, employment laws
and practices in foreign countries, longer payment cycles, problems in
collecting accounts receivable, political instability, fluctuations in
currency exchange rates, imposition of currency exchange controls, seasonal
reductions in business activity and potentially adverse tax consequences, any
of which could adversely affect the Company's international operations.
Furthermore, certain foreign governments, such as Germany, have enforced laws
and regulations related to content distributed over the Internet that are
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more strict than those currently in place in the United States. There can be
no assurance that one or more of these factors will not have a material
adverse effect on the Company's current or future international operations
and, consequently, on the Company's business, results of operations and
financial condition. In addition, there can be no assurance that the Company
will be able to compete effectively in international markets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE UPON SCALABILITY OF THE COMPANY'S NETWORK
The Company must continue to expand and adapt its network infrastructure as
the number of users and the amount of information they wish to transmit
increases, and as customer requirements change. The expansion and adaptation
of the Company's telecommunications infrastructure will require substantial
financial, operational and management resources. If the Company is required to
expand its network significantly and rapidly due to increased usage,
additional stress will be placed upon the Company's existing network
infrastructure. Due to the limited deployment of the Company's services to
date, the ability of the Company's network to connect and manage a
substantially larger number of customers at high transmission speeds is as yet
unknown, and the Company faces risks related to the network's ability to
operate with higher customer levels while maintaining superior performance. As
customers' usage of bandwidth increases, the Company will need to make
additional investments in its infrastructure to maintain adequate data
transmission speeds, the availability of which may be limited or the cost of
which may be significant. As a result, there can be no assurance that the
Company's network will be able to achieve or maintain a sufficiently high
capacity of data transmission, especially if customer usage increases. The
Company's failure to achieve or maintain high capacity data transmission could
significantly reduce customer demand for its services and have a material
adverse effect on its business, results of operations and financial condition.
In addition, as the Company upgrades its telecommunications infrastructure to
increase bandwidth available to its customers, it is likely to encounter a
certain level of equipment or software incompatibility which may cause delays
in implementation. There can be no assurance that the Company will be able to
expand or adapt its telecommunications infrastructure to meet additional
demand or its customers' changing requirements. See "Business--Pilot Dynamic
Security Infrastructure."
DEPENDENCE UPON THIRD PARTY NETWORK INFRASTRUCTURE PROVIDERS
The Company's success will depend upon third party network infrastructure
providers. In particular, the Company is dependent on telecommunications
network suppliers such as MCI, Sprint and WorldCom for its backbone capacity.
In addition, the Company relies on a number of public and private peering
interconnections (i.e., arrangements among access providers to carry traffic
of each other) to deliver its services. If the carriers that operate the
Internet exchange points ("IXPs") were to discontinue their support of the
peering points and no alternative providers were to emerge, or such
alternative providers were to increase the cost of utilizing the IXPs, the
transmission of network traffic by the Company would be significantly
constrained. Furthermore, as traffic through the IXPs increases, if
commensurate increases in bandwidth are not added, the Company's ability to
distribute content rapidly and reliably through these networks will be
adversely affected. Many of the operators of the private peering
interconnections are competitors of the Company. If these organizations were
to refuse to continue to peer directly with the Company, the Company might be
required to purchase Internet transit access services from these
organizations. In those cases where the Company currently purchases Internet
transit access from other organizations, if these organizations were to
increase the pricing associated with their Internet transit access, the
Company might be required to identify alternative methods through which it can
transmit its customers' traffic. If the Company were unable to access on a
cost-effective basis alternative networks to distribute its customers' content
or pass through any additional costs of utilizing these networks to its
customers, the Company's business, results of operations and financial
condition could be materially adversely affected. See "Business--Pilot Dynamic
Security Infrastructure."
The recent growth in the use of the Internet has caused frequent periods of
performance degradation, requiring the upgrade of routers and switches,
telecommunications links and other components forming the infrastructure of
the Internet by ISPs and other organizations with links to the Internet. Any
perceived degradation in the performance of the Internet as a whole could
undermine the benefits of the Company's
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services. Potentially increased performance provided by the services of the
Company and others is ultimately limited by and reliant upon the speed and
reliability of the networks operated by third parties. Consequently, the
emergence and growth of the market for the Company's services is dependent on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion.
DEPENDENCE ON OTHER THIRD-PARTY RELATIONSHIPS
The Company is dependent on other companies to supply certain key components
of its telecommunications infrastructure and system and network management
solutions that, in the quantities and quality demanded by the Company, are
available only from sole or limited sources. The Company uses routers and
switches supplied primarily by Cisco Systems, hardware servers supplied
primarily by Sun Microsystems and virtual private networking software and
hardware supplied by VPNet Technologies. The Company purchases these
components pursuant to purchase orders placed from time to time, does not
carry significant inventories of these components and has no guaranteed supply
arrangements with these vendors. In addition, the Company includes within its
services certain security software products that are available only from
certain vendors. Any failure to obtain required components or software on a
timely basis and at an acceptable cost would have a material adverse effect on
the Company's business, results of operations and financial condition. The
loss of any such components or software could require the Company to obtain
substitute components or software of lower quality or performance standards or
at greater cost, which could materially adversely affect the Company's
business, results of operations and financial condition. In addition, any
failure of the Company's sole or limited source suppliers to provide
components or software that comply with evolving Internet and
telecommunications standards or that interoperate with other components or
software used by the Company in its communications infrastructure could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company also intends to develop alternative distribution and lead
generation channel partners for the Company's services, such as systems
integration firms and bandwidth providers. Any failure by the Company to
develop these channel partners could materially and adversely impact the
ability of the Company to generate increased revenues, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Sales, Marketing and Customer Support" and
"--Strategic Relationships."
DEPENDENCE ON THE INTERNET AS A MEANS OF CONDUCTING BUSINESS
The increased use of the Internet for retrieving, sharing and transferring
information among businesses, consumers, suppliers and partners has only
recently begun to develop, and the Company's success will depend in large part
on continued growth in the use of the Internet. Critical issues concerning the
commercial use of the Internet, including security, reliability, cost, ease of
access, quality of service and necessary increases in bandwidth availability,
remain unresolved and are likely to affect the development of the market for
the Company's services. The adoption of the Internet for information retrieval
and exchange, commerce and communications, particularly by those enterprises
that have historically relied upon alternative means of commerce and
communications, generally will require the acceptance of a new medium of
conducting business and exchanging information. Demand and market acceptance
of the Internet are subject to a high level of uncertainty and are dependent
on a number of factors, including the growth in consumer access to and
acceptance of new interactive technologies, the development of technologies
that facilitate interactive communication between organizations and targeted
audiences and increases in user bandwidth. If the Internet as a commercial or
business medium fails to develop or develops more slowly than expected, the
Company's business, results of operations and financial condition could be
materially adversely affected. See "Business--Industry Background" and "--
Pilot Dynamic Security Infrastructure."
RAPID TECHNOLOGICAL CHANGE; EVOLVING INDUSTRY STANDARDS
The Company's future success will depend, in part, on its ability to offer
services that incorporate leading technology, address the increasingly
sophisticated and varied needs of its current and prospective customers and
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respond to technological advances and emerging industry standards and
practices on a timely and cost-effective basis. The market for the Company's
services is characterized by rapidly changing and unproven technology,
evolving industry standards, changes in customer needs, emerging competition
and frequent new service introductions. There can be no assurance that future
advances in technology will be beneficial to, or compatible with, the
Company's business or that the Company will be able to incorporate such
advances on a cost-effective and timely basis into its business. Moreover,
certain operating platforms, such as Windows NT, may be less compatible with
security technologies than other platforms, such as UNIX-based systems, and
may be more susceptible to security breaches. To the extent the Company's
current and prospective customers adopt Windows NT, the Company may not be
able to provide the same levels of security as it provides to customers
employing UNIX-based systems. As a result, if a breach of security were to
occur involving a customer in a Windows NT environment, the general perception
of the Company in the market as a provider of secure bandwidth and electronic
commerce services may be adversely effected, which would have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, technological advances may have the effect of
encouraging certain of the Company's current or future customers to rely on
in-house personnel and equipment to furnish the services currently provided by
the Company. In addition, keeping pace with technological advances in the
Company's industry may require substantial expenditures and lead time.
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its
services with products, services and architectures offered by various vendors
as part of the Company's services. There can be no assurance that such
products will be compatible with the Company's infrastructure or that such
products will adequately address changing customer needs. Although the Company
currently intends to support emerging standards, there can be no assurance
that industry standards will be established or that, if they become
established, the Company will be able to conform to these new standards in a
timely fashion and maintain a competitive position in the market. The failure
of the Company to conform to the prevailing standard, or the failure of a
common standard to emerge, could have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, there can be no assurance that products, services or technologies
developed by others will not render the Company's services uncompetitive or
obsolete. See "Business--Services" and "--Pilot Dynamic Security
Infrastructure."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends in significant part upon the continued
services of its key technical, sales and senior management personnel,
including the Company's President and Chief Executive Officer, Marketta
Silvera, and the Company's Vice President, Engineering and Development, Thomas
Wadlow. None of the Company's officers is a party to an employment agreement
with the Company. Any officer or employee of the Company can terminate his or
her relationship with the Company at any time. The Company's future success
will also depend on its ability to attract, train, retain and motivate highly
qualified technical, marketing, sales and management personnel. In the past,
the Company has experienced high rates of employee turnover, which in certain
periods has limited the Company's ability to effectively manage its growth.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to attract and retain sufficient numbers of qualified
personnel to handle its planned expansion, particularly because the Company
maintains stringent hiring standards and conducts a thorough background check
for each prospective employee. The loss of the services of one or more of the
Company's key employees or the Company's failure to attract additional
qualified personnel could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business--
Employees" and "Management."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
There is currently only a small body of laws and regulations directly
applicable to access to or commerce on the Internet, other than regulations
applicable to businesses generally and regulations applicable to certain
encryption technologies incorporated into products provided by certain of the
Company's vendors. However, because the Internet has recently emerged, there
is significant uncertainty as to the application of existing laws and
regulations with respect to the Internet, covering issues such as user
privacy, freedom of expression, pricing,
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characteristics and quality of products and services, taxation, advertising,
intellectual property rights, information security and the convergence of
traditional telecommunications services with Internet communications.
Moreover, a number of laws and regulations have been proposed and are
currently being considered by federal, state and foreign legislatures with
respect to such issues. The nature of any new laws and regulations and the
manner in which existing and new laws and regulations may be interpreted and
enforced cannot be fully determined. Therefore, such laws and regulations
could decrease the growth of the Internet, decrease demand for the Company's
services, restrict the Company's activities, impose taxes or other costly
technical requirements, subject the Company and/or its customers to potential
liability or otherwise adversely affect the Company or its customers, each of
which could have a material adverse effect on the Company's business, results
of operations and financial condition. For example, because the Company's
services are available over the Internet in multiple states and foreign
countries, and as the Company facilitates sales by its customers to end users
located in such states and foreign countries, such jurisdictions may claim
that the Company is required to qualify to do business as a foreign
corporation in each such state or foreign country, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
A number of governments have imposed controls, export license requirements
and restrictions on the export of encryption technologies provided by certain
of the Company's vendors. To the extent the Company or its vendors are
required to export products incorporating certain encryption technology
developed in the United States in support of services provided to the
Company's customers located outside of the United States, the Company and its
vendors will need to comply with United States export controls. In particular,
all cryptographic products require either qualification under appropriate
licensing exemptions or export licenses from either the U.S. State Department,
acting under the authority of the International Traffic in Arms Regulation, or
the U.S. Commerce Department, acting under the authority of the Export
Administration Regulations. Furthermore, if the Company is unable to comply
with such export controls, it may not be able to obtain on commercially
reasonable terms encryption technologies developed outside the United States
for its international services that provide for encryption as strong as those
developed in the United States. There can be no assurance that U.S. export
restrictions will be changed to allow stronger encryption for international
delivery, that the Company or its vendors will be able to comply with such
restrictions, or that such factors will not have a material adverse effect on
the Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH INFORMATION DISSEMINATED THROUGH THE COMPANY'S NETWORK
The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. It is possible that claims could be made
against online services companies and Internet access providers under both
United States and foreign law for defamation, negligence, copyright or
trademark infringement, or other theories based on the nature and content of
the materials disseminated through their networks. Several private lawsuits
seeking to impose such liability upon online services companies and Internet
access providers are currently pending. In addition, legislation has been
proposed that imposes liability for or prohibits the transmission over the
Internet of certain types of information. The imposition upon the Company and
other Internet network providers of potential liability for information
carried on or disseminated through their systems could require the Company to
implement measures to reduce its exposure to such liability, which may require
the expenditure of substantial resources, or to discontinue certain service or
product offerings. The increased attention focused upon liability issues as a
result of these lawsuits and legislative proposals could adversely impact the
growth of Internet use. While the Company carries general liability and errors
and omissions insurance, it may not be adequate to compensate or may not cover
the Company in the event the Company becomes liable for information carried on
or disseminated through its networks. Any costs not covered by insurance
incurred as a result of such liability or asserted liability could have a
material adverse effect on the Company's business, results of operations and
financial condition. Certain businesses, organizations and individuals send
unsolicited commercial e-mails to massive numbers of people, typically to
advertise products or services. This practice, known as "spamming," can lead
to complaints against service providers that enable such activities,
particularly where recipients view the materials received as offensive. The
Company is not aware of instances in which spamming has occurred from servers
hosted at its
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facilities. However, certain ISPs and other online services companies could
deny network access to the Company if undesired content or spamming were to be
transmitted from servers hosted at its facilities. Although the Company's
customer-use policy prohibits its customers from spamming, there can be no
assurance that its customers will not engage in this practice, which could
have a material adverse effect on the Company's business, results of
operations and financial condition.
PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of copyright, trademark, service mark
and trade secret laws and contractual restrictions to establish and protect
certain proprietary rights in technology underlying its services. The Company
has recently applied for three separate patents in the U.S. and intends to
continue to seek patents on its inventions when appropriate, although the
Company currently has no patented technology that would preclude or inhibit
competitors from entering the Company's market. There can be no assurance that
patents will issue from currently pending or any future applications, or that
any patents that may be issued will be sufficient in scope or strength to
provide meaningful protection or any commercial advantage to the Company. The
Company has three separate trademark applications pending in the United States
and counterparts in certain foreign jurisdictions for distinct marks,
including its distinctive Pilot logo; however, there can be no assurance that
such trademarks will be granted. The laws of certain foreign countries may not
protect the Company's products, services or intellectual property rights to
the same extent as do the laws of the United States.
The Company has entered into confidentiality and invention assignment
agreements with its employees and contractors, and nondisclosure agreements
with its suppliers, distributors and appropriate customers in order to limit
access to and disclosure of its proprietary information. There can be no
assurance that these contractual arrangements or other steps taken by the
Company to protect its intellectual property will prove sufficient to prevent
infringement of or misappropriation of the Company's technology or to deter
independent third-party development of similar technologies. Any such
infringement or misappropriation, should it occur, could have a material
adverse effect on the Company's business, results of operation and financial
condition. Furthermore, litigation may be necessary to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, results of operations and
financial condition.
To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement or indemnification by
the Company with respect to current or future products. The Company expects
that participants in its markets will be increasingly subject to infringement
claims as the number of products and competitors in the Company's industry
segment grows. Any such claim, whether meritorious or not, could be time-
consuming, result in costly litigation, cause product installation delays,
prevent the Company from using important technologies or methods, subject the
Company to substantial damages, or require the Company to enter into royalty
or licensing agreements. Such royalty or licensing agreements might not be
available on terms acceptable to the Company or at all. As a result, any such
claim could have a material adverse effect upon the Company's business,
results of operations and financial condition.
YEAR 2000 RISKS
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. This could result in system failures or miscalculations
causing disruptions of operations including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements. The Company has established procedures for evaluating and
managing the risks and costs associated with this problem and believes that
its computer systems are currently Year 2000 compliant. However, many of the
Company's customers maintain
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their Internet operations on commercially available operating systems, which
may be impacted by Year 2000 complications. In addition, the Company relies on
third party vendors for certain equipment and software included within the
Company's services which may not be Year 2000 compliant. The Company is in the
early stages of conducting an audit of its third-party suppliers as to the
Year 2000 compliance of their systems. The Company does not believe it will
incur significant incremental costs in order to comply with Year 2000
requirements. However, failure of the Company's internal computer systems or
of such third-party equipment or software, or of systems maintained by the
Company's suppliers, to operate properly with regard to the Year 2000 and
thereafter could require the Company to incur significant unanticipated
expenses to remedy any problems and could have a material adverse effect on
the Company's customers, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as actual or anticipated variations in the Company's results of operations,
announcements of technological innovations or new Network Security Centers,
new products or services introduced by the Company or its competitors, changes
in financial estimates by securities analysts, conditions and trends in the
Internet, general market conditions and other factors. Further, the stock
markets, and in particular the Nasdaq National Market, have experienced
extreme price and volume fluctuations that have particularly affected the
market prices of equity securities of many technology companies and that often
have been unrelated or disproportionate to the operating performance of such
companies. The trading prices of many technology companies' stocks are at or
near historical highs and reflect price to earnings ratios substantially above
historical levels. There can be no assurance that these trading prices and
price to earnings ratios will be sustained. These broad market factors may
adversely affect the market price of the Common Stock. These market
fluctuations, as well as general economic, political and market conditions
such as recessions, interest rates or international currency fluctuations, may
adversely affect the market price of the Common Stock. In the past, following
periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such
companies. Such litigation, if instituted, could result in substantial costs
and a diversion of management's attention and resources, which would have a
material adverse effect on the Company's business, results of operations and
financial condition.
CONTROL BY PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS
Upon completion of this Offering, the Company's executive officers,
directors and existing 5% and greater stockholders (and their affiliates)
will, in the aggregate, beneficially own approximately 68.4% of the Company's
outstanding Common Stock (66.1% if the Underwriters' over-allotment option is
exercised in full). As a result, such persons, acting together, will have the
ability to control all matters submitted to stockholders of the Company for
approval (including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of the Company's assets) and
to control the management and affairs of the Company. Accordingly, such
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of the Company, impede a merger, consolidation,
takeover or other business combination involving the Company or discourage a
potential acquirer from making a tender offer or otherwise attempting to
obtain control of the Company, which in turn could have an adverse effect on
the market price of the Common Stock. See "Management" and "Principal and
Selling Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock (including shares issued upon
the exercise of outstanding options and warrants) in the public market after
this offering could adversely affect the market price of the Common Stock.
Such sales also might make it more difficult for the Company to sell equity or
equity-related securities in the future at a time and price that the Company
deems appropriate. In addition to the 3,250,000 shares of Common Stock offered
hereby (assuming no exercise of the Underwriters' over-allotment option), as
of the date of this Prospectus, there will be 10,495,686 shares of Common
Stock outstanding (including 600,000 shares expected to be issued upon
exercise of the Series F Warrants prior to the closing of the Offering), all
of
16
<PAGE>
which are restricted shares ("Restricted Shares") under the Securities Act of
1933, as amended (the "Securities Act"). As of such date, no Restricted Shares
will be eligible for sale in the public market. Following the expiration of
180-day lock-up agreements (the "Lock-up Period") with the representatives of
the Underwriters or the Company, (i) 2,507,246 of the Restricted Shares will
be eligible for immediate sale without restriction under Rules 144(k) or 701
under the Securities Act, (ii) 7,188,440 of the Restricted Shares will be
eligible for sale subject to compliance with the volume and other restrictions
of Rule 144, and (ii) 800,000 of the Restricted Shares (including 600,000
shares expected to be issued upon exercise of the Series F Warrants prior to
the closing of the Offering) will become eligible for sale at various times
after the Lock-up Period upon expiration of applicable holding periods under
Rule 144, subject in some cases to the volume and other restrictions of Rule
144. In addition, as of June 30, 1998, there were outstanding 1,756,940
options and 292,910 warrants to purchase shares of the Company (excluding
600,000 shares which are expected to be issued upon exercise of the Series F
Warrants prior to the closing of the Offering) and all of such options and
warrants will be subject to 180-day lock-up agreements. Following the
expiration of the Lock-up Period, all of the warrants will be exercisable and
369,518 of such options will be exercisable. Credit Suisse First Boston
Corporation may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. In
addition, the holders of approximately 8,839,918 Restricted Shares and
warrants to purchase 892,910 shares of Common Stock of the Company are
entitled to certain rights with respect to registration of such shares for
sale in the public market. If such holders sell in the public market, such
sales could have a material adverse effect on the market price of the
Company's Common Stock.
Immediately after this Offering, the Company intends to register
approximately 2,956,940 shares of Common Stock subject to outstanding options
and reserved for issuance under its stock option and purchase plans. See
"Shares Eligible for Future Sale."
BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS; USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
being offered by the Company hereby at an assumed initial public offering
price of $14.00 per share are estimated to be approximately $39.5 million
(approximately $45.8 million if the Underwriters' over-allotment option is
exercised in full), after deducting the estimated underwriting discount and
estimated offering expenses. The principal purposes of this Offering are to
obtain additional capital, create a public market for the Common Stock,
facilitate future access by the Company to public equity markets and to
provide increased visibility and credibility in a marketplace where many of
the Company's current and potential competitors are or will be publicly held
companies. The Company expects to use such proceeds for general corporate
purposes, including working capital, operating losses and capital expenditures
for geographic expansion, and the repayment of the funding of certain existing
and expected indebtedness. The Company may use a portion of the net proceeds
of this Offering to repay approximately $6.0 million of debt that bears
interest at the rate of 13.5% per annum and has a maturity date of June 1999.
The lenders have the right to require the Company to repay the full amount of
such debt after the closing of this Offering. The Company's management will
retain broad discretion in the allocation of a substantial portion of the net
proceeds. The failure of management to apply such funds effectively could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Use of Proceeds."
The Company believes that the net proceeds from this offering, together with
existing cash balances, anticipated cash flows from operations and anticipated
borrowings to finance a portion of its capital expenditures, should be
sufficient to meet its capital requirements for at least the next 12 months.
However, there can be no assurance that the Company will be successful in
generating anticipated levels of cash from operations or borrowings. If the
Company is unable to generate sufficient cash flow from operations or
additional borrowings, it may be required to sell assets, scale down its
operations and expansion plans, refinance all or a portion of its existing
indebtedness or obtain other sources of financing earlier than planned, any of
which could have a material adverse effect on the Company's business, results
of operations and financial condition. There can be no assurance that any such
refinancing would be available on commercially reasonable terms, or at all, or
that any other financing could be obtained.
17
<PAGE>
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW
Upon completion of this offering, the Company's Board of Directors will have
the authority to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no current plans to issue shares of
Preferred Stock. The Company is also subject to certain provisions of Delaware
law which could have the effect of delaying, deterring or preventing a change
in control of the Company, including Section 203 of the Delaware General
Corporation Law, which prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years from the date the person became an interested stockholder unless certain
conditions are met. In addition, the Company's certificate of incorporation
and bylaws contain certain provisions that, together with the ownership
position of the Company's executive officers and directors and their
affiliates, could discourage potential takeover attempts and make more
difficult attempts by stockholders to change management which could adversely
affect the market price of the Company's Common Stock. See "--Control by
Principal Stockholders, Executive Officers and Directors" and "Description of
Capital Stock."
NO PRIOR MARKET FOR COMMON STOCK
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market will develop
or be sustained after this Offering or that investors will be able to sell the
Common Stock should they desire to do so. The initial public offering price
will be determined by negotiations between the Company and the representatives
of the Underwriters and may bear no relationship to the price at which the
Common Stock will trade upon completion of this offering. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock in this Offering will suffer immediate and
substantial dilution of $11.03 per share in the net tangible book value of the
Common Stock from the initial public offering price. To the extent that
outstanding options or warrants to purchase the Company's Common Stock are
exercised, there may be further dilution. See "Dilution."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
being offered by the Company hereby at an assumed initial public offering
price of $14.00 per share are estimated to be approximately $39.5 million
(approximately $45.8 million if the Underwriters' over-allotment option is
exercised in full), after deducting the estimated underwriting discount and
offering expenses. The Company will not receive any proceeds from the sale of
Common Stock by the Selling Stockholders.
The principal purposes of this Offering are to obtain additional capital,
repay certain existing and expected indebtedness, create a public market for
the Common Stock, facilitate future access by the Company to public equity
markets and to provide increased visibility and credibility in a marketplace
where many of the Company's current and potential competitors are or will be
publicly held companies. The Company expects to use such proceeds for general
corporate purposes, including working capital, the funding of operating losses
and capital expenditures for geographic expansion, and the repayment of
certain existing and expected indebtedness. The Company may use a portion of
the net proceeds of this Offering to repay approximately $6.0 million of debt
that bears interest at the rate of 13.5% per annum and has a maturity date of
June 1999. The lenders have the right to require the Company to repay the full
amount of such debt after the closing of this Offering. The Company's
management will retain broad discretion in the allocation of a substantial
portion of the net proceeds. Pending use of the net proceeds for the above
purposes, the Company intends to invest such funds in short-term, interest
bearing, investment grade securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Risk Factors--Broad Management Discretion in
Allocation of Proceeds."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain all available funds and any
future earnings of its business for use in the operation of its business and
does not anticipate paying any cash or other dividends in the foreseeable
future. In addition, the terms of the Company's current credit facility
prohibit the paying of dividends without the lender's consent.
19
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1998: (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the
Company giving effect to the conversion of the outstanding Preferred Stock
into Common Stock and the filing of a Restated Certificate of Incorporation
prior to the closing of this Offering; and (iii) the pro forma capitalization
of the Company as adjusted to reflect the receipt of the estimated net
proceeds from the sale of the 3,110,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $14.00 per
share, after deducting the estimated underwriting discount and offering
expenses payable by the Company, and the assumed exercise of Warrants to
purchase 600,000 shares of Series F Preferred Stock at $6.00 per share. This
table contains unaudited numbers and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, net of current
maturities..................................... $ 4,429 $ 4,429 $ 4,429
Redeemable convertible preferred stock; $0.001
par value, 7,432,810 shares authorized actual;
6,363,030 shares issued and outstanding,
actual; no shares authorized, issued or
outstanding pro forma and pro forma as
adjusted....................................... 12,480 -- --
Stockholders' equity:
Convertible Series A preferred stock, $0.001 par
value; 1,400,000 shares authorized, issued and
outstanding, actual; no shares authorized,
issued or outstanding pro forma and pro forma
as adjusted.................................... 1 -- --
Preferred Stock, $0.001 par value, no shares
authorized, issued or outstanding actual;
2,000,000 shares authorized pro forma and pro
forma as adjusted; no shares issued or
outstanding pro forma and pro forma as
adjusted....................................... -- -- --
Common Stock, $0.001 par value, 40,000,000
shares authorized actual, pro forma and pro
forma as adjusted; 2,272,656 shares issued and
outstanding actual; 10,035,686 shares issued
and outstanding pro forma; 13,745,686 shares
issued and outstanding pro forma as adjusted(1)... 2 11 14
Additional Paid in Capital...................... 4,687 17,159 60,248
Deferred Compensation related to grant of common
stock options, net of amortization............. (2,772) (2,772) (2,772)
Accumulated deficit............................. (16,664) (16,664) (16,664)
-------- -------- --------
Total stockholders' equity (deficit)............ (14,746) (2,266) 40,826
-------- -------- --------
Total capitalization............................ $ 2,163 $ 2,163 $ 45,255
======== ======== ========
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1998. The pro
forma as adjusted amounts include the number of shares to be issued upon
the assumed exercise of warrants outstanding as of June 30, 1998 to
purchase Series F Preferred Stock, which are convertible into an aggregate
of 600,000 shares of Common Stock, and exclude (i) 1,756,940 shares
issuable upon exercise of options outstanding as of June 30, 1998 with a
weighted average exercise price of $1.99 per share, (ii) shares issuable
upon exercise of outstanding warrants as of June 30, 1998 to purchase
Series B Preferred Stock and Series D Preferred Stock, which are
convertible into an aggregate of 142,910 shares of Common Stock with a
weighted average exercise price of $1.31 per share, (iii) shares issuable
upon exercise of outstanding warrants as of June 30, 1998 to purchase an
aggregate of 150,000 shares of Common Stock at an exercise price of $11.20
per share (assuming an initial public offering price of $14.00 per share),
(iv) shares issuable upon exercise of options to purchase 20,000 shares of
Common Stock at an exercise price of $13.00 per share, and (v) 1,380,000
shares available for issuance under the Company's 1998 stock plans. See
"Management--Stock Plans" and Note 5 of Notes to Consolidated Financial
Statements.
20
<PAGE>
DILUTION
The pro forma net tangible book deficit of the Company was approximately
$2,266,000, or $0.23 per share of Common Stock, as of June 30, 1998. Pro forma
net tangible book value (deficit) per share represents the amount of total
tangible assets less total liabilities, divided by the total pro forma number
of shares of Common Stock outstanding, after giving effect to the automatic
conversion of all outstanding shares of Preferred Stock. After giving effect
to the sale of the 3,110,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $14.00 per share, after
deducting the estimated underwriting discount and offering expenses payable by
the Company and the assumed exercise of 600,000 Warrants to purchase Series F
Preferred Stock at $6.00 per share, the pro forma net tangible book value of
the Company, as adjusted, at June 30, 1998, would have been approximately
$40,826,000 or $2.97 per share of Common Stock. This amount represents an
immediate increase in such net tangible book value of $3.20 per share to
existing stockholders and an immediate dilution of $11.03 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $14.00
Pro forma net tangible book deficit at June 30, 1998......... $(0.23)
Increase attributable to new investors....................... 3.20
------
Adjusted pro forma net tangible book value after this
Offering...................................................... 2.97
------
Dilution per share to new investors............................ $11.03
======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of June
30, 1998, the differences between the existing stockholders and new investors
with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company, and the average price
per share paid (based on an assumed initial public offering price of $14.00
per share before deducting the estimated underwriting discount and offering
expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1)
(2)..................... 10,635,686 77.4% $11,087,921 20.3% $ 1.04
New Investors............ 3,110,000 22.6 43,540,000 79.7 14.00
---------- ----- ----------- -----
Total(1)............... 13,745,686 100.0% $54,627,921 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1998. Pro forma
as adjusted amounts include the number of shares to be issued upon the
assumed exercise of warrants outstanding as of June 30, 1998 to purchase
Series F Preferred Stock, which are convertible into an aggregate of
600,000 shares of Common Stock, and exclude (i) 1,756,940 shares issuable
upon exercise of options outstanding, as of June 30, 1998 with a weighted
average exercise price of $1.99 per share, (ii) shares issuable upon
exercise of outstanding warrants as of June 30, 1998 to purchase Series B
Preferred Stock and Series D Preferred Stock, which are convertible into
an aggregate of 142,910 shares of Common Stock with a weighted average
exercise price of $1.31 per share, (iii) shares issuable upon exercise of
outstanding warrants as of June 30, 1998 to purchase an aggregate of
150,000 shares of Common Stock at an exercise price of $11.20 per share
(assuming an initial public offering price of $14.00 per share), (iv)
shares issuable upon exercise of options to purchase 20,000 shares of
Common Stock at an exercise price of $13.00 per share, and (v) 1,380,000
shares available for issuance under the Company's 1998 stock plans. See
"Management--Stock Plans" and Note 5 of Notes to Consolidated Financial
Statements.
(2) Sales by the Selling Stockholders will reduce the number of shares of
Common Stock held by existing stockholders to 10,495,686 or 76.4% of the
total number of shares (or 73.7% if the Underwriters' over-allotment
option is exercised in full) and will increase the number of shares of
Common Stock held by new investors to 3,250,000 or 23.6% (or 26.3% if the
Underwriters' over-allotment option is exercised in full). See "Principal
and Selling Stockholders."
21
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operation," the Financial Statements and the Notes thereto and the other
information contained in this Prospectus. The selected statements of
operations data for the years ended March 31, 1996, 1997 and 1998 and the
selected balance sheet data as of March 31, 1997 and 1998, are derived from,
and are qualified by reference to, the audited financial statements of the
Company appearing elsewhere in this Prospectus. The selected statements of
operations data for the year ended March 31, 1995, and the selected balance
sheet data as of March 31, 1995 and 1996, are derived from audited financial
statements of the Company not included herein. The selected statement of
operations data for the year ended March 31, 1994 and for the three months
ended June 30, 1997 and 1998, and the selected balance sheet data as of March
31, 1994 and June 30, 1998, are derived from unaudited financial statements of
the Company not included in this Prospectus which have been prepared by the
Company on a basis consistent with the audited financial statements appearing
elsewhere in the Prospectus. The historical results are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
----------------------------------------------------- ---------------
1994 1995 1996 1997 1998 1997 1998
----------- --------- --------- --------- --------- ------ -------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Service revenues........ $ 151 $ 800 $ 2,525 $ 6,300 $ 11,317 $2,461 $ 3,720
Cost of service
revenues............... 83 322 1,424 4,181 9,825 1,745 4,023
------ -------- --------- --------- --------- ------ -------
Gross margin............ 68 478 1,101 2,119 1,492 716 (303)
Operating expenses:
Sales and marketing... 127 579 1,792 3,109 4,306 868 2,134
Engineering and
development.......... 78 93 162 275 799 142 299
General and
administrative....... 110 253 766 1,064 1,551 341 688
------ -------- --------- --------- --------- ------ -------
Total operating
expenses........... 315 925 2,720 4,448 6,656 1,351 3,121
------ -------- --------- --------- --------- ------ -------
Operating loss.......... (247) (447) (1,619) (2,329) (5,164) (635) (3,424)
Interest expense, net... (1) (1) (131) (323) (471) (83) (208)
------ -------- --------- --------- --------- ------ -------
Net loss................ $ (248) $ (448) $ (1,750) $ (2,652) $ (5,635) $ (718) $(3,632)
Accretion on redeemable
convertible preferred
stock.................. (12) (80) (263) (478) (1,069) (132) (337)
------ -------- --------- --------- --------- ------ -------
Net loss attributable to
common stockholders.... $ (260) $ (528) $ (2,013) $ (3,130) $ (6,704) $ (850) $(3,969)
====== ======== ========= ========= ========= ====== =======
Basic and diluted net
loss per share(1)...... $(1.39) $ (0.39) $ (1.07) $ (1.58) $ (3.31) $(0.42) $ (1.81)
====== ======== ========= ========= ========= ====== =======
Shares used in computing
basic and diluted net
loss per share(1)...... 187 1,350 1,889 1,982 2,025 2,005 2,198
====== ======== ========= ========= ========= ====== =======
Pro forma basic and
diluted net loss per
share(1)............... $ (0.60) $ (0.36)
========= =======
Shares used in computing
pro forma basic and
diluted net loss per
share(1)............... 9,355 9,961
========= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1998
----------- ------ ------- ------- -------- -----------
(UNAUDITED) (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 339 $1,149 $ 420 $ 3,081 $ 1,447 $ 6,176
Total current assets.... 378 1,329 1,056 3,927 2,786 10,030
Total current
liabilities............ 90 333 1,695 3,291 5,749 15,760
Capital lease
obligations, net of
current portion........ 43 205 908 1,946 3,444 4,429
Total stockholders'
deficit................ (271) (766) (2,762) (5,882) (12,414) (14,746)
</TABLE>
- --------
(1) See Notes 1 and 5 of Notes to Financial Statements for an explanation of
the determination of the number of shares used in computing per share
amounts.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in such
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed below and in "Risk Factors"
and "Business," as well as those discussed elsewhere in this Prospectus.
OVERVIEW
Pilot is the leading provider of comprehensive security services that
incorporate high bandwidth connectivity and enable secure electronic commerce
over the Internet. Pilot's services include secure access and gateway
services, secure hosting and electronic commerce services, and secure extranet
and virtual private networking services. The Company delivers its services
from geographically dispersed Network Security Centers that are connected
through its secure high performance Internet backbone.
The Company was incorporated in August 1992 and commenced operations in
1993. The Company opened its first Network Security Center in the San
Francisco metropolitan area in 1993, followed by three additional centers in
the Los Angeles, New York and Chicago metropolitan areas in 1995. The Company
is commencing operations at Network Security Centers in the Boston,
Minneapolis, Washington, D.C. and London metropolitan areas during 1998.
Customers subscribe to the Company's services for an initial setup fee plus
a fixed monthly fee. The Company's contracts with its customers are generally
based on a one-year term with renewal periods. The minimum first-year
commitment is $62,000 consisting of an installation fee of $6,000 per month
for the first two months of service and a recurring fee of $5,000 per month
for ten months. Service fees vary according to the services selected by the
customer. In fiscal 1998, the average new customer commitment for the first
year of service was $81,000. Installation fees are typically recognized as
revenue over the installation period, which is generally 60 days. The ongoing
monthly fees are billed one month in advance for the following month and
recognized as revenue when earned in the following month.
The Company has recently expanded and expects to continue to expand its
capacity significantly, sales and marketing activities and the development of
new services by making significant investments in new and existing Network
Security Centers. This subjects the Company to relatively large increments of
fixed expenses in advance of potential future revenues. As a result, the
Company has incurred and expects to incur substantially higher costs of
revenues during these periods. The Company has and anticipates that it will
continue to add customers over time to utilize this planned capacity
expansion. However, because its services are offered on a subscription basis
rather than for an up front fee, revenues from any additional customers
increase gradually. As a result, although the planned capacity expansion may
potentially increase the Company's revenue and profitability over the long
term, the Company experienced a decline in gross margin and an increase in net
loss in fiscal 1997 and expects to continue to experience significant net
losses on a quarterly and annual basis for the forseeable future, including a
decline in gross margin at least through fiscal 1999.
Since the Company's inception, it has experienced operating losses and
negative cash flows from operations in each quarterly and annual period. As of
June 30, 1998, the Company had an accumulated deficit of approximately $16.7
million. The revenue and income potential of the Company's business and market
is unproven, and the Company's limited operating history makes an evaluation
of the Company and its prospects difficult. The Company and its prospects must
be considered in light of the risks, expenses and difficulties encountered by
companies in the new and rapidly evolving market for Internet system and
network management solutions. To address these risks, among other things, the
Company must market its brand name effectively,
23
<PAGE>
provide scaleable, reliable and cost-effective services, continue to grow its
infrastructure to accommodate new Network Security Centers and increased
bandwidth use of its network, expand its channels of distribution, retain and
motivate qualified personnel and continue to respond to competitive
developments. Failure of the Company to achieve market acceptance of its
services would have a material adverse effect on the Company's business,
results of operations and financial condition. There can be no assurance that
the Company will ever achieve profitability on a quarterly or an annual basis
or will sustain profitability if achieved. See "Risk Factors--Limited
Operating History; History of Losses."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statement of operations to
service revenues.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
YEAR ENDED MARCH 31, (UNAUDITED)
------------------------ -----------------
1996 1997 1998 1997 1998
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Service revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of service revenues........ 56.4 66.4 86.8 70.9 108.1
------ ------ ------ ------- -------
Gross margin.................... 43.6 33.6 13.2 29.1 (8.1)
Operating expenses:
Sales and marketing........... 71.0 49.3 38.1 35.3 57.4
Engineering and development... 6.4 4.4 7.1 5.7 8.0
General and administrative.... 30.3 16.9 13.6 13.9 18.5
------ ------ ------ ------- -------
Total operating expenses.... 107.7 70.6 58.8 54.9 83.9
------ ------ ------ ------- -------
Operating loss.................. (64.1) (37.0) (45.6) (25.8) (92.0)
Interest expense, net........... (5.2) (5.1) (4.2) (3.4) (5.6)
------ ------ ------ ------- -------
Net loss........................ (69.3)% (42.1)% (49.8)% (29.2)% (97.6)%
====== ====== ====== ======= =======
</TABLE>
FISCAL YEARS ENDED MARCH 31, 1996, 1997 AND 1998
Service revenues. Service revenues consist of monthly fees for installation,
recurring services and, to a lesser extent, one-time fees for management and
consulting services such as security audits. The Company's service revenues
increased 150% from $2.5 million in fiscal 1996 to $6.3 million in fiscal 1997
and increased an additional 80% to $11.3 million in fiscal 1998. The growth in
the Company's service revenues over this period resulted primarily from an
increase in the number of customers and to a lesser extent from increases in
the number of service offerings and in service revenues per customer. To date,
a substantial majority of the Company's revenues have been derived from its
secure access, gateway and hosting services.
Cost of service revenues. The Company's cost of service revenues is
comprised primarily of the Company's costs for network bandwidth, equipment
costs and salaries and benefits for the Company's customer service and
operations personnel, including its network engineers, backbone engineers,
network management and systems and installation personnel. Network bandwidth
consists of costs for access to and use of third-party communications
networks.
Cost of service revenues increased from $1.4 million in fiscal 1996 to $4.2
million in fiscal 1997 and to $9.8 million in fiscal 1998. The Company's cost
of service revenues as a percentage of service revenues increased from 56.4%
in fiscal 1996 to 66.4% in fiscal 1997, and to 86.8% in fiscal 1998. The
increases in cost of service revenues in absolute dollars and as a percentage
of service revenues were due to increased costs
24
<PAGE>
associated with the build-out and operation of the Company's Network Security
Centers, including increased costs for its network bandwidth, equipment costs
and salaries and benefits for its customer service and operations personnel.
As discussed above, the Company expects cost of service revenues to increase
on an absolute basis and as a percentage of revenues at least through fiscal
1999 as a result of the planned expansion of the Company's Network Security
Centers.
Sales and marketing. The Company's marketing and sales expenses are
comprised primarily of salaries, commissions and benefits for the Company's
marketing and sales personnel and marketing expenses for items such as trade
shows and product literature. The Company's sales and marketing expenses
increased from $1.8 million in fiscal 1996 to $3.1 million in fiscal 1997 and
to $4.3 million in fiscal 1998. These increases were primarily the result of
hiring additional marketing and sales personnel and expanding marketing
programs in connection with the Company's expansion of its operations. The
Company expects that marketing and sales expenses will continue to increase in
absolute dollars but may begin to decline as a percentage of total revenues to
the extent recurring revenues from current customers, which tend to have lower
marketing and sales expenses, increase as a percentage of total revenues.
Engineering and development. The Company's engineering and development
expenses are comprised primarily of salaries and benefits for its engineering
and development personnel and fees paid to consultants. These individuals work
on day-to-day security operations, development of new processes and
methodologies, and integration of best-of-breed components into the Company's
secure operating environment. The Company's engineering and development
expenses increased from $162,000 in fiscal 1996 to $275,000 in fiscal 1997 and
to $799,000 in fiscal 1998. The Company's security and services development
expenses grew between the comparison periods primarily due to the addition of
engineering personnel required to support the Company's expanded service
offerings. The Company expects that engineering and development expenses will
continue to increase in absolute dollars as the Company makes additional
investments in developing its secure electronic commerce services.
General and administrative. The Company's general and administrative
expenses are comprised primarily of salaries and benefits for the Company's
general management and administrative personnel as well as fees paid for
professional services. The Company's general and administrative expenses
increased from $766,000 in fiscal 1996 to $1.1 million in fiscal 1997 and to
$1.6 million in fiscal 1998. These increases were primarily the result of
increased hiring of general and administrative personnel, and costs for
consultants and professional services providers. These increased expenses
reflected the Company's need for additional general and administrative
personnel to handle the expansion of the Company's operations. General and
administrative costs are expected to increase significantly in absolute
dollars to the extent the Company expands its operations and as a result of
costs associated with being a public company.
Interest expense, net. The Company's net interest expense increased from
$131,000 in fiscal 1996 to $323,000 in fiscal 1997 and to $471,000 in fiscal
1998. The increases in net interest expense between the comparison periods
were primarily the result of increased borrowings as the Company entered into
equipment loans and lease agreements to finance the construction of its
Network Security Centers.
Income Tax Benefit. There has been no provision for income taxes in fiscal
1996, 1997 and 1998 due to the Company's net losses. As of March 31, 1998, the
Company has approximately $9.5 million of operating loss carryforwards for
federal tax purposes. These expire at various periods through the year 2012.
Because of the uncertainties surrounding the Company's ability to utilize
those tax losses in future periods, the Company does not carry a corresponding
net tax asset in its financial statements.
Net Loss Attributable to Common Stockholders. Net loss per share reflects a
charge for accretion on redeemable convertible preferred stock of $263,000 in
fiscal 1996, $478,000 in fiscal 1997 and $1,069,000 in fiscal 1998. The
Company will no longer record a charge for accretion on redeemable convertible
preferred stock upon conversion of all outstanding Preferred Stock of the
Company at the closing of this Offering.
25
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited statements of operations
data of the Company for each of the five quarters for the period ended June
30, 1998, as well as such data expressed as a percentage of the Company's net
revenues for the quarters presented. This information has been derived from
the Company's unaudited financial statements, which, in management's opinion,
have been prepared on substantially the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information
for the quarters presented. This information should be read in conjunction
with the Financial Statements and Notes thereto included elsewhere in this
Prospectus. The operating results in any quarter are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1998 1998
-------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Service revenues........ $2,461 $ 2,774 $ 2,977 $ 3,105 $ 3,720
Cost of service
revenues............... 1,745 2,290 2,623 3,167 4,023
------ ------- ------- ------- -------
Gross margin............ 716 484 354 (62) (303)
Operating expenses:
Sales and marketing.... 867 850 1,082 1,507 2,134
Engineering and
development........... 143 184 243 229 299
General and
administrative........ 341 390 435 385 688
------ ------- ------- ------- -------
Operating expenses..... 1,351 1,424 1,760 2,121 3,121
------ ------- ------- ------- -------
Operating loss.......... (635) (940) (1,406) (2,183) (3,424)
Interest expense, net... (83) (94) (145) (149) (208)
------ ------- ------- ------- -------
Net loss................ $ (718) $(1,034) $(1,551) $(2,332) $(3,632)
====== ======= ======= ======= =======
AS A PERCENTAGE OF
REVENUES:
Service revenues........ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of service
revenues............... 70.9 82.6 88.1 102.0 108.1
------ ------- ------- ------- -------
Gross margin............ 29.1 17.4 11.9 (2.0) (8.1)
Operating expenses:
Sales and marketing.... 35.3 30.6 36.3 48.5 57.4
Engineering and
development........... 5.7 6.6 8.2 7.4 8.0
General and
administrative........ 13.9 14.1 14.6 12.4 18.5
------ ------- ------- ------- -------
Operating expenses..... 54.9 51.3 59.1 68.3 83.9
------ ------- ------- ------- -------
Operating loss.......... (25.8) (33.9) (47.2) (70.3) (92.0)
Interest expense net.... (3.4) (3.4) (4.9) (4.8) (5.6)
------ ------- ------- ------- -------
Net loss................ (29.2)% (37.3)% (52.1)% (75.1)% (97.6)%
====== ======= ======= ======= =======
</TABLE>
Service revenues. The Company's revenues increased sequentially each
quarter. This growth in revenues resulted primarily from increases in the
number of customers and to a lesser extent increases in the number of service
offerings and in revenues per customer.
Cost of service revenues. The Company's cost of service revenues increased
in absolute dollars and as a percentage of revenues sequentially each quarter.
These increases in cost of service revenues in absolute dollars and as a
percentage of service revenues were primarily the result of costs associated
with expanding the Company's network to provide both broader geographic
coverage as well as increased types of services. Additionally, the Company
incurred higher than usual expenses in the quarters ended March 31 and June
30, 1998 due to the conversion of its backbone network from a "frame relay"
network to an ATM network. This new protocol will allow the Company to more
efficiently and cost effectively expand its communications bandwidth. The
increases in costs for the quarter ended June 30, 1998 also resulted from
increased costs for salaries, telecommunications, recruiting, temporary help
and depreciation associated with preparations to open four new Network
Security Centers. The Company expects that its cost of service revenues as a
percentage of service revenues may remain above 100% through at least fiscal
1999.
26
<PAGE>
Sales and marketing. Sales and marketing expenses as a percentage of total
revenues fluctuated from quarter to quarter primarily due to increases in
personnel, the timing of sales compensation and the timing of promotional
activities. The increase in sales and marketing expenses in the three quarters
for the period ended June 30, 1998 is largely the result of an increase in
sales and marketing personnel from 17 to 38 people during that period.
Engineering and development. Engineering and development expenses have
increased in absolute dollars and as a percentage of revenue as a result of
continuing efforts to develop new security methodologies, integrate and
enhance best-of-breed third-party technologies to support the Company's
security and add new service offerings.
General and administrative. General and administrative expenses have
generally increased primarily as a result of additional personnel, recruiting
fees and consulting costs. The increases in costs for the quarter ended June
30, 1998 resulted from increases in professional fees, business taxes,
salaries and amortization of deferred compensation. The Company expects that
general and administrative expenses will continue to increase in absolute
dollars.
DEFERRED COMPENSATION EXPENSE
Through June 1998, the Company recorded aggregate deferred stock
compensation of $3.2 million in connection with stock options granted during
that period. This deferred compensation is generally being amortized over 48
months in an accelerated manner consistent with Financial Accounting Standards
Board (FASB) Interpretation No. 28. The Company recognized approximately
$459,000 in deferred stock compensation expense through June 1998. The Company
expects total amortization of approximately $1.5 million during fiscal 1999,
$900,000 during fiscal 2000, $500,000 during fiscal 2001 and $200,000 during
fiscal 2002 as a result of deferred compensation expense recorded in fiscal
1998 and the first quarter of fiscal 1999. These amortization amounts will be
allocated to cost of service revenues, sales and marketing, engineering and
development and general and administrative costs based on the applicable job
function of each optionee. See Note 5 of Notes to Financial Statements.
FACTORS AFFECTING RESULTS OF OPERATIONS
The Company derives revenue from its customers primarily through initial set
up fees and ongoing monthly service charges. For each new customer, the
Company must incur costs in anticipation of the customer's decision to use the
Company's services and in advance of the receipt of sufficient revenues to
repay these costs and provide a return on the Company's investment. As a
result, a relatively large portion of the Company's expenditures are fixed in
the short term, and the Company's success is substantially dependent on the
continuous growth in its customer base and the retention of its customers for
sufficient periods to provide returns on the Company's expenditures. The
Company's customers generally enter into one year contracts with the Company,
with renewal periods, and there can be no assurance that the Company's
customers will maintain or renew their commitments to use the Company's
services. The Company typically experiences a lengthy sales cycle for its
services, particularly given the importance to customers of adequately
securing Internet connectivity for electronic commerce and the need to educate
them regarding the requirements for effective network security. Any change in
the sales cycle for the Company's services, particularly as the Company
expands its customer base, could have a significant impact on the Company's
periodic results of operations. Changes in the rate of growth in the Company's
customer base and the customer renewal rates have caused, and are expected to
continue to cause, significant fluctuations in the Company's results of
operations on a quarterly and an annual basis.
The Company expects to continue to experience significant fluctuations in
its future quarterly and annual results of operations due to a variety of
factors, many of which are outside the Company's control, including: demand
for and market acceptance of the Company's services and enhancements; the
timing of customer installations; provisions for customer discounts and
credits; the mix of services sold by the Company; introductions of services or
enhancements by the Company and its competitors; the length of sales cycles;
customer retention; the timing and success of marketing efforts and service
introductions by the Company; the
27
<PAGE>
timely expansion of existing Network Security Centers and completion of new
Network Security Centers; the timing and magnitude of capital expenditures,
including construction costs relating to the expansion of operations; capacity
utilization of its Network Security Centers; the introduction by third parties
of new security, Internet and networking technologies; increased competition
in the Company's markets; changes in the pricing policies of the Company and
its competitors; reliable security, continuity of service and network
availability; the ability to increase bandwidth as necessary; fluctuations in
bandwidth used by customers and fluctuations in the cost of such bandwidth;
the retention of key personnel; economic conditions specific to the Internet
and Internet security industries; and other general economic factors. In
addition, although the Company has not encountered significant difficulties in
collecting upon accounts receivable in the past, there can be no assurance
that the Company will be able to collect receivables on a timely basis.
For these and other reasons, in some future quarters, the Company's results
of operations may fall below the expectations of securities analysts or
investors, which could have a material adverse effect on the market price of
the Company's Common Stock. See "--Risks of Business Expansion and Management
of Growth" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The market for security monitoring, detection and defense services in
general is new and rapidly evolving. Growth of this market will depend, in
large part, upon the public recognition of the potential threat posed by
computer attackers and other unauthorized users, the increased use of the
Internet and corporate intranets for electronic commerce and business
communications, the ability of network infrastructures to support an
increasing number of users and services, and the continued development of new
and improved services for implementation across the Internet and between the
Internet and corporate intranets. If the necessary network infrastructure or
complementary products and services are not developed in a timely manner and,
consequently, the market for network security solutions fails to grow or grows
more slowly than the Company currently anticipates, the Company's business,
operating results and financial condition would be materially and adversely
affected. Moreover, to date, most businesses have purchased and managed their
own network security solutions and have not sought to outsource network
security to a third party service provider. As a result, customer acceptance
of outsourcing network security services is extremely limited. The Company has
spent, and intends to continue to spend, considerable resources educating
potential customers about the value of outsourcing services provided by the
Company. To date, the Company has experienced lengthy sales cycles for its
services. There can be no assurance that such expenditures will increase
market acceptance of the Company's services, or that such sales cycles will
shorten. If the market for such services fails to grow or grows more slowly
than the Company currently anticipates, the Company's business, operating
results and financial condition would be materially and adversely affected.
See "Risk Factors--Competition."
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. This could result in system failures or miscalculations
causing disruptions of operations including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements. The Company has established procedures for evaluating and
managing the risks and costs associated with this problem and believes that
its computer systems are currently Year 2000 compliant. However, many of the
Company's customers maintain their Internet operations on commercially
available operating systems, which may be impacted by Year 2000 complications.
In addition, the Company relies on third party vendors for certain equipment
and software included within the Company's services which may not be Year 2000
compliant. The Company is in the early stages of conducting an audit of its
third-party suppliers as to the Year 2000 compliance of their systems. The
Company does not believe it will incur significant incremental costs in order
to comply with Year 2000 requirements. However, failure of the Company's
internal computer systems or of such third-party equipment or software, or of
systems maintained by the Company's suppliers, to operate properly with regard
to the Year 2000 and thereafter could require the Company to incur significant
unanticipated expenses to remedy any problems and could have a material
adverse effect on the Company's customers, which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of capital stock totaling $10.6 million and through various
types of equipment loans and lease lines and working capital lines of credit.
At June 30, 1998, the principal source of liquidity for the Company was $6.2
million of cash and cash equivalents.
As of June 30, 1998, the Company also had an $8.0 million equipment line of
credit and lease facility with Transamerica Business Credit Corporation with
interest rates of approximately 14.5% and an unused balance of $3.5 million,
of which $500,000 is immediately available. In May 1998, the Company obtained
a $1.5 million working capital line of credit with Transamerica Business
Credit Corporation with a minimum interest rate of 11%. As of June 30, 1998,
the Company had borrowed an aggregate of $5.5 million under these lines of
credit and lease facilities. See Note 6 of Notes to Financial Statements.
In June 1998, the Company consummated a borrowing agreement with two lenders
providing an additional $6.0 million of short term financing. The loan expires
in June 1999 and bears interest at 13.5% per year. The loan may be pre-paid at
the Company's option after 6 months and at the option of the lenders at any
time after the closing of this Offering. As additional consideration, the
Company issued 150,000 warrants to purchase Common Stock at an exercise price
of $11.20 per share (assuming a public offering price of $14.00 per share).
The Company has determined that the warrants have a fair market value of $1.2
million. The Company has capitalized the cost of the warrants and expects to
write off such amount over the one-year term of the loan.
Since the Company began to offer its services in 1993, the Company has
experienced significant negative cash flows from operating activities. Net
cash used for operating activities was $806,000, $511,000 and $1.9 million in
fiscal 1996, fiscal 1997 and fiscal 1998, respectively. Net cash used for
operating activities in each of these periods was primarily the result of net
losses, and to a lesser extent increases in trade receivables, offset in part
by increases in depreciation and amortization, accounts payable and accrued
expenses. Net cash used for investing activities was $597,000, $651,000 and
$1.5 million in fiscal 1996, fiscal 1997 and fiscal 1998, respectively. Net
cash used for investing activities in these periods was almost entirely the
result of capital expenditures for the construction of Network Security
Centers, leasehold improvements, furniture and fixtures, and computers and
other equipment.
Net cash provided by financing activities in fiscal 1996, fiscal 1997 and
fiscal 1998 was $675,000, $3.8 million and $1.8 million, respectively. Of
these amounts, $903,000, $4.5 million and $3.0 million in fiscal 1996, fiscal
1997 and fiscal 1998, respectively, resulted from the issuance of preferred
stock, net of issuance costs and related warrants.
The Company's capital expenditures for fiscal 1998 were approximately $4.8
million. The Company plans to incur substantial additional capital
expenditures, primarily for additions to and expansions of its Network
Security Centers. Assuming the conversion of the Company's Redeemable
Preferred Stock, as of March 31, 1998 the Company's aggregate payment
commitments under bank borrowings, debt and capital lease obligations, and
noncancelable operating leases were $3.3 million, $3.0 million, $2.0 million
and $1.1 million in fiscal 1999, fiscal 2000, fiscal 2001 and fiscal 2002,
respectively.
The Company believes that the net proceeds from this offering, together with
existing cash balances, anticipated cash flows from operations and anticipated
borrowings to finance a portion of its capital expenditures, should be
sufficient to meet its capital requirements for at least the next 12 months.
However, there can be no assurance that the Company will be successful in
generating anticipated levels of cash from operations or borrowings. If the
Company is unable to generate sufficient cash flow from operations or
additional borrowings, it may be required to sell assets, scale down its
operations and expansion plans, refinance all or a portion of its existing
indebtedness or obtain other sources of financing earlier than planned, any of
which could have a material adverse effect on the Company's business, results
of operations and financial condition. There can be no assurance that any such
refinancing would be available on commercially reasonable terms, or at all, or
that any other financing could be obtained. See "Use of Proceeds" and Notes 3
and 6 of Notes to Financial Statements.
29
<PAGE>
BUSINESS
OVERVIEW
Pilot is the leading provider of comprehensive security services that
incorporate high-bandwidth connectivity and enable secure electronic commerce
over the Internet. The Company provides a broad range of security services for
a fixed monthly fee on an annual subscription-basis, including secure access
and gateway services, secure hosting and electronic commerce services and
secure extranet and virtual private networking services. The Company offers a
scalable solution that enables customers to quickly deploy and expand
electronic commerce capabilities by subscribing to Pilot's secure Internet
services.
Pilot's subscription-based secure Internet services allow customers to avoid
the risks associated with traditional approaches to Internet security.
Customers can also avoid extensive costs associated with implementing an in-
house solution, including set-up costs for security and systems design,
hardware, software, ISP services and labor, and ongoing costs for
telecommunications, staffing, maintenance and upgrades.
The foundation of Pilot's solution is its Dynamic Security Infrastructure,
consisting of a multi-layered defensive architecture and around-the-clock
security operations delivered through geographically dispersed Network
Security Centers. This infrastructure allows Pilot to continuously manage and
monitor Internet traffic to and from customer networks in order to respond in
real-time to security threats. The Pilot solution aggregates the experience
gained from protecting each customer against attacks and leverages such
experience for the collective benefit of all customers. The Dynamic Security
Infrastructure offers benefits over other security approaches by eliminating
single points of failure, enhancing attack detection, delivering real-time
defenses, and adapting continuously to external conditions. Customers can
concentrate on their core business because the secure infrastructure for
electronic commerce is provided by Pilot.
INDUSTRY BACKGROUND
Over the past several years, the Internet has become an increasingly
important means of communications. International Data Corporation (IDC)
estimates that the number of World Wide Web ("Web") users was approximately 69
million at the end of 1997 and will grow to 320 million users by the end of
2002. The explosive growth of the Internet is being driven not only by its
global reach, easy accessibility and use of open standards, but also by its
promise to greatly improve the cost efficiency and quality of communications.
To date, Internet growth has been fueled primarily by the use of general
applications such as electronic mail, chat and Web browsing. The Internet's
potential for more cost-efficient and higher quality communications has made
it an increasingly attractive platform for complex business applications such
as marketing and sales, contract negotiations and customer support. As a
result, an increasing number of businesses seek to use the Internet as a means
for extending their traditional business activities. Business activities over
the Internet involve not only commercial transactions, but also general
business communications. These communications include running mission-critical
applications across geographically dispersed facilities, exchanging highly
sensitive information and linking customers, remote employees and business
partners in extended business networks.
These business activities have become known as electronic commerce. Use of
the Internet for electronic commerce is expected to grow substantially. For
example, IDC estimates that the value of electronic commerce will grow from
$12 billion in 1997 to $426 billion in 2002.
Despite the advantages of conducting business on the Internet, lack of
Internet security is a significant inhibitor to the adoption and growth of
electronic commerce. The Internet is inherently vulnerable to security
breaches due to its easy accessibility, use of open standards and lack of
centralized management. As the Internet has developed into an increasingly
complex computing environment with multiple hardware, operating systems,
networking protocols and applications supplied by different vendors, it has
become even more vulnerable to security breaches. Although losses due to
computer crime and security breaches are difficult to estimate,
30
<PAGE>
independent industry sources estimate such losses were between $3 billion and
$5 billion in 1997. These intrusions draw unwelcome attention from the press
and financial community. As a result of security concerns, businesses are
investing substantial amounts of money in security technology. According to
market research firm INPUT, the total worldwide market for firewall software
and services alone is predicted to grow from $1.1 billion in 1995 to $16.2
billion in 2000.
Limitations of Existing Security Approaches
To date, much of the investment in security technology has been directed to
"point" products specifically designed to address only a single aspect of
Internet security. Perhaps the most widely used point product is the firewall,
which provides a barrier between a company and the Internet. Although there
are dozens of commercially available firewall software packages, they are
often difficult to install and must be configured and constantly maintained by
skilled personnel. Other popular point product technologies include encryption
(which protects information during transmission) and access security
mechanisms (such as user authentication and passwords). There are more than 15
different point products that companies can purchase and integrate to enhance
security.
However, even if all of these technologies are properly implemented, it is
often still possible for computer attackers to successfully breach security.
For example, in a 1995 study conducted by the FBI and the Computer Security
Institute, 30 percent of all reported successful break-ins involving the
Internet took place despite the presence of a firewall. This is possible
largely because point products typically provide only a static, single point
of defense which can fail if computer attackers find new loopholes to exploit.
Point products also suffer from being difficult to integrate and manage as a
single solution because they are generally developed by different vendors.
Finally, even if companies are successful in installing an integrated set of
point products, maintaining them requires companies to continuously invest in
updating current versions and training its security administrators.
To mitigate this complexity, some vendors have combined multiple point
products in an effort to provide more integrated product offerings. However,
customers using these products are often forced to make a trade-off between
selecting the best-of-breed products regardless of vendor, or installing a set
of point products that are integrated but not best-of-breed. Moreover, neither
stand-alone nor integrated product offerings address the inherent limitations
of static approaches, which do not evolve rapidly in response to the
increasing sophistication of attackers, the evolution of networks and the
increasing complexity and value of Internet applications. Fundamentally, such
offerings fail to effectively address security as a process, which is
characterized by the need to evolve with and respond rapidly to a continuously
changing network environment.
To address these concerns, some companies have outsourced the management of
their Internet security infrastructure to Internet Service Providers (ISPs)
and Web hosting services. However, ISPs and Web hosting services have
traditionally focused on providing high-bandwidth access and Web design
services and have generally addressed security concerns secondarily, if at
all, through outsourced administration of point product offerings.
THE PILOT SOLUTION
Pilot offers services designed to combine the highest level of commercially
available security with high bandwidth connectivity to enable secure
electronic commerce over the Internet. The foundation of Pilot's solution is
its Dynamic Security Infrastructure, consisting of a multi-layered defensive
architecture and security operations 24 hours a day, 7 days a week (24x7)
delivered through geographically dispersed Network Security Centers. This
infrastructure allows Pilot to continuously manage and monitor Internet
traffic to and from customer networks in order to respond in real-time to
security threats. The Pilot solution aggregates the experience gained from
protecting each customer against attacks and leverages such experience for the
collective benefit of all customers. As illustrated below, the Dynamic
Security Infrastructure offers benefits over other
31
<PAGE>
security approaches by eliminating single points of failure, enhancing attack
detection, delivering real-time defenses, and adapting continuously to
external conditions.
Pilot provides a broad range of security services for a fixed monthly fee on
an annual subscription basis, including secure access and gateway services,
secure hosting and electronic commerce services, and secure extranet and
virtual private networking services. The Company offers a scalable solution
that enables customers to quickly deploy and expand electronic commerce
capabilities by subscribing to Pilot's secure Internet services. As a result,
companies avoid costs associated with implementing an in-house solution,
including set-up costs for security and systems design, hardware, software,
ISP services and labor, and ongoing costs for telecommunications, staffing,
maintenance and upgrades. Pilot's services enable customers to concentrate on
their core business because the secure infrastructure for electronic commerce
is provided by Pilot.
[Graphic depicts two charts, side-by-side.
The chart in the left of the graphic depicts Static Security Products. The
left chart shows a gray cloud representing the Internet. A line of data passes
through a transparent box representing an Internet Service Provider and enters
directly into a Customer Network. The left chart states "Must be precisely
configured and constantly upgraded by dedicated in-house staff" and "Must be
continuously monitored and acted upon by customer."
The chart in the right of the graphic depicts Pilot's Dynamic Security
Infrastructure. It depicts the same gray cloud and line of data. However,
before reaching the Customer Network, the line of data passes through Pilot's
Dynamic Security Infrastructure. The Dynamic Security Infrastructure contains
active arrows indicating the action and responsive change that the Pilot
service provides. The right chart states "Fully configured and upgraded by
Pilot," "Statistical and event-based monitoring (24x7) by security engineers"
and "Multi-layer, fully redundant technology."]
STRATEGY
The Company's strategy is to become the leading supplier of secure
electronic commerce services for businesses worldwide. Key elements of the
Company's strategy include:
Maintain Leadership in Security and Electronic Commerce Services. Pilot
intends to maintain and enhance its technological leadership in security and
electronic commerce services. Pilot's Dynamic Security Infrastructure is the
first dynamic, multi-layered service with built-in security for corporate
Internet protection against computer attackers. It consists of proprietary
security processes incorporating third-party best-of-breed components. To
improve and upgrade its Dynamic Security Infrastructure the Company
continuously develops new software, methodologies and approaches, and
evaluates new security technologies. The Company intends to hire additional
network and Internet security experts to expand its database of security
knowledge and experience, and continue to invest in new electronic commerce
services.
Strengthen Marketing and Distribution Channels Through Strategic
Relationships. Pilot intends to expand the marketing and distribution of its
service offerings by pursuing strategic relationships with systems integrators
and consultants. The Company has established a strategic marketing
relationship with Arthur Andersen LLP ("Arthur Andersen") and is expanding its
relationship with GE Capital Information Technology Solutions, Inc. ("GE
Capital ITS"). In addition, the Company has engaged in joint-marketing
activities with many of its
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vendors, such as Sun Microsystems and Cisco Systems. The Company also intends
to build relationships with other market leaders, such as telecommunications
carriers, that can benefit from and leverage its secure communications
infrastructure.
Expand Global Presence. Pilot's mission is to make its service offerings
available on a global scale. The Company's services are currently offered
nationwide through Network Security Centers located in the San Francisco, Los
Angeles, New York and Chicago metropolitan areas. Pilot plans to expand its
Network Security Centers both nationally and internationally. Pilot is
commencing operations at Network Security Centers in the Boston, Minneapolis,
Washington, D.C. and London metropolitan areas during 1998. An important
element of Pilot's international expansion strategy is forming strategic
partnerships with companies which have established marketing and distribution
infrastructures in foreign markets, including systems integrators and
telecommunications carriers.
Offer Emerging Secure Electronic Commerce Services. Pilot's proprietary
Dynamic Security Infrastructure establishes a secure platform for electronic
commerce and business communications. Pilot plans to expand its offering of
electronic commerce services to include broad market applications that leverage
its secure network, such as electronic data interchange (EDI), secure
messaging, payment processing, bill presentment, electronic wallets,
micropayments and public key infrastructure (PKI) management, and specialized
vertical market applications in the transportation, financial services,
consumer, entertainment, and high-tech industries. Pilot plans to offer these
applications through continued enhancement of its core network and security
service offerings as well as through partnering with best-of-breed vendors.
SERVICES
The Company offers three categories of services: secure access and gateway
services; secure hosting and electronic commerce services; and secure extranet
and virtual private networking services. Customers subscribe to the Company's
services for an initial installation fee and a fixed monthly fee. The Company's
contracts with its customers are generally based on a one-year term with
renewal periods. Service fees vary according to the services selected by the
customer. The minimum first-year commitment is $62,000 consisting of
installation fees of $6,000 in each of the first two months of service followed
by a recurring fee of $5,000 per month for ten months. In fiscal 1998, the
average new customer first-year commitment was $81,000.
Secure Access and Gateway Services. The Company provides secure access and
gateway services that enable secure connectivity between a corporate network
and the Internet. Services range from secure access to electronic mail gateways
and Web servers to custom electronic commerce offerings.
Secure Internet Provides continuously monitored, secure
Services connectivity between an enterprise network and the
Internet at speeds of T-1 (1.5Mbps) to T-3
(45Mbps). These services include telecommunications
connectivity, selected gateway services and custom
security policy configuration to protect a
customer's internal network from unauthorized
access from the Internet.
- --------------------------------------------------------------------------------
Authentication Provides user and network device authentication,
Services including options for hardware-based token
authentication, Web traffic filtering or reporting
and virus scanning.
- --------------------------------------------------------------------------------
Secure Telecommuting Enables secure, high-performance telecommuting
Services between a remote user in a fixed-location and an
enterprise network.
- --------------------------------------------------------------------------------
Auxiliary Services Includes options for back-up communications and for
defining security zones within an enterprise
network.
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Secure Hosting and Electronic Commerce Services. The Company provides secure
hosting and electronic commerce services that combine high-throughput data
transmission (10Mbps and higher) and comprehensive host security.
Secure Hosting Includes hosting of FTP, World Wide Web and News
Services servers at Pilot's Network Security Centers.
Industry-standard hardware and software for these
services are dedicated to individual customers.
- -------------------------------------------------------------------------------
Secure Commerce Web Provides a secure operating system and network
infrastructure for Web-based and electronic
commerce applications. Dedicated Internet
bandwidth, extra database protection, and
monitoring software enable mission-critical systems
deployment.
- -------------------------------------------------------------------------------
Secure Flex Web Provides a secure network infrastructure for Web-
based and electronic commerce applications,
allowing customers to physically maintain some or
all of their application/Web servers at a Pilot
Network Security Center while retaining the ability
to directly maintain and manage the servers from
their location over a secure link. The Company
supports Windows NT and UNIX-based Internet
applications.
Secure Extranet and Virtual Private Network Services. The Company provides
secure extranet and virtual private network services that combine integrated
security and bandwidth to enable remote users or networks to communicate with
a local network. These services include encryption, authentication and access
control technologies to protect both the information in transit as well as the
security of the network.
Secure Road Warrior Provides authenticated, encrypted access to
internal networks over the Internet, for mobile
employees or business partners. This service cost-
effectively supports connectivity over any Internet
connection worldwide and protects against
eavesdropping and unauthorized access.
- -------------------------------------------------------------------------------
Corporate Partner Allows secure network-to-network worldwide
Privacy connectivity between a customer's enterprise
network and networks of business partners,
subsidiaries or branch offices.
See "Risk Factors--Risks Associated with the Emerging Market for Outsourced
Network Security Services."
PILOT DYNAMIC SECURITY INFRASTRUCTURE
The Pilot Dynamic Security Infrastructure consists of a multi-layered
defensive architecture, and 24x7 security operations provided through
geographically dispersed Network Security Centers.
Proprietary Architecture
Proprietary Security Processes. The Company has developed a set of
technology-based processes, including secure networking, a layered defense,
real-time data collection and analysis, and a feedback loop that continuously
updates a database of security threats and responses. ISPs typically permit
all traffic that is not explicitly restricted, while Pilot's secure network
blocks all traffic that is not explicitly permitted, greatly reducing the risk
of an attack. Legitimate inbound traffic from the Internet passes through a
number of increasingly protective defensive layers on its way to a customer.
Each layer provides a different type of protection, and combined, these layers
implement customer-specific security policies. This layered defense gives the
Company time to detect, analyze, plan and defend, thereby reducing the
probability of and minimizing the potential damage from an attack. Data
collection and analysis processes include security logging, monitoring and
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analysis and authentication. The data from these processes is then analyzed by
proprietary software that applies policy rules and statistical analysis to
identify patterns which could signal an attack in progress. This data along
with ongoing research into current attack methods is continuously used to
update the Company's defense databases and processes, resulting in a system
that learns from its experiences and adapts defenses to respond to emerging
attack techniques. This process allows the Company to aggregate the experience
gained from protecting each individual customer and leverage such experience
for the collective benefit of all customers.
Multi-Layered, Distributed Architecture. Pilot's multi-layered defense
distributes specific functions across separate devices. This adds isolation,
in which the breach of one device does not compromise another; detectability,
in which the time required to attack (and the time available to detect an
attack) is increased; and performance, in which the performance and
measurability of each device can be tailored for its particular purpose. In
contrast, a traditional firewall software package requires many services, such
as electronic mail, telnet, DNS, and FTP, to pass through a single device.
This complexity makes it difficult to rule out inadvertant interactions
between one type of service and another within the same device. Pilot's
distributed defense eliminates these interactions and simplifies attack
detection by distributing each function across separate devices. In addition,
the Company continuously evaluates new technologies to ensure that it
incorporates best-of-breed hardware and software into its infrastructure.
Security Operations
Trained Security Personnel. Pilot's security team includes expert engineers
with significant security experience. The Security Team consists of four
groups: (i) Security Operations, which handles the day-to-day management of
the Pilot Dynamic Security Infrastructure, manages incident investigation and
response, and applies standard procedures regarding changes to Pilot's systems
and services, (ii) Security Engineering, which is responsible for incident
analysis and escalation, attack pattern research, defense design, and service
extension, as well as the creation of new automated methodologies, (iii)
Security Infrastructure, which is responsible for the acquisition and
maintenance of security tools and the development of internal tools, and (iv)
the New Services Group, which incorporates Pilot's security processes into new
services introduced to customers.
Dynamic 24x7 Monitoring and Management. The Pilot Dynamic Security
Infrastructure provides a flexible, dynamic and rapid response capability, 24
hours per day, seven days per week, through its Security Team and the
monitoring and management methods illustrated below. All systems within the
Pilot Dynamic Security Infrastructure log their status and activities in
detail. Using sophisticated display and analysis packages developed by Pilot,
the Security Team detects and stores patterns indicative of an attack and
blocks attackers from further attempts. Patterns of actual and potential
attacks are collected in a centralized security database. Pilot's monitoring
and management methods allow it to protect customers by blocking new attacks
on a real-time basis and rapidly adapting and automating its security
defenses.
[CHART APPEARS HERE]
[Chart shows an arrow representing data moving out of a gray symbol of the
Internet through an oval representing the Pilot Security Network. It passes
from the cloud through symbols of Log Servers, Analysis Servers, a Security
Database and finally travels through symbols of Security Engineers performing
Monitoring and Management functions before traveling back through the Pilot
Security Network to a symbol of the Company's customers.]
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<PAGE>
Third-Party Audits. Pilot regularly engages independent third-party security
experts to audit its Dynamic Security Infrastructure. Such auditors prepare a
detailed technical report for Pilot's internal use, and an executive summary
available to Pilot's current and potential customers. The most recent audit
was conducted by Trident Data Systems in April 1998.
Network Infrastructure
Network Security Centers. The Company provides its services to customers by
connecting their networks to the Internet through its regional Network
Security Centers via dedicated, high-speed data lines. The Company currently
has Network Security Centers located in the San Francisco, Los Angeles, New
York and Chicago metropolitan areas. Pilot is commencing operations at Network
Security Centers in the Boston, Minneapolis, Washington D.C. and London
metropolitan areas during 1998. Each Network Security Center establishes
interconnections with other global and local Internet service providers. The
Company currently connects directly to the Internet at four major network
access points: Pacific Bell and Palo Alto Exchange in Northern California;
Sprint in New York; and Ameritech in Chicago. The Company also maintains
private connections from each Network Security Center to MCI and Sprint and
from two centers to UUNET. Each Network Security Center is also connected to
Pilot's Secure Asynchronous Transfer Mode (ATM) Backbone. As a result,
customer connectivity to various Internet sites can be improved by routing
traffic through Pilot's Secure ATM Backbone in addition to direct Internet
interconnections.
The distributed design of the Company's architecture allows Pilot to scale
security and electronic commerce services relatively easily. Additional
servers, telecommunications capacity and Pilot services can easily be added to
meet customer demand. In the event of equipment failure, operations are
disrupted only for the components involved, and not across all services.
Because of Pilot's standardized operations, internal monitoring and backup
equipment, a failure can be detected and a replacement operation scheduled
rapidly, minimizing downtime. Each Network Security Center is staffed by
technical, sales and customer support personnel, and operates as a physically
secured facility for Pilot and customer equipment. Each Network Security
Center is constructed with high-availability power supplies, fire suppression,
computer cooling systems and braced racks.
Pilot Secure ATM Backbone. In addition to bandwidth management, the Pilot
Secure ATM Backbone is used for Pilot-specific traffic, such as security
management and monitoring, and customer-specific traffic, such as secured
traffic between multiple Pilot customers. Unlike backbone networks of most
other providers, this network blocks all traffic except for traffic that is
specifically allowed. The Pilot Secure ATM Backbone also supports a wide
variety of encryption options, so that traffic between customers can be
secured at multiple levels.
The operation and expansion of the Company's network infrastructure is
subject to a number of risks, including those set forth in "Risk Factors--
Risks Associated with Security Breaches," "--Risks of Business Expansion and
Management Growth," "--Risks of System Failure," "--Dependence Upon
Scalability of the Company's Network" and "--Dependence on Third-Party Network
Infrastructure Providers."
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<PAGE>
CUSTOMERS
The Company's customers span a diverse range of industries. The Company's
services are suitable for any organization building or maintaining Internet-
based connectivity for their networks or applications at or above the Company's
minimum bandwidth requirements. The following is a representative list of
customers who as of May 31, 1998 have entered into annual commitments to
purchase more than $50,000 of services from the Company. No single customer
accounted for more than 5% of the Company's total revenues for the year ended
March 31, 1998.
<TABLE>
<S> <C> <C>
FINANCIAL AND HIGH-TECHNOLOGY CONSUMER,
PROFESSIONAL SERVICES ENTERTAINMENT,
Altera Corporation EDUCATION AND MEDIA
A.M. Best Company AVCOM Technologies,
American Bar Inc. 20th Century Fox, Inc.
Association Cogit Corporation American Stores Company
American Medical Computer Adaptive The Good Guys, Inc.
Association Technology Los Angeles Times
American Stock E-Stamp, Inc. Playboy Enterprises,
Exchange, Inc. Lucent Technologies Inc.
C.E. Unterberg, Towbin PeopleSoft, Inc. PR Newswire, Inc.
Co. Xilinx, Inc. Rainbow Media Holdings,
First Data Corporation Inc.
Gibson, Dunn & Crutcher INDUSTRIAL AND Saban Entertainment,
LLP MANUFACTURING Inc.
Graham & James, LLP Wilson Sporting Goods
Memorial Health Continental Grain Co.
Services Company Ziff-Davis Comdex &
Morrison & Foerster, Global Marine, Inc. Forums
LLP JM Huber Corporation
Troop Meisinger Steuber Kaiser Aluminum &
& Pasich, LLP Chemical Corporation
Pacific Enterprises
(parent of Southern
California Gas)
QST Industries, Inc.
</TABLE>
PeopleSoft, Inc. PeopleSoft, Inc., a leading provider of enterprise
application software products, selected Pilot to provide secure, high-bandwidth
access between its worldwide network and the Internet. Network availability
requirements will become increasingly significant for PeopleSoft as its
products incorporate the Internet and use it for product demonstrations and
deployment. Pilot engineered the integration of high-speed fiber connections,
the associated routing and the security infrastructure components to create
secure Internet connections for PeopleSoft. Secure connectivity and Pilot's
ongoing security services enable PeopleSoft to protect its critical internal
engineering and business networks from electronic intruders.
E-Stamp, Inc. E-Stamp, Inc. is the first company to be granted permission by
the United States Postal Service (USPS) to field test an Internet postage
solution. E-Stamp's products and services give users with a PC, printer and
Internet access the ability to easily and securely purchase and print postage.
In 1997, E-Stamp selected Pilot to provide Internet security and connectivity
services for its ESTAMP.COM(TM) commerce servers. The Pilot solution for E-
Stamp incorporates several distinct security elements, including encryption and
authentication components, secure data replication services, telecommunications
connections, physical security, high-availability features and protection
against a number of denial-of-service attack techniques. Pilot helped E-Stamp
design its network infrastructure and worked with the USPS and other auditor
groups to ensure adherence to security requirements.
20th Century Fox, Inc. 20th Century Fox, Inc. ("Fox"), a division of News
Corporation, is a leading media and entertainment enterprise. Pilot provides a
variety of electronic commerce and secure access services to Fox. Since 1995,
Fox has used Pilot's secure Internet services to connect its internal networks
to the Internet. More recently, Pilot has provided hosting services for Web
sites associated with Fox's "The X-Files" television show (www.thex-files.com)
and "Titanic" motion picture (www.titanicmovie.com). These sites are
particularly
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<PAGE>
vulnerable to electronic attack due to their content and high traffic levels.
For example, the site for "Titanic" initially received an average load of
several million hits per day, with an immediate 50% increase in the week
following the Academy Awards. Fox selected Pilot to provide Web hosting
services because of Pilot's expertise both in securing high-profile Web sites
and in providing high-performance connectivity and availability.
PR Newswire, Inc. PR Newswire, Inc., a leading distributor of full-text news
to the media and financial communities, requires immediate, highly-reliable
information flow between its regional offices and to newsmakers, news media
and Internet news consumers. PR Newswire selected Pilot in early 1997 to
provide secure connectivity between its worldwide WAN and the Internet. More
recently, PR Newswire has had discussions with Pilot regarding the addition of
independent connections from multiple cities to Pilot's backbone, in order to
establish a high bandwidth, high performance, secure virtual private network.
SALES, MARKETING AND CUSTOMER SUPPORT
The Company's sales, marketing, and customer support efforts are designed to
achieve broad market penetration by targeting enterprises that depend upon the
Internet for electronic commerce and business communications. The Company also
intends to build a recurring revenue base from such enterprises by continuing
to provide value-added services and through active account management.
As of June 30, 1998, the Company had 55 employees in sales, marketing, and
customer support. The Company's sales force is organized into separate groups
consisting of field sales (account generation), strategic accounts (account
retention and expansion), partnerships and alliances (channel and OEM sales),
and telesales. Each of these groups is further divided into geographical
regions within the United States. The Company's sales, marketing and customer
support employees are located at the Company's headquarters in Alameda,
California, and in most of the Company's other Network Security Centers.
To date, most of the Company's sales have been derived directly through the
efforts of its sales force. The Company is actively seeking to increase its
sales and marketing capabilities and coverage in the United States and to
expand internationally as new Network Security Centers are established outside
of the United States. See "Risk Factors--Risks of Business Expansion and
Management of Growth."
A key element of the Company's sales and marketing strategy is to strengthen
relationships with partners in order to generate an increasing percentage of
total sales through partners. The Company is building joint-marketing
relationships with strategic partners, such as Arthur Andersen and GE Capital
ITS, electronic commerce vendors, such as BroadVision, Open Market and
VeriSign, technology vendors such as Cisco Systems, Inc., Sun Microsystems,
Oracle Corporation, VPNet Technologies, IPass, and TrendMicro and selected
telecommunications partners. See "Risk Factors--Dependence on Other Third-
Party Relationships."
The Company's marketing organization is responsible for new service
introductions, public relations and marketing communications. New service
introductions include strategy, definition, pricing, competitive analysis,
launches, and partner program management. The Company stimulates demand for
its services through a broad range of marketing communications and public
relations activities, including co-marketing efforts with the Company's
marketing partners. Primary marketing communications vehicles include Web
banner and direct mail promotions, telemarketing, trade shows and seminars,
event sponsorship and management of the Company's Web site. Public relations
focuses on cultivating industry analyst and media relationships with the goal
of obtaining media coverage and public recognition of the Company's leadership
position in the market for secure electronic commerce and business
communications services.
The Company's account management and customer support organization provides
cross-functional teams for customers consisting of account management,
customer service and operations personnel. The Company regularly conducts
account reviews internally with customers to measure satisfaction. Pilot's
customer base provides revenue growth opportunities in the form of referrals,
recurring revenue, and new services. Customers generally enter into one year
contracts with the Company, with renewal periods. However, there can be no
assurance that the Company's customers will continue or renew their
commitments to use the Company's services.
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<PAGE>
STRATEGIC RELATIONSHIPS
The Company continues to establish strategic relationships with leading
firms which act as marketing partners, electronic commerce vendors, technology
vendors and telecommunications carriers.
Marketing Partners. The Company's marketing partners assist the Company in
introducing, marketing and selling the Company's services alongside their own
complementary services. The Company works with Arthur Andersen to identify and
develop mutual information security and electronic commerce opportunities. The
Company and Arthur Andersen executed several joint marketing programs between
June 1997 and June 1998, including fax and direct mail campaigns, seminars and
joint customer calls. In addition, the Company is expanding its relationship
with GE Capital ITS whereby GE Capital ITS will assist the Company in
marketing the Company's services to its corporate clients nationwide. GE
Capital ITS was formed in 1996 as a result of the acquisition of Ameridata
Technologies, Inc. by General Electric Capital Corporation, and resells
information technology products and services. Arthur Andersen and General
Electric Capital Corporation, the parent of GE Capital ITS, are also
stockholders of the Company, and certain General Electric business units are
subscribers to the Company's services. See "Certain Transactions."
Electronic Commerce Vendors. The Company is currently building relationships
with electronic commerce vendors, including BroadVision, Open Market and
VeriSign, that provide complementary technologies for assisting customers in
developing and deploying complete, high-performance electronic commerce
solutions. BroadVision and Open Market provide software applications for which
security, high availability, manageability and high performance are critical.
By focusing on a limited number of leading vendors, the Company builds
stronger technical and operational expertise with respect to these particular
technologies in order to provide better security and management services to
customers working with those vendors. The Company has mutual customers with
both BroadVision and Open Market and plans to engage in joint marketing and
cross-selling programs to these partners' customer and prospect bases. The
Company embeds digital certificates in its electronic commerce services to
provide increased data integrity and authentication. The generation and
distribution of these certificates is provided by VeriSign and included
transparently in the Company's services where appropriate.
Technology Vendors. The Company's technology vendors provide industry-
standard hardware, software or service components to the Company at favorable
prices with back-up support, which assists the Company in delivering its
services. In many cases the Company has executed or plans to execute co-
marketing or lead generation programs with these vendors. The Company's
principal technology vendors are Cisco Systems, Sun Microsystems, VPNet
Technologies, iPass, Oracle Corporation, Netscape Communications Corporation,
RSA Data Security and Trend Micro. The Company is a member of the "Cisco
Powered Network" branding program and carries the exclusive "innovator"
designation. Cisco Systems provides a market development fund consisting of a
portion of the Company's equipment spending with Cisco Systems to fund
marketing programs. In the fall of 1997, Cisco Systems, Pilot, and Arthur
Andersen conducted a six-city seminar program focused on electronic commerce
applications. Sun Microsystems provides hardware and system software for
internal operations and electronic commerce hosting services, and engages in
joint-marketing programs with the Company. The Company has engaged in close
technical development and joint-selling efforts with VPNet Technologies, a
leading developer of industry-standard, high-performance encryption hardware
and software, and iPass, a leading provider of Internet dial-up roaming
settlement services. The Company has entered into a relationship with Oracle
whereby Pilot can sublicense certain Oracle products to Pilot's electronic
commerce and hosting customers at discounted prices. The Company also uses
Oracle technology for security and ongoing operations tracking. Finally, the
Company employs certain products and support services from Netscape, RSA Data
Security and Trend Micro.
Telecommunications Carriers. Pilot intends to establish relationships with
telecommunications carriers to expand its service offerings, while providing
such carriers with value-added services. Because Pilot's secure Internet
access and gateway services and electronic commerce services are provided
through its Network Security Centers, which operate independently of the
source of bandwidth, Pilot can treat different sources of bandwidth
39
<PAGE>
as distinct distribution channels for its secure services. Pilot believes this
strategy can be implemented either through providing a discrete, outsourcing
solution at existing Pilot Network Security Centers for pass-through traffic
from a telecommunications carrier partner, or establishing a security center
within the operations of the telecommunications carrier partner which would be
supported by Pilot.
COMPETITION
The market served by the Company is new, rapidly evolving, highly
competitive and largely undefined. There are few substantial barriers to
entry, and the Company expects that it will face additional competition from
existing competitors and new market entrants in the future. The Company
believes that this market is characterized by a limited period of time during
which participants must grow rapidly and achieve a significant presence in the
market in order to compete effectively. The principal competitive factors in
this market include Internet system and security engineering expertise,
customer service, network and security capabilities, reliability, quality and
scalability of service, broad geographic presence, brand name, technical
expertise and functionality, the variety of services offered, the ability to
maintain and expand distribution channels, customer support, price, the timing
of introductions of new services, financial resources and conformity with
industry standards. There can be no assurance that the Company will have the
resources or expertise to compete successfully in the future.
The Company competes with a broad range of products and services. The
Company's competitors include companies providing security, electronic
commerce, and secure Internet networking products that are offered as stand-
alone point solutions. Companies offering stand-alone products include
providers of firewall software, such as Check Point Software Technologies and
AXENT Technologies (formerly Raptor Systems), security monitoring software,
such as ISS Group, and electronic commerce products. The security and
electronic commerce products provided by these companies are typically
implemented and managed by internal MIS departments of enterprises. In
addition, internal corporate MIS departments increasingly rely on third party
consultants or system integrators to manage the integration and implementation
of multiple stand-alone products from different vendors.
The Company also competes with third party service providers that offer
Internet hosting and access services, including (i) providers of server
hosting services, such as Exodus Communications and PSI Net; (ii) national and
regional ISPs such as Concentric Network Corp., UUNET, certain subsidiaries of
GTE Corporation and Global Center, which was recently acquired by Frontier
Corporation; and (iii) global, regional and local telecommunications companies
such as MCI, Sprint and WorldCom, and regional bell operating companies. The
Company also competes with information technology service firms providing
either outsourcing or systems integration services such as International
Business Machines Corporation and Electronic Data Systems. Although these
third party service providers often add security features to their service
offerings, either through internal development efforts or through the
incorporation of products purchased from vendors of stand-alone point
solutions, the Company believes that generally these competitors do not offer
the same level of security in their services as the Company. However, the
Company expects competition to intensify as third party service providers
incorporate a broader range of security, electronic commerce and secure
Internet networking services and products into their service offerings.
Furthermore, the Company may face competition from its vendors and other
partners. The Company's agreements with its vendors and other partners
generally do not limit or restrict those parties from selling similar products
and services directly to the Company's customers or its competitors, thereby
enabling such parties to compete against the Company. There can be no
assurance that such vendors or other partners will not compete with the
Company in the future.
Many of the Company's competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than the Company. As a result, certain of these competitors may be
able to develop and expand their network infrastructures and service offerings
more quickly, adapt to new or emerging technologies and changes in customer
requirements more quickly, take advantage of acquisition and other
opportunities more readily, devote greater resources to the marketing and sale
of their products and adopt more aggressive pricing policies than the Company.
In addition, these competitors have entered, and will likely continue to
enter, into
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<PAGE>
joint ventures or consortiums to provide additional services competitive with
those provided by the Company. Certain of the Company's competitors may be
able to provide customers with additional benefits in connection with their
Internet system and network management solutions, including reduced
communications costs, which could reduce the overall costs of their services
relative to the Company's. There can be no assurance that the Company will be
able to offset the effects of any resulting price reductions. In addition, the
Company believes that the businesses in which the Company competes are likely
to encounter consolidation in the near future, which could result in increased
price and other competition that could have a material adverse effect on the
Company's business, results of operations and financial condition.
INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of copyright, trademark, service mark
and trade secret laws and contractual restrictions to establish and protect
certain proprietary rights in technology underlying its services. The Company
has recently applied for three separate patents in the U.S. and intends to
continue to seek patents on its inventions when appropriate, although the
Company currently has no patented technology that would preclude or inhibit
competitors from entering the Company's market. There can be no assurance that
patents will issue from currently pending or any future applications, or that
any patents that may be issued will be sufficient in scope or strength to
provide meaningful protection or any commercial advantage to the Company. The
Company has three separate trademark applications pending in the United States
and counterparts in certain foreign jurisdictions for distinct marks,
including its distinctive Pilot logo; however, there can be no assurance that
such trademarks will be granted. The laws of certain foreign countries may not
protect the Company's products, services or intellectual property rights to
the same extent as do the laws of the United States.
The Company has entered into confidentiality and invention assignment
agreements with its employees and contractors, and nondisclosure agreements
with its suppliers, distributors and appropriate customers in order to limit
access to and disclosure of its proprietary information. There can be no
assurance that these contractual arrangements or the other steps taken by the
Company to protect its intellectual property will prove sufficient to prevent
infringement of or misappropriation of the Company's technology or to deter
independent third-party development of similar technologies. Any such
infringement or misappropriation, should it occur, could have a material
adverse effect on the Company's business, results of operation and financial
condition. Furthermore, litigation may be necessary to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, results of operations and
financial condition.
To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement or indemnification by
the Company with respect to current or future products. The Company expects
that participants in its markets will be increasingly subject to infringement
claims as the number of products and competitors in the Company's industry
segment grows. Any such claim, whether meritorious or not, could be time-
consuming, result in costly litigation, cause product installation delays,
prevent the Company from using important technologies or methods, subject the
Company to substantial damages, or require the Company to enter into royalty
or licensing agreements. Such royalty or licensing agreements might not be
available on terms acceptable to the Company or at all. As a result, any such
claim could have a material adverse effect upon the Company's business,
results of operations and financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
There is currently only a small body of laws and regulations directly
applicable to access to or commerce on the Internet, other than regulations
applicable to businesses generally and regulations applicable to certain
encryption technologies incorporated into products provided by certain of the
Company's vendors. However, because the Internet has recently emerged, there
is significant uncertainty as to the application of existing laws and
regulations with respect to the Internet, covering issues such as user
privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information
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<PAGE>
security and the convergence of traditional telecommunications services with
Internet communications. Moreover, a number of laws and regulations have been
proposed and are currently being considered by federal, state and foreign
legislatures with respect to such issues. The nature of any new laws and
regulations and the manner in which existing and new laws and regulations may
be interpreted and enforced cannot be fully determined. Therefore, such laws
and regulations could decrease the growth of the Internet, decrease demand for
the Company's services, restrict the Company's activities, impose taxes or
other costly technical requirements, subject the Company and/or its customers
to potential liability or otherwise adversely affect the Company or its
customers, each of which could have a material adverse effect on the Company's
business, results of operations and financial condition. For example, because
the Company's services are available over the Internet in multiple states and
foreign countries, and as the Company facilitates sales by its customers to
end users located in such states and foreign countries, such jurisdictions may
claim that the Company is required to qualify to do business as a foreign
corporation in each such state or foreign country, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
A number of governments have imposed controls, export license requirements
and restrictions on the export of encryption technologies provided by certain
of the Company's vendors. To the extent the Company or its vendors are
required to export products incorporating certain encryption technology
developed in the United States in support of services provided to the
Company's customers located outside of the United States, the Company and its
vendors will need to comply with United States export controls. In particular,
all cryptographic products require either qualification under appropriate
licensing exemptions or export licenses from either the U.S. State Department,
acting under the authority of the International Traffic in Arms Regulation, or
the U.S. Commerce Department, acting under the authority of the Export
Administration Regulations. Furthermore, if the Company is unable to comply
with such export controls, it may not be able to obtain on commercially
reasonable terms encryption technologies developed outside the United States
for its international services that provide for encryption as strong as those
developed in the United States. There can be no assurance that U.S. export
restrictions will be changed to allow stronger encryption for international
delivery, that the Company or its vendors will be able to comply with such
restrictions, or that such factors will not have a material adverse effect on
the Company's business, operating results and financial condition.
FACILITIES
The Company's executive, sales and administrative offices are located in
Alameda, California. The Company's Network Security Centers are located in the
San Francisco, Los Angeles, New York and Chicago metropolitan areas. The
Company's leases for its executive, sales and administrative offices and its
Network Security Centers expire from June 2000 to September 2004 (including
options to renew), and cover an aggregate of approximately 38,250 gross square
feet.
Most of the Company's leases provide for a renewal option upon the
expiration of the initial term. The Company believes that these existing
facilities are adequate to meet its current foreseeable requirements or that
suitable additional or substitute space will be available on commercially
reasonable terms. Pilot plans to expand its Network Security Centers both
nationally and internationally. The Company is commencing operations at
Network Security Centers in the Boston, Minneapolis, Washington, D.C. and
London metropolitan areas during 1998.
EMPLOYEES
As of June 30, 1998, the Company had 116 full-time employees, including 41
people in security implementation and operations, 8 people in security
engineering, 55 people in sales, marketing and customer support and 12 people
in finance and administration. The Company's success depends to a significant
degree upon the continued contribution of its executive management and
security operations and engineering teams. See "Risk Factors--Dependence on
Key Personnel" and "--Risks of Business Expansion and Management of Growth."
LITIGATION
The Company is currently not a party to any material legal proceedings.
42
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of June 30, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH COMPANY
- ---- --- ------------------------
<S> <C> <C>
M. Marketta Silvera..... 55 Chairman of the Board of Directors,
President and Chief Executive Officer
William C. Leetham...... 45 Senior Vice President, Finance and Administration,
Chief Financial Officer, Treasurer and Secretary
Peter Liebowitz......... 51 Senior Vice President, Sales and Marketing
Thomas A. Wadlow........ 41 Vice President, Engineering and Development
Michael Millikin........ 44 Vice President, Operations and Business Development
Robert G. Carrade....... 36 Vice President, Finance and Administration
Shanda Bahles(1)(2)..... 42 Director
William B. Elmore(1).... 45 Director
K. Flynn McDonald....... 45 Director
Thomas O'Rourke(1)(2)... 74 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
M. MARKETTA SILVERA is the founder of the Company and has served as its
President and Chief Executive Officer since June 1993, and as a director of
the Company since July 1993. From June 1991 to January 1993, Ms. Silvera
served as President of VoiceCom Systems, Inc., a voice processing services
company. From May 1989 to June 1991, she served as President of Votan
Corporation, a voice recognition technology company. Ms. Silvera served as
Vice President of Sales and Marketing at Granite Systems, a voice technology
systems developer, and Votan from 1986 to 1989. Ms. Silvera is also a director
of AVIOS, a voice and data technology organization, and has previously served
as its President.
WILLIAM C. LEETHAM has served as Senior Vice President, Finance and
Administration, Chief Financial Officer, Treasurer, and Secretary of the
Company since May 1998. From December 1996 to May 1998, Mr. Leetham served as
Chief Financial Officer of Success Factor Systems, Inc., a human resources
software applications company. From March 1995 to September 1996, Mr. Leetham
served as Chief Financial Officer of Scopus Technology, Inc., an information
management software company. From November 1992 to March 1995, he served as
Chief Financial Officer of Berkeley Systems, Inc., a consumer software vendor.
From August 1984 to November 1992, he held various positions at Candle
Corporation, a system performance software company, most recently serving as
Vice President, Financial Operations.
PETER LIEBOWITZ has served as the Senior Vice President, Sales and Marketing
of the Company since January 1998. From July 1996 to December 1997, he served
as Vice President and General Manager of the Telecommunications Business Unit
at Sybase Inc., a database software company. From January 1995 to July 1996,
Mr. Liebowitz served as Vice President of Sales and Support at Onstream
Networks, Inc., a networking systems corporation. From June 1993 to December
1994, he served as Vice President of Sales and Service at Pulsecom Inc., a
telecommunications company. Mr. Liebowitz was President of Liebowitz
Associates, a telecom consulting firm, from September 1992 to May 1993.
THOMAS A. WADLOW has served as Vice President, Engineering and Development
of the Company since January 1996, and Director of Engineering from September
1993 to January 1996. From 1989 to September 1993, he served as Research
Network Architect at Sun Microsystems Laboratories, Inc., a workstation
manufacturer. From 1988 to 1989, Mr. Wadlow served as Systems and Network
Manager of ParcPlace Systems, an object oriented software developer. From 1987
to 1988, Mr. Wadlow served as an engineer of the Smalltalk
43
<PAGE>
Group of Xerox Palo Alto Research Center, a computer science research
laboratory. Prior to 1988 Mr. Wadlow served in various senior technical staff
positions at Schlumberger Limited, a petroleum exploration and research
company, and Lawrence Livermore National Laboratories, a national defense
contractor.
MICHAEL MILLIKIN has served as Vice President, Operations and Business
Development of the Company since February 1998, and as Vice President,
Business Development since January 1998. From June 1992 to December 1997, Mr.
Millikin served in various senior management positions with Softbank Forums, a
conference and voice event management company, including Senior Vice
President, Worldwide Content from December 1996 to December 1997, and Senior
Vice President and General Manager, Networld+Interop, an exposition company,
from November 1994 to December 1996. Mr. Millikin is also the founder of
Gunstock Hill Associates, an information technology consulting firm which he
founded in June 1991 and with which he remained until June 1992.
ROBERT G. CARRADE has served as the Vice President, Finance and
Administration of the Company since April 1997, and Director of Finance and
Administration from February 1994 to April 1997. From May 1993 to February
1994 he was an independent financial consultant. From November 1991 to May
1993 he served as a corporate finance associate with Berkeley International
Capital Corporation. Mr. Carrade is a certified public accountant in
California.
SHANDA BAHLES has served as director of the Company since January 1994. Ms.
Bahles has served as a General Partner of El Dorado Ventures (El Dorado), a
venture capital firm focused on early stage investments in information
technology companies, since May 1991, and joined El Dorado as an associate in
July 1987. From 1979 to 1985 Ms. Bahles held various engineering, marketing
and management positions with Millennium Systems, a systems integration
company, and Fortune Systems Corporation, a workstation manufacturer. Ms.
Bahles also serves as a director of several privately held information
technology companies.
WILLIAM B. ELMORE has served as a director of the Company since July 1993.
Mr. Elmore has served as a General Partner of Foundation Capital Management,
LLC ("Foundation Capital"), a venture capital firm focused on early stage
information technology companies, since December 1995, and is a founder of
Foundation Capital. From 1987 to 1995, Mr. Elmore served as a General Partner
of Inman and Bowman, a venture capital firm. Mr. Elmore also serves as a
director of Wind River Systems, Inc., a software operating systems company,
and several privately held information technology companies. Mr. Elmore plans
to resign from the Company's Board of Directors within several months of this
Offering.
K. FLYNN MCDONALD has served as a director of the Company since March 1995.
Ms. McDonald has been a Managing Director of Vector Fund Management, L.P. and
a General Partner of Vector Later-Stage Equity Fund, L.P. since November 1995.
From December 1993 to October 1995, Ms. McDonald served as Vice President of
Investments at Technology Funding, Inc., a venture capital firm focused on
technology and health care companies. From 1986 to 1993, she held various
positions at Raychem Corporation, a material sciences company, including Vice
President of Raychem Ventures, Inc. Ms. McDonald is a Director of LifeCell
Corporation, a biotechnology company.
THOMAS O'ROURKE has served as a Director of the Company since November 1995.
Mr. O'Rourke has served as the President and Chairman of the Board of O'Rourke
Investment Corporation, an investment company, since 1989. From January 1985
to April 1988, Mr. O'Rourke was a General Partner of Hambrecht and Quist
Venture Partners, a venture capital firm. From 1966 to 1985, he was the
founder, President and Chairman of the Board of Tymshare, Inc., a computer
services company.
EXECUTIVE OFFICERS
The Company's executive officers are appointed by, and serve at the
discretion of, the Board of Directors. Each executive officer is a full-time
employee of the Company.
44
<PAGE>
BOARD COMPOSITION
The Company currently has authorized five directors. Each director is
elected for a period of one year and serves until his or her successor is duly
elected and qualified. Each of the Company's directors, excluding non-employee
directors, devotes substantially full time to the affairs of the Company. The
Company's non-employee directors devote such time to the affairs of the
Company as is necessary to discharge their duties. There are no family
relationships among any of the directors, officers or key employees of the
Company. See "Certain Transactions." The Company is seeking to appoint one or
two new directors with relevant industry experience.
BOARD COMMITTEES
The Board of Directors has two committees, an Audit Committee and a
Compensation Committee. The Board's Audit Committee currently consists of Mr.
Elmore, Ms. Bahles and Mr. O'Rourke. The Audit Committee reviews the Company's
annual audit and meets with the Company's independent auditors to review the
Company's internal accounting procedures and financial management practices.
The Compensation Committee currently consists of Ms. Bahles and Mr. O'Rourke.
The Compensation Committee recommends compensation and benefits for certain of
the Company's executive officers to the Board, reviews general policy relating
to compensation and benefits of employees of the Company, and administers the
Company's Stock Plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board is currently
or has been, at any time since the formation of the Company, an officer or
employee of the Company. No executive officer of the Company serves as a
member of the Board of Directors or compensation committee of any entity that
has one or more executive officers serving on the Company's Board or
Compensation Committee.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their services
as directors or members of committees of the Board of Directors, but are
reimbursed for their reasonable expenses incurred in attending meetings of the
Board of Directors. Employee Directors are eligible to participate in the
Company's 1994 Stock Plan and 1998 Stock Option Plan. Non-employee Directors
are eligible to participate in the Company's 1998 Stock Option Plan and 1998
Directors' Stock Option Plan. In April 1997, Ms. Silvera was granted an option
to purchase 60,000 shares of Common Stock at an exercise price of $0.75 per
share subject to a forty-eight month vesting schedule. In April 1998, Ms.
Silvera was granted an option to purchase 60,000 shares of Common Stock at an
exercise price of $3.30 per share subject to a forty-eight month vesting
schedule. Ms. McDonald has been granted an option to purchase 20,000 shares of
Common Stock at an exercise price of $13.00 per share. The option granted to
Ms. McDonald was fully vested upon grant and has a term of 3 years.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the full extent permitted by Delaware law. Delaware law provides that a
corporation's certificate of incorporation may contain a provision eliminating
or limiting the personal liability of directors for monetary damages for
breach of their fiduciary duties as directors, except for liability (i) for
any breach of their duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation Law (the "DGCL"), or (iv) for any
transaction from which the director derived an improper personal benefit. The
Company's Bylaws provide that the Company shall indemnify its directors and
officers and may indemnify its employees and agents to the fullest extent
permitted by law. The Company believes that indemnification under its Bylaws
covers at least negligence and gross negligence on the part of indemnified
parties.
45
<PAGE>
The Company intends to enter into agreements which indemnify its directors
and executive officers. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by such persons in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company or any other company or enterprise to which the
person provides services at the request of the Company. The Company believes
that these provisions and agreements are necessary to attract and retain
qualified directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.
EXECUTIVE COMPENSATION
The following table sets forth certain estimated compensation awarded or
paid by the Company during the fiscal year ended March 31, 1998 ("Last Fiscal
Year") to (i) the Company's President and Chief Executive Officer, (ii) the
Company's Vice President, Finance and Administration, (iii) the Company's Vice
President, Engineering and Development, and (iv) two individuals who would
have been included as the Company's four most highly compensated executive
officers (other than the Chief Executive Officer), each of whose aggregate
compensation during the Last Fiscal Year exceeded $100,000, but were not
serving as executive officers of the Company at the end of the Last Fiscal
Year (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
---------------------------------------- ------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION(1) SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($) (2)
- ------------------ ---------- --------- ---------------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
M. Marketta Silvera......... $205,000 $43,650 -- 60,000 $237
President and Chief
Executive Officer
Robert G. Carrade........... 115,000 18,188 -- 30,000 230
Vice President, Finance and
Administration
Thomas A. Wadlow............ 110,000 18,188 -- 30,000 178
Vice President, Engineering
and Development
Wister Walcott.............. 90,000 14,550 -- 20,000 213
Vice President, Marketing
Jeffrey Gall (3)............ 94,541 26,911 (4) -- 30,000 179
Vice President, Sales
</TABLE>
- --------
(1) In January 1998, the Company hired Peter Liebowitz as its Senior Vice
President, Sales and Marketing at an annual salary for the 1999 fiscal
year of $150,000. In January 1998, the Company hired Michael Millikin as
its Vice President, Operations and Business Development at an annualized
salary for the 1999 fiscal year of $150,000. In May 1998, the Company
hired William C. Leetham as its Senior Vice President, Finance and
Administration, Chief Financial Officer, Treasurer and Secretary at an
annualized salary for the 1999 fiscal year of $150,000.
(2) Amounts listed represent term life insurance premiums paid by the Company
on behalf of the listed Named Executive Officer.
(3) Mr. Gall terminated his employment with the Company on January 15, 1998.
(4) Consists of $26,911 earned by Mr. Gall as sales commissions.
46
<PAGE>
OPTION GRANTS
The following table provides certain information regarding stock options
granted to the Named Executive Officers during the Last Fiscal Year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENTAGE OF TOTAL STOCK PRICE
SECURITIES OPTIONS GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES OPTION TERM(4)
OPTIONS IN EXERCISE PRICE EXPIRATION ---------------------
NAME GRANTED(1) 1998 FISCAL YEAR(2) PER SHARE ($/SH)(3) DATE 5%($) 10%($)
- ---- ---------- ------------------- ------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
M. Marketta Silvera..... 60,000 5.9% $0.75 4/15/07 $1,258,116 $1,935,676
Robert G. Carrade....... 30,000 2.9 0.75 4/15/07 629,058 967,838
Thomas A. Wadlow........ 30,000 2.9 0.75 4/15/07 629,058 967,838
Wister Walcott.......... 20,000 2.0 0.75 4/15/07 419,372 645,225
Jeffrey Gall............ 30,000 2.9 0.75 4/15/07 629,058 967,838
</TABLE>
- --------
(1) 25% of the shares issuable upon exercise of such options vest on the first
anniversary of the vesting commencement date, with the remaining shares
vesting in equal monthly installments over the following three years.
(2) Based on an aggregate of 1,020,000 options granted to employees,
consultants and directors during the fiscal year ended March 31, 1998.
(3) The exercise price per share of each option was equal to the fair value of
the Common Stock on the date of grant as determined by the Board of
Directors based upon such factors as the purchase prices paid by investors
for shares of the Company's Preferred Stock, the absence of a trading
market for the Company's securities and the Company's financial outlook
and results of operations. See Note 5 of Notes to Consolidated Financial
Statements.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the SEC. There can be no assurance that the
actual stock price appreciation over the five-year option term will be at
the assumed 5% and 10% levels or at any other defined level. Unless the
market price of the Common Stock appreciates over the option term, no
value will be realized from the option grants made to the Named Executive
Officers. The potential realizable value is calculated by assuming that an
assumed initial public offering price of $14.00 per share appreciates at
the indicated rate for the entire term of the option and that the option
is exercised at the exercise price and sold on the last day at the
appreciated price.
(5) In December 1997, Mr. Liebowitz received an option to acquire 150,000
shares of Common Stock at an exercise price of $0.75 per share. In
December 1997, Mr. Millikin received an option to acquire 100,000 shares
of Common Stock at an exercise price of $0.75 per share. In May 1998, Mr.
Leetham received an option to acquire 150,000 shares of Common Stock at an
exercise price of $6.00 per share.
47
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides certain summary information concerning the
shares of Common Stock represented by outstanding stock options held by each of
the Named Executive Officers in the Last Fiscal Year as of March 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES MARCH 31, 1998 (#) MARCH 31, 1998($)(2)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
M. Marketta Silvera..... -- $ -- -- 60,000 $ -- $795,000
Robert G. Carrade....... 8,958 5,683 938 35,104 13,013 468,210
Thomas A. Wadlow........ -- -- 9,896 35,104 137,390 468,210
Wister Walcott.......... -- -- 4,790 25,210 66,629 337,471
Jeffrey Gall(3)......... 9,272 5,879 -- -- -- --
</TABLE>
- --------
(1) The amount set forth represents the difference between the fair market
value of the shares on the date of exercise as determined by the Board of
Directors and the exercise price of the option.
(2) Value of unexercised in-the-money options is based on a value of $14.00 per
share of the Company's Common Stock, the assumed initial public offering
price. Amounts reflected are based on the assumed value minus the exercise
price multiplied by the number of shares acquired on exercise.
(3) All of Mr. Gall's unexercised options have expired.
STOCK PLANS
1998 Stock Option Plan. The Company's 1998 Stock Option Plan (the "Option
Plan") was adopted by the Board of Directors in June 1998 and will be approved
by the stockholders in July 1998. A total of 1,000,000 shares of Common Stock
has been reserved for issuance under the Option Plan, plus an automatic annual
increase on the first day of each of the Company's fiscal years commencing in
1999, 2000, 2001, 2002 and 2003 equal to the lesser of 500,000 shares, 3% of
the Company's outstanding Common Stock on the last day of the immediately
preceding fiscal year or such lesser number of shares as the Board of Directors
determines. As of June 30, 1998, options to purchase 20,000 shares of Common
Stock had been granted under the Option Plan.
The purposes of the Option Plan are to attract and retain the best available
personnel to the Company, to provide additional incentives to the Company's
employees and consultants and to promote the success of the Company's business.
The Option Plan provides for the granting to employees, including officers and
directors, of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") and for the granting to
employees and consultants including nonemployee directors of nonstatutory stock
options. To the extent an optionee would have the right in any calendar year to
exercise for the first time one or more incentive stock options for shares
having an aggregate fair market value (under all plans of the Company and
determined for each share as of the date the option to purchase the shares was
granted) in excess of $100,000, any such excess options shall be treated as
nonstatutory stock options. If not terminated earlier, the Option Plan will
terminate in June 2008.
The Option Plan may be administered by the Board of Directors or a committee
of the Board (the "Administrator"). The Option Plan is currently administered
by the Compensation Committee. The Administrator determines the terms of
options granted under the Option Plan, including the number of shares subject
to the option, exercise price, term and exercisability. In no event, however,
may an individual employee receive option grants for more than 1,000,000 shares
under the Option Plan in any fiscal year. The exercise price of all incentive
stock options granted under the Option Plan must be at least equal to the fair
market value of the Common Stock of the Company on the date of grant. The
exercise price of any incentive stock option granted to an optionee who owns
stock representing more than 10% of the total combined voting power of all
classes of outstanding capital stock of the Company or any parent or subsidiary
corporation of the Company (a "10%
48
<PAGE>
Stockholder") must equal at least 110% of the fair market value of the Common
Stock on the date of grant. The exercise price of all nonstatutory stock
options granted after the Company's Common Stock is designated or approved for
designation on the Nasdaq National Market must equal at least 85% of the fair
market value of the Common Stock on the date of grant; provided, however, that
the exercise price of any nonstatutory stock option granted to the Company's
Chief Executive Officer or its four other most highly compensated officers
must equal at least 100% of the fair market value of the Common Stock on the
date of grant. Payment of the exercise price may be made in cash or other
consideration as determined by the Administrator.
The Administrator determines the term of options, which may not exceed 10
years (5 years in the case of an incentive stock option granted to a 10%
Stockholder). No option may be transferred by the optionee other than by will
or the laws of descent or distribution, except in the case of nonstatutory
stock options granted after the Company's Common Stock is designated or
approved for designation on the Nasdaq National Market with respect to which
the Administrator may allow limited transferability in certain circumstances.
Each option may be exercised during the lifetime of the optionee only by such
optionee. The Administrator determines when options become exercisable.
Options granted under the Option Plan generally become exercisable at the rate
of 1/4th of the total number of shares subject to an option twelve months
after the date of grant of such option, and 1/48th of the total number of
shares subject to the option each month thereafter.
In the event of the sale of all or substantially all of the assets of the
Company, or the merger, consolidation or other capital reorganization of the
Company (other than one in which holders of more than 50% of the Company's
capital stock outstanding before such transaction continue to hold more than
50% of the total voting power after such transaction), then each option may be
assumed or an equivalent option substituted by the successor corporation. In
lieu thereof, the Administrator may in its discretion elect to accelerate the
exercisability of each option effective upon the consummation of such
transaction. The Administrator has the authority to amend or terminate the
Option Plan as long as such action does not adversely affect any outstanding
option and provided that stockholder approval shall be required for an
amendment to increase the number of shares subject to the Option Plan, to
change the designation of the class of persons eligible to be granted options,
or to change the limitation on grants to individual employees.
1994 Stock Plan. The Company's 1994 Stock Plan (the "1994 Stock Plan") was
adopted by the Board of Directors in July 1994 and approved by the
stockholders in September 1994. The 1994 Stock Plan provides for the granting
of incentive stock options to employees, officers and employee directors and
the granting of nonstatutory stock options and stock purchase rights to
employees, officers, directors (including nonemployee directors) and
consultants. A total of 3,400,000 shares of Common Stock has been reserved for
issuance under the 1994 Stock Plan plus an automatic annual increase on the
first day of the Company's fiscal years commencing in 1999, 2000, 2001 and
2002 equal to the lesser of 300,000 shares or 3% of the Company's outstanding
stock on the last day of the preceding fiscal year. As of March 31, 1998,
options to purchase 109,622 shares of Common Stock had been exercised, options
to purchase a total of 1,125,312 shares at a weighted average exercise price
of $0.68 per share were outstanding, and 840,914 shares of Common Stock have
been issued upon exercise of stock purchase rights at a weighted average
purchase price of $0.06 per share. Subsequent to March 31, 1998, the Company
issued options to purchase 681,000 shares of Common Stock at a weighted
average exercise price of $3.69 per share. The Company does not intend to
issue any additional options or purchase rights pursuant to the 1994 Stock
Plan, and as a result future automatic annual increases under the plan will
not be effected.
The terms of options issued under the 1994 Stock Plan are generally the same
as those which may be issued under the Option Plan, except that the 1994 Stock
Plan does not impose a maximum number of shares which may be subject to
options issued to an individual in any fiscal year. The restricted stock
purchase agreements reflecting stock purchase rights issued pursuant to the
1994 Stock Plan generally provide that the Company shall have a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability), unless the relevant administrator determines otherwise. The
Company's repurchase right generally lapses at a rate of 1/4th of the total
number of shares twelve months after the date of grant, and 1/48th of the
total number of shares each month thereafter.
49
<PAGE>
In addition, the 1994 Stock Plan provides that, in the event of a merger of
the Company with or into another corporation where the successor corporation
issues its securities to the Company's stockholders, or a sale of all or
substantially all of the Company's assets, unexercised options and purchase
rights outstanding under the 1994 Stock Plan will be assumed or substituted by
the successor corporation or, in the event the successor corporation refuses
to assume or substitute the options, outstanding options and purchase rights
shall terminate upon consummation of such transaction.
1998 Directors' Stock Option Plan. The 1998 Directors' Stock Option Plan
(the "Directors' Plan") was adopted by the Board of Directors in June 1998 and
will be approved by the stockholders in July 1998. A total of 200,000 shares
of Common Stock has been reserved for issuance under the Directors' Plan. As
of June 30, 1998, no options to purchase shares of Common Stock have been
issued under the Directors' Plan. The Directors' Plan provides for the grant
of nonstatutory stock options to nonemployee directors of the Company and is
designed to work automatically without administration; however, to the extent
administration is necessary, it will be performed by the Board of Directors.
To the extent they arise, it is expected that conflicts of interest will be
addressed by abstention of any interested director from both deliberations and
voting regarding matters in which such director has a personal interest.
The Directors' Plan provides that each person who becomes a nonemployee
director of the Company after the date of the closing of this Offering will be
granted a nonstatutory stock option to purchase 25,000 shares of Common Stock
(the "First Option") on the date on which the optionee first becomes a
nonemployee director of the Company. The First Option shall become exercisable
in installments as to 25% of the total number of shares subject to the First
Option on each of the first, second, third and fourth anniversaries of the
date of grant of the First Option. The First Option will not be granted to
individuals serving as nonemployee directors as of the date of this Offering.
Instead, each person who is a nonemployee director of the Company on the date
of this Offering will be granted a nonstatutory option to purchase 5,000
shares which shall become exercisable as to 100% of such shares on the first
anniversary of the date of grant. Thereafter, on the date of each of the
Company's Annual Stockholders Meetings following which a nonemployee director
is serving on the Board of Directors, each such nonemployee director
(including nonemployee directors who were not granted a First Option prior to
the date of such Annual Meeting) will be granted an additional option to
purchase 5,000 shares of Common Stock (a "Subsequent Option") if, on such
date, he or she has served on the Company's Board of Directors for at least
six months. Each Subsequent Option shall become exercisable as to 100% of such
shares on the first anniversary of the date of grant.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one nonemployee director, but does
specify the number of shares that may be included in any grant and the method
of making a grant. No option granted under the Directors' Plan is transferable
by the optionee other than by will or the laws of descent or distribution or
pursuant to a qualified domestic relations order, and each option is
exercisable, during the lifetime of the optionee, only by such optionee. If a
nonemployee Director ceases to serve as a Director for any reason other than
death or disability, he or she may, but only within 90 days after the date he
or she ceases to be a Director of the Company, exercise options granted under
the Directors' Plan to the extent that he or she was entitled to exercise it
at the date of such termination. To the extent that he or she was not entitled
to exercise any such option at the date of such termination, or if he or she
does not exercise such option (which he or she was entitled to exercise)
within such 90 day period, such option shall terminate. The exercise price of
all stock options granted under the Directors' Plan shall be equal to the fair
market value of a share of the Company's Common Stock on the date of grant of
the option, except for the options granted to non-employee directors on the
date of this Offering, which shall have an exercise price equal to the initial
public offering price. Options granted under the Directors' Plan have a term
of ten years.
In the event of the dissolution or liquidation of the Company, a sale of all
or substantially all of the assets of the Company, or the merger,
consolidation or other capital reorganization of the Company (other than one
in which holders of more than 50% of the Company's capital stock outstanding
before such transaction continue to
50
<PAGE>
hold more than 50% of the total voting power after such transaction), (1) each
nonemployee director shall have the right to exercise the option, including
any part of the option that would not otherwise be exercisable, prior to the
effectiveness of such dissolution, liquidation, sale, merger or
reorganization, and (2) the option shall be assumed or substituted by the
successor corporation or, if such successor corporation refuses to agree to
such assumption or substitution, the option shall terminate upon consummation
of such transaction. The Board of Directors may amend or terminate the
Directors' Plan; provided, however, that no such action may adversely affect
any outstanding option, and the provisions regarding the grant of options
under the plan may be amended only once in any six-month period, other than to
comport with changes in the Code. If not terminated earlier, the Directors'
Plan will have a term of ten years.
1998 Employee Stock Purchase Plan. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
June 1998 and will be approved by the stockholders in July 1998. A total of
200,000 shares of Common Stock has been reserved for issuance under the
Purchase Plan, plus an automatic annual increase on the first day of each of
the Company's fiscal years in 1999, 2000, 2001, 2002 and 2003 equal to the
lesser of 100,000 shares, 1/2% of the Company's outstanding Common Stock on
the last day of the immediately preceding fiscal year, or such lesser number
of shares as the Board of Directors shall determine.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a series of overlapping offering periods of 24
months' duration, with new offering periods (other than the first offering
period) commencing on May 1 and November 1 of each year. Each offering period
will consist of four consecutive purchase periods of six months' duration. The
initial offering period is expected to commence on the date of this Offering
and end on October 31, 2000; the initial purchase period is expected to end on
April 30, 1999. The Purchase Plan will be administered by the Board of
Directors or by a committee appointed by the Board of Directors. Employees
(including officers and employee directors) of the Company, or of any
majority-owned subsidiary designated by the Board of Directors, are eligible
to participate in the Purchase Plan if they are employed by the Company or any
such subsidiary for at least 20 hours per week and more than five months per
year. The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 10% of an employee's
compensation, at a price equal to the lower of 85% of the fair market value of
the Company's Common Stock at the beginning of each offering period or at the
end of each purchase period. The Board of Directors shall have the discretion
to increase, prior to the beginning of an offering period, the percentage of
participants' compensation that may be withheld through the Purchase Plan,
provided that such percentage may not exceed 20%. No employee shall be granted
an option under the Purchase Plan if immediately after the grant such employee
would own stock and/or hold outstanding options to purchase stock possessing
five percent (5%) or more of the total voting power or value of all classes of
stock of the Company or its subsidiaries, or if such option would permit an
employee to purchase stock under all employee stock purchase plans of the
Company and its subsidiaries to accrue at a rate which exceeds $25,000 of fair
market value of such stock for each calendar year in which such option is
outstanding at any time. If the fair market value of the Common Stock on a
purchase date is less than the fair market value at the beginning of the
offering period, a new twenty-four month offering period will automatically
begin on the first business day following the purchase date with a new fair
market value. Employees may end their participation in the offering at any
time during the offering period, and participation ends automatically on
termination of employment with the Company. The Purchase Plan may be
terminated by action of the Board of Directors. If not terminated earlier, the
Purchase Plan will have a term of 20 years.
The Purchase Plan provides that in the event of a sale of all or
substantially all of the Company's assets, or a merger, consolidation or other
capital reorganization of the Company (other than one in which holders of more
than 50% of the Company's capital stock outstanding before such transaction
continue to hold more than 50% of the total voting power after such
transaction), each right to purchase stock under the Purchase Plan will be
assumed or an equivalent right substituted by the successor corporation unless
the Board of Directors shortens the offering period so that employees' rights
to purchase stock under the Purchase Plan are exercised prior to the merger or
sale of assets. The Board of Directors has the power to amend or terminate the
Purchase Plan as long as such action does not adversely affect any outstanding
rights to purchase stock thereunder.
51
<PAGE>
401(K) RETIREMENT PLAN
Effective July 1, 1995 the Company established a 401(k) defined contribution
retirement plan (the "Retirement Plan") covering all full-time employees with
greater than one months' service. The Retirement Plan provides for voluntary
employee contributions from 1% to 15% of annual compensation, subject to a
maximum limit allowed by Internal Revenue Service guidelines ($10,000 for
1998). The Company may contribute such amounts to the accounts of participants
in the Retirement Plan as determined by the Board of Directors. However, to
date, the Company has not made any contribution to the Retirement Plan.
MANAGEMENT BONUS PLAN
In April 1998, the Company adopted a management bonus plan (the "Bonus
Plan") pursuant to which key members of Company management will be eligible to
receive cash bonuses during the fiscal year ending March 31, 1999 if the
Company meets certain financial objectives during that year. Each eligible
employee has been assigned an individual fixed-dollar bonus base amount, which
amount was determined based upon various factors, including the individual
employee's annual salary. The amount of bonus that an individual employee may
receive under the Bonus Plan is calculated as a percentage of his or her bonus
base amount, which percentage is determined based upon the degree to which the
Company achieves certain objective revenue (80% of the bonus) and operating
income (20% of the bonus) goals established by the Board of Directors.
52
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since April 1, 1995, the Company has issued in private placement
transactions shares of Preferred Stock as follows: an aggregate of 783,118
shares of Series E Preferred Stock at $2.00 per share in July 1996 and an
aggregate of 1,220,000 shares of Series F Preferred Stock at $5.00 per share
in March 1997, December 1997 and February 1998. In addition, in December 1995
and January 1996, the Company issued an aggregate of 1,210,068 shares of
Series C Preferred Stock upon the exercise of outstanding Series C Preferred
Stock warrants at an exercise price of $0.73 per share. Each share of Series
C, Series E and Series F Preferred Stock is convertible into one share of
Common Stock. The purchasers of the Series C Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock included, among others, the
following executive officers, directors and 5% stockholders of the Company,
and persons and entities associated with them:
<TABLE>
<CAPTION>
SERIES C SERIES E SERIES F
DIRECTORS AND PREFERRED PREFERRED PREFERRED
ENTITIES AFFILIATED WITH DIRECTORS STOCK STOCK STOCK
- ---------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Entities affiliated with El Dorado Venture
Partners
(Shanda Bahles)(1) ........................... 1,027,396 500,000 --
William B. Elmore.............................. 124,450 -- --
K. Flynn McDonald.............................. 27,400 -- --
O'Rourke Investments (Thomas O'Rourke)......... -- 80,180 --
OTHER 5% STOCKHOLDERS
- ---------------------
Technology Funding Venture Partners V, and
Aggressive Growth Fund, L.P. ................. -- 147,940 --
The Trustees of the General Electric Pension
Trust......................................... -- -- 900,000(2)
General Electric Capital Corporation........... -- -- 600,000(3)
Jeffrey Webber................................. 30,822 -- --
</TABLE>
- --------
(1) Includes shares held by El Dorado Ventures III, L.P., a California limited
partnership, El Dorado Technology IV, L.P. and El Dorado C&L Fund, L.P.
(2) Includes warrants to purchase 300,000 shares of Series F Preferred Stock.
(3) Includes warrants to purchase 200,000 shares of Series F Preferred Stock.
On June 15, 1996, M. Marketta Silvera, the Company's President and Chief
Executive Officer, purchased 60,000 shares of Common Stock at a purchase price
of $0.20 per share, and pursuant to the terms of a Restricted Stock Purchase
Agreement, the Company has the right to repurchase the shares with such right
expiring as to 25% of the shares on the first anniversary of the vesting
commencement date and the remaining shares in equal monthly installments over
the following three years. On April 15, 1997, the Company granted to Ms.
Silvera an option to purchase 60,000 shares of Common Stock at an exercise
price of $0.75 per share, and pursuant to the terms of these options, 25% of
the shares issuable upon exercise of such options vest on the first
anniversary of the vesting commencement date, with the remaining shares
vesting in equal monthly installments over the following three years. On
April 24, 1998, the Company granted to Ms. Silvera an option to purchase
60,000 shares of Common Stock at an exercise price of $3.30 per share, and
pursuant to the terms of these options, 25% of the shares issuable upon
exercise of such options vest on the first anniversary of the vesting
commencement date, with the remaining shares vesting in equal monthly
installments over the following three years.
On April 19, 1996, the Company granted to Robert G. Carrade, its Vice
President, Finance and Administration, an option to purchase 5,000 shares of
Common Stock at an exercise price of $0.20 per share, and pursuant to the
terms of these options, 25% of the shares issuable upon exercise of such
options vest on the first anniversary of the vesting commencement date, with
the remaining shares vesting in equal monthly installments over the following
three years. On April 15, 1997, the Company granted to Mr. Carrade an option
to purchase 30,000 shares of Common Stock at an exercise price of $0.75 per
share, and pursuant to the terms of these options, 25% of the shares issuable
upon exercise of such options vest on the first anniversary of the vesting
commencement date, with the remaining shares vesting in equal monthly
installments over the following three
53
<PAGE>
years. On April 24, 1998, the Company granted to Mr. Carrade an option to
purchase 35,000 shares of Common Stock at an exercise price of $3.00 per
share, and pursuant to the terms of these options, 25% of the shares issuable
upon exercise of such options vest on the first anniversary of the vesting
commencement date, with the remaining shares vesting in equal monthly
installments over the following three years. With respect to options granted
to Mr. Carrade, on December 23, 1997 and April 15, 1998, Mr. Carrade exercised
options to purchase 8,958 and 8,750 shares of Common Stock, respectively.
On April 19, 1996, the Company granted to Thomas A. Wadlow, its Vice
President, Engineering and Development, an option to purchase 5,000 shares of
Common Stock at an exercise price of $0.20 per share, and pursuant to the
terms of these options, 25% of the shares issuable upon exercise of such
options vest on the first anniversary of the vesting commencement date, with
the remaining shares vesting in equal monthly installments over the following
three years. On April 15, 1997, the Company granted to Mr. Wadlow an option to
purchase 30,000 shares of Common Stock at an exercise price of $0.75 per
share, and pursuant to the terms of these options, 25% of the shares issuable
upon exercise of such options vest on the first anniversary of the vesting
commencement date, with the remaining shares vesting in equal monthly
installments over the following three years.
On December 23, 1997, the Company granted to Peter Liebowitz, its Senior
Vice President, Sales and Marketing, an option to purchase 150,000 shares of
Common Stock at an exercise price of $0.75 per share. Pursuant to the terms of
this option, 25% of the shares issuable upon exercise of such option vest on
the first anniversary of the vesting commencement date, with the remaining
shares vesting in equal monthly installments over the following three years.
On April 21, 1998, the Board of Directors approved 75,000 shares to become
immediately exercisable, subject to the Company's right to repurchase such
shares with such right expiring as to 25% of the shares on the first
anniversary of the vesting commencement date and the remaining shares in equal
monthly installments over the following three years. Mr. Liebowitz purchased
75,000 shares on April 27, 1998, subject to such repurchase right.
On December 23, 1997, the Company granted to Michael Millikin, its Vice
President, Operations and Business Development, an option to purchase 100,000
shares of Common Stock at an exercise price of $0.75 per share. Pursuant to
the terms of these options, 25% of the shares issuable upon exercise of such
options vest on the first anniversary of the vesting commencement date, with
the remaining shares vesting in equal monthly installments over the following
three years. On April 21, 1998, the Board of Directors approved 50,000 shares
to become immediately exercisable subject to the Company's right to repurchase
such shares with such right expiring as to 25% of the shares on the first
anniversary of the vesting commencement date and the remaining shares in equal
monthly installments over the following three years. Mr. Millikin purchased
50,000 shares on April 28, 1998, subject to such repurchase right.
On May 20, 1998, the Company granted William C. Leetham, its Senior Vice
President, Finance and Administration, Chief Financial Officer, Treasurer and
Secretary an option to purchase 150,000 shares of Common Stock at an exercise
price of $6.00 per share. Pursuant to the terms of these options, (i) 17,000
shares are immediately exercisable, subject to the Company's right to
repurchase such shares in the event of termination of Mr. Leetham's employment
with the Company, with such right expiring on the first anniversary of the
vesting commencement date; (ii) 20,500 shares vest on the first anniversary of
the vesting commencement date and (iii) the remaining shares vest in equal
monthly installments over the following three years. In the event the Company
is acquired and Mr. Leetham's employment is terminated without cause within 12
months after such acquisition, then 50% of the unvested portion of his option
shall immediately become fully vested at the time of such termination.
See "Management--Executive Compensation" for additional information with
respect to stock option grants to directors and executive officers of the
Company.
On June 18, 1996, the Company entered into an agreement with AmeriData
Technologies Inc. ("AmeriData") whereby the Company granted AmeriData options
to purchase 200,000 shares of the Company's
54
<PAGE>
Common Stock at $2.00 per share and AmeriData agreed to sell the Company's
Internet security service to AmeriData customers in exchange for a commission
on the first two years of revenue from those customers. The Company and
AmeriData also agreed to cooperate in areas such as training and marketing. In
June 1996, Ameridata was acquired by GE Capital Corp., a subsidiary of General
Electric Company, and is now GE Capital Information Technologies Solutions,
Inc.
The Company intends to enter into indemnification agreements with its
executive officers and directors containing provisions which may require the
Company, among other things, to indemnify its executive officers and directors
against certain liabilities that may arise by reason of their status or
service as executive officers and directors (other than liabilities arising
from willful misconduct of a culpable nature) and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. The Company also intends to execute such agreements with its
future directors and executive officers. See "Management--Limitation of
Liability and Indemnification Matters."
55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1998 and as adjusted to
reflect the sale of the Common Stock offered by this Prospectus by (i) each
stockholder who is known by the Company to own beneficially more than 5% of
the Common Stock, (ii) each executive officer of the Company, (iii) each
director of the Company, and (iv) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) AFTER OFFERING (1)
OFFICERS, DIRECTORS AND -------------------- SHARES --------------------
PRINCIPAL STOCKHOLDERS NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
- ----------------------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
El Dorado Ventures(3)....... 3,011,546 28.3% 3,011,546 21.9%
2400 Sand Hill Road
Menlo Park, CA 94025
M. Marketta Silvera(4)....... 1,330,000 12.5 60,000 1,270,000 9.3
William B. Elmore............ 1,026,916 9.7 -- 1,026,916 7.5
Technology Funding Venture
Partners V.................. 891,054 8.4 -- 891,054 6.5
an Aggressive Growth
Fund, L.P.
2000 Alameda de las Pulgas
San Mateo, CA 94403
The Trustees of the General --
Electric Pension Trust(5)... 900,000 8.5 900,000 6.6
P.O. Box 7900
3003 Summer Street
Stamford, CT 06904-6092
Jeffrey Webber............... 771,918 7.3 80,000 691,918 5.1
R.B. Webber & Company
1717 Embarcadero Road, Suite
2000
Palo Alto, CA 94303
GE Electric Capital
Corporation(6).............. 700,000 6.5 -- 700,000 5.1
120 Long Ridge Road
Stamford, CT 06927
Shanda Bahles(7)............. 3,011,546 28.3 -- 3,011,546 21.9
Thomas O'Rourke(8)........... 394,580 3.7 -- 394,580 2.9
Thomas A. Wadlow(9).......... 227,082 2.1 -- 227,082 1.7
Robert G. Carrade(10)........ 131,124 1.2 -- 131,124 1.0
Jeffrey Gall(11)............. 86,380 * -- 86,380 *
39 Woodhill Drive
Redwood City, CA 94061
Peter Liebowitz.............. 75,000 * -- 75,000 *
Michael Millikin............. 50,000 * -- 50,000 *
K. Flynn McDonald(12)........ 47,400 * -- 47,400 *
William C. Leetham(13)....... 17,000 * -- 17,000 *
All directors and executive
officers as a group
(10 persons)(14)............ 6,310,648 58.9% 60,000 6,250,648 46.1%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the Company's common
Stock.
56
<PAGE>
(1) Except pursuant to applicable community property laws or as indicated in
the footnotes of this table, to the Company's knowledge, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
(2) Applicable percentage of ownership for each stockholder is based on
10,635,686 shares of Common Stock outstanding as of June 30, 1998,
together with applicable options and warrants for such stockholders.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The number of shares beneficially
owned by a person includes shares of Common Stock subject to options held
by that person that are currently exercisable within 60 days of June 30,
1998. Such shares issuable pursuant to such options are deemed
outstanding for computing the percentage ownership of the person holding
such options but are not deemed outstanding for the purposes of computing
the percentage ownership of each other person. Unless otherwise
indicated, the address of each of the individuals named above is: c/o
Pilot Services, Inc., 1080 Marina Village Parkway, Alameda, CA 94501.
(3) Consists of 52,932 shares held by El Dorado C&L Fund, L.P., 100,230
shares held by El Dorado Technology IV, L.P., and 2,858,384 shares held
by El Dorado Ventures III, L.P. (collectively, the "El Dorado Entities").
(4) Includes 20,000 shares issuable upon exercise of stock options that are
exercisable within 60 days of June 30, 1998.
(5) Assumes exercise of Series F warrants to purchase 300,000 shares.
(6) Assumes exercise of Series F warrants to purchase 200,000 shares and
includes 100,000 shares issuable upon exercise of stock options that are
exercisable within 60 days of June 30, 1998 held by AmeriData, which was
acquired in June 1996 by GE Capital Corp., a subsidiary of General
Electric Company, and is now GE Capital Information Technologies
Solutions, Inc.
(7) Represents 3,011,546 shares held by the El Dorado Entities. Ms. Bahles, a
Director of the Company and a General Partner to each of the El Dorado
Entities, disclaims beneficial ownership of the shares held by the El
Dorado Entities, except for her proportional pecuniary interest therein,
if any.
(8) Consists of 394,580 shares held by O'Rourke Investment Corporation
("OIC"). Mr. O'Rourke, a Director of the Company and Chairman and CEO of
OIC, owns a majority of the outstanding voting shares of O'Rourke
Investments and is a director of OIC.
(9) Includes 21,458 shares issuable upon exercise of stock options that are
exercisable within 60 days of June 30, 1998.
(10) Includes 3,750 shares issuable upon exercise of stock options that are
exercisable within 60 days of June 30, 1998.
(11) Mr. Gall terminated his employment with the Company on January 15, 1998.
(12) Includes 20,000 shares issuable upon exercise of stock options that are
exercisable within 60 days of June 30, 1998.
(13) Includes 17,000 shares issuable upon exercise of stock options that are
exercisable within 60 days of June 30, 1998.
(14) Includes 82,208 shares issuable upon exercise of stock options that are
exercisable within 60 days of June 30, 1998.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this Offering, the authorized capital stock of the
Company will consist of forty million shares of Common Stock, $0.001 par value
per share, and two million shares of undesignated Preferred Stock, $0.001 par
value per share.
COMMON STOCK
As of June 30, 1998, there were 10,635,686 shares of Common Stock
outstanding (including shares issuable upon conversion of all outstanding
Preferred Stock and the exercise of warrants to purchase Series F Preferred
Stock, which are convertible into an aggregate of 600,000 shares of Common
Stock), held of record by 52 stockholders, and options to purchase an
aggregate of 1,756,940 shares of Common Stock and warrants to purchase an
aggregate of 150,000 shares of Common Stock were also outstanding. There will
be 13,745,686 shares of Common Stock outstanding after this Offering (assuming
no exercise of the Underwriter's overallotment option, no exercise of
outstanding warrants to purchase Series B Preferred Stock, Series D Preferred
Stock and Common Stock, and no exercise of outstanding options after June 30,
1998) after giving effect to the sale of the shares of Common Stock to the
public offered hereby.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferential rights with respect to any outstanding Preferred Stock, holders
of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor.
See "Dividend Policy." In the event of liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities and satisfaction of
preferential rights of any outstanding Preferred Stock. The Common Stock has
no preemptive or conversion rights or other subscription rights. The
outstanding shares of Common Stock are, and the shares of Common Stock to be
issued upon completion of this Offering will be, fully paid and non-
assessable.
PREFERRED STOCK
Effective upon the closing of this Offering, each outstanding share of
Preferred Stock will be converted into one share of Common Stock and
automatically retired. Thereafter, the Board of Directors is authorized to
issue up to two million shares of Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series or the designation of such series, without
further vote or action by the stockholders.
The issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company without further action by the
stockholders. The issuance of preferred stock with voting and conversion
rights may adversely affect the voting power of the holders of Common Stock,
including voting rights, of the holders of Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock. As of the closing of this Offering, no shares of
Preferred Stock will be outstanding and the Company currently has no plans to
issue any shares of Preferred Stock.
WARRANTS
As of June 30, 1998, the Company had outstanding exercisable warrants to
purchase 27,124 shares of Series B Preferred Stock at $0.365 per share; 48,286
shares of Series D Preferred Stock at $0.875 per share and 67,500 shares of
Series D Preferred Stock at $2.00 per share; 600,000 shares of Series F
Preferred Stock at $6.00 per share; and 150,000 shares of Common Stock (the
"Common Stock Warrants") at $11.20 per share (assuming an initial offering
price of $14.00 per share). All unexercised warrants to purchase Series F
Preferred Stock will terminate upon the closing of the Offering. All warrants
to purchase Series B Preferred Stock, Series D Preferred Stock and Common
Stock contain net exercise provisions. Warrants that remain outstanding after
the Offering
58
<PAGE>
will expire between June 30, 2002 and March 10, 2007. Following the automatic
conversion of all classes of Preferred Stock into Common Stock that will take
place in connection with the Offering, pursuant to the terms of each
respective warrant all remaining warrants will become exercisable for Common
Stock.
REGISTRATION RIGHTS
Following this Offering, the holders of 9,582,828 shares of Common Stock
(the "Registrable Securities") or their transferees will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of an agreement
between the Company and the holders of the Registrable Securities. Subject to
certain limitations in the agreement, the holders of at least 25% of the
Registrable Securities may require, on two occasions beginning after the
earlier of March 15, 1999 or six months after the effective date of this
Offering, that the Company use its best efforts to register the Registrable
Securities for public resale. If the Company registers any of its Common Stock
either for its own account or for the account of other security holders, the
holders of Registrable Securities are entitled to include their shares of
Common Stock in such registration, subject to the ability of the underwriters
to limit the number of shares included in such offering. The holders of at
least 20% of the Registrable Securities, excluding such shares held by M.
Marketta Silvera, may also require the Company (not more than one time in any
twelve-month period) to register all or a portion of their Registrable
Securities on Form S-3 when use of such forms becomes available to the
Company, provided, among other limitations, that the proposed aggregate
selling price (net of any underwriters' discounts or commissions) is at least
$500,000. All registration expenses must be borne by the Company. However, all
registration expenses incurred in effecting any Forms S-1 or S-2 Registration
Statements after the second such Registration Statements or more than one (1)
Form S-3 Registration Statement in any twelve (12) month period shall be borne
pro rata by the holders of the Registrable Securities included in such
registration, in accordance with the number of shares being sold in such
registration. These rights shall terminate either (i) seven years following
the consummation of the Offering or (ii) for each individual holder, at such
time as the holder holds less than 1% of the voting securities of the Company.
In addition, commencing 180 days after the effective date of this Offering and
prior to June 30, 1999, the holders of warrants to purchase an aggregate of
150,000 shares of Common Stock have the right to require the Company to
register under the Securities Act shares issuable upon exercise of such
warrants.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Certain provisions of Delaware law and the Company's Restated Certificate of
Incorporation could make more difficult the acquisition of the Company by
means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of the Company to first
negotiate with the Company. The Company believes that the benefits of
increased protection of the Company's potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure
the Company outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in an
improvement of their terms.
The Company will be subject to the provisions of Section 203 of the Delaware
law. In general, the statute prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved
in a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior,
did own) 15% or more of the corporation's voting stock. This provision may
have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the Company's stockholders.
Commencing at the first annual meeting of stockholders following the annual
meeting of stockholders when the Company shall have had at least 800
stockholders, the Restated Certificate of Incorporation of the Company will
provide for the Board of Directors to be divided into two classes, with
staggered two-year terms. As a result,
59
<PAGE>
only one class of directors will be elected at each annual meeting of
stockholders of the Company, with the other class continuing for the remainder
of its respective two-year term. Thereafter, stockholders shall no longer have
cumulative voting rights and the Company's stockholders representing a
majority of the shares of Common Stock outstanding will be able to elect all
of the directors. The classification of the Board of Directors and elimination
of cumulative voting make it more difficult for the Company's existing
stockholders to replace the Board of Directors as well as for another party to
obtain control of the Company by replacing the Board of Directors. Since the
Board of Directors has the power to retain and discharge officers of the
Company, these provisions could also make it more difficult for existing
stockholders or another party to effect a change in management. See
"Management--Executive Officers and Directors--Board of Directors."
The Company's Restated Certificate of Incorporation will provide that
stockholder action can be taken only at an annual or special meeting of
stockholders and may not be taken by written consent. The Bylaws will provide
that special meetings of stockholders can be called only by the Board of
Directors, the Chairman of the Board, if any, the President of the Company and
holders of 10% of the votes entitled to be cast at a meeting. Moreover, the
business permitted to be conducted at any special meeting of stockholders is
limited to the business brought before the meeting by the Board of Directors,
the Chairman of the Board, if any, the President of the Company or any such
10% holder. The Bylaws will set forth an advance notice procedure with regard
to the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors and with regard to business
to be brought before a meeting of stockholders of the Company.
The Company's Restated Certificate of Incorporation will contain a provision
requiring the affirmative vote of the holders of at least two-thirds of the
voting stock of the Company to amend the foregoing provisions of the Restated
Certificate of Incorporation and Bylaws.
The foregoing provisions could have the effect of making it more difficult
for a third party to effect a change in the control of the Board of Directors.
In addition, these provisions could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, a majority of the outstanding voting stock of the
Company. See "Risk Factors--Anti-Takeover Provisions."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corporation. Its telephone number is (800) 835-8778.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has not been any public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in
the public market could adversely affect prevailing market prices from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this Offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this Offering, based on the number of shares outstanding
as of June 30, 1998, the Company will have outstanding an aggregate of
13,745,686 shares of Common Stock assuming no exercise of warrants or options
to purchase Common Stock outstanding as of June 30, 1998, but including the
600,000 shares expected to be issued upon exercise of the Series F Warrants
prior to the closing of the Offering. Of these shares, the 3,250,000 shares
sold in this Offering will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are purchased by an
existing "affiliate" of the Company as that term is defined in Rule 144 under
the Securities Act (an "Affiliate"). The remaining shares of Common Stock held
by existing stockholders are "restricted securities" as that term is defined
in Rule 144 under the Securities Act ("Restricted Shares"). As of such date,
no Restricted Shares will be eligible for sale in the public market. Following
the expiration of the 180-day Lock-up Period with the representatives of the
Underwriters or the Company, (i) 2,507,246 of the Restricted Shares will be
eligible for immediate sale without restriction under Rules 144(k) or 701
under the Securities Act, (ii) 7,188,440 of the Restricted Shares will be
eligible for sale subject to compliance with the volume and other restrictions
of Rule 144, and (iii) 800,000 of the Restricted Shares (including 600,000
shares expected to be issued upon exercise of the Series F Warrants prior to
the closing of the Offering) will become eligible for sale at various times
after the Lock-up Period upon expiration of applicable holding periods under
Rule 144, subject in some cases to the volume and other restrictions of Rule
144. In addition, as of June 30, 1998, there were outstanding 1,756,940
options and 292,910 warrants to purchase shares of the Company (excluding
600,000 shares which are expected to be issued upon exercise of the Series F
Warrants prior to the closing of the Offering) and all of such options and
warrants will be subject to 180-day lock-up agreements with the
representatives of the Underwriters or the Company. Following the expiration
of the Lock-up Period, all of the warrants will be exercisable and 369,518 of
such options will be exercisable.
All of the officers and directors and certain stockholders of the Company
have entered into lock-up agreements generally providing that they will not
offer, pledge, sell, offer to sell, contract to sell, sell any option or
contract to purchase, purchase any option to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for, Common Stock owned by them, or enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Common Stock, or
any securities convertible into, or exercisable or exchangeable for, shares of
Common Stock, for a period of 180 days after the date of this Prospectus,
without the prior written consent of Credit Suisse First Boston Corporation,
subject to certain limited exceptions. Credit Suisse First Boston Corporation
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. Credit Suisse First
Boston Corporation currently has no plans to release any portion of the
securities subject to lock-up agreements. When determining whether or not to
release shares from the lock-up agreements, Credit Suisse First Boston
Corporation will consider, among other factors, the stockholder's reasons for
requesting the release, the number of shares for which the release is being
requested and market conditions at the time.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 137,500 shares immediately after
61
<PAGE>
this Offering); or (ii) the average weekly trading volume of the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale. Sales under Rule 144
are also subject to certain manner of sale provisions, notice requirements and
to the availability of current public information about the Company. Under
Rule 144(k), a person who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Accordingly,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this Offering.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisors prior to the date the
issuer becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written
compensatory benefit plans or written contracts relating to the compensation
of such persons. In addition, the SEC has indicated that Rule 701 will apply
to typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired
upon exercise of such options (including exercises after the date of this
Offering). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90
days after the date of this Prospectus, may be sold (i) by persons other than
Affiliates, subject only to the manner of sale provisions of Rule 144 and (ii)
by Affiliates, under Rule 144 without compliance with its one-year minimum
holding period requirements.
Following this Offering, the Company intends to file a registration
statement under the Securities Act covering approximately 2,956,940 shares of
Common Stock, subject to outstanding options or reserved for issuance under
the Company's stock plans. See "Management-Stock Plans." Accordingly, shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to Affiliates, be available for sale in the open
market, except to the extent that such shares are subject to vesting
restrictions with the Company.
Upon completion of this Offering, the holders of approximately 9,732,828
shares of Registrable Securities or the transferees will be entitled to
certain rights with respect to registration of such shares under the
Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradable without restriction under the
Securities Act (except for shares purchased by Affiliates of the Company)
immediately upon the effectiveness of such registration. See "Description of
capital stock--Registration Rights."
62
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus (the "Underwriting Agreement") the
underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation, BancAmerica Robertson Stephens and Hambrecht & Quist LLC
are acting as representatives (the "Representatives"), have severally but not
jointly agreed to purchase from the Company and the Selling Stockholders, the
following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
BancAmerica Robertson Stephens.....................................
Hambrecht & Quist LLC..............................................
---------
Total.......................................................... 3,250,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the shares of Common Stock offered hereby (other
than those shares covered by the over-allotment option described below) if any
are purchased. The Underwriting Agreement provides, that, in the event of a
default by an Underwriter, in certain circumstances the purchase commitments
of non-defaulting Underwriters may be increased or the Underwriting Agreement
may be terminated.
The Company and the Selling Stockholders have granted to the Underwriters an
option, expiring at the close of business on the 30th day after the date of
this Prospectus, to purchase up to 487,500 additional shares of Common Stock
at the initial public offering price, less the underwriting discounts and
commissions, all as set forth on the cover page of this Prospectus. Such
option may be exercised only to cover over-allotments in the sale of the
shares of Common Stock. To the extent that such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
it was obligated to purchase pursuant to the Underwriting Agreement.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public initially at the public offering price set forth on the
cover page of this Prospectus and, through the Representatives, to certain
dealers at such price less a concession of $ per share and the
Underwriters and such dealers may allow a discount of $ per share on sales
to certain other dealers. After the Offering, the public offering price and
concession and discount to dealers may be changed by the Representatives.
The Representatives have informed the Company and the Selling Stockholders
that they do not expect discretionary sales by the Underwriters to exceed 5%
of the shares being offered hereby.
The Company and certain of its directors, officers and stockholders have
agreed that they will not publicly announce any intention to, will not allow
any affiliate or subsidiary to, and will not itself, without the prior written
consent of Credit Suisse First Boston Corporation on behalf of the
Underwriters, (i) offer, pledge, sell, offer to sell, contract to sell, sell
any option or contract to purchase, purchase any option to sell, grant any
option
63
<PAGE>
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for, Common Stock, or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the
economic consequences of ownership of the shares of Common Stock or any
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock (whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of the Shares or other such securities, in
cash or otherwise), in each case, beneficially owned (within the meaning of
Rule 13d-3 under the Securities Exchange Act of 1934, as amended) or otherwise
controlled by the undersigned on the date hereof or hereafter acquired, for a
period beginning from the date of execution of the Underwriting Agreement and
continuing to and including the date 180 days after the effective date of the
Registration Statement.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or contribute to payments that the Underwriters may be
required to make in respect thereof.
Application has been made to list the shares of Common Stock on the Nasdaq
Stock Market's National Market under the symbol "PILT."
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be negotiated between the Company and
the Representatives. Among the material factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to the prevailing market conditions, will be the Company's historical
performance, capital structure, estimates of the business potential, revenues
and earnings prospects of the Company, an assessment of the Company's
management and consideration of the above factors in relation to the market
values of companies in related businesses. There can be no assurance that the
initial public offering price of the Common Stock will correspond to the price
at which the Common Stock will trade in the public market subsequent to the
Offering or that an active public market for the Common Stock will develop or
continue after the Offering. See "Risk Factors --No Prior Market for Common
Stock."
The Representatives, on behalf of the Underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions, and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934 (the "Exchange Act"). Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchase of the shares of Common Stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Representatives to reclaim
a selling concession from a syndicate member when the shares of Common Stock
originally sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
Common Stock to be higher than it would otherwise be in the absence of such
transactions.
64
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of Common Stock are
effected. Accordingly, any resale of the Common Stock in Canada must be made
in accordance with applicable securities laws which will vary depending on the
relevant jurisdiction not listed on a Canadian exchange, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Stockholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities
laws to purchase such Common Stock without the benefit of a prospectus
qualified under such securities laws, (ii) where required by law, that such
purchaser is purchasing as principal and not as agent, and (iii) such
purchaser has reviewed the text above under "--Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or recission or rights of
action under the civil liability provision of the U.S. federal securities
laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein and the Selling Stockholders may be located outside of Canada, and as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the Company or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
Purchasers of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchasers are required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.
65
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Venture Law Group, A Professional Corporation, Menlo Park,
California. Certain legal matters relating to this Offering will be passed
upon for the Underwriters by Gunderson Dettmer Stough Villenueve Franklin &
Hachigian, LLP, Menlo Park, California.
EXPERTS
The financial statements of the Company as of March 31, 1997 and 1998, and
for each of the years in the three-year period ended March 31, 1998, have been
included in the Registration Statement in reliance upon the report of KPMG
Peat Marwick LLP, independent auditors, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any
amendments thereto) on Form S-1 under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement, certain items of which are contained in exhibits
to the Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, and the financial statements and notes filed
as a part thereof. Statements made in this Prospectus concerning the contents
of any document referred to herein are not necessarily complete. With respect
to each such document filed with the Commission as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved. The Registration Statement, including
exhibits thereto and the financial statements and notes filed as a part
thereof, as well as such reports and other information filed with the
Commission, may be inspected without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, NY 10048, and the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of all or any part thereof may be obtained from the Commission upon payment of
certain fees prescribed by the Commission. Such reports and other information
may also be inspected without charge at a Web site maintained by the
Commission. The address of such site is http://www.sec.gov.
66
<PAGE>
PILOT NETWORK SERVICES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................ F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statement of Stockholders' Deficit.......................................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
When the reincorporation of the Company in Delaware and stock split
described in Note 6 of the Notes to Financial Statements has been consummated,
we will be in position to render the following report.
KPMG Peat Marwick LLP
The Board of Directors
Pilot Network Services, Inc.:
We have audited the accompanying balance sheets of Pilot Network Services,
Inc. (the "Company") as of March 31, 1997 and 1998, and the related statements
of operations, stockholders' deficit and cash flows for each of the years in
the three-year period ended March 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pilot Network Services,
Inc. as of March 31, 1997 and 1998, and the results of its operations and its
cash flows for each of the years in the three-year period ended March 31,
1998, in conformity with generally accepted accounting principles.
Oakland, California
May 29, 1998, except for Note 6 which is
as of June 30, 1998
F-2
<PAGE>
PILOT NETWORK SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
------------------------- JUNE 30,
1997 1998 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 3,081,270 $ 1,446,711 $ 6,176,153
Trade receivables, less allowance
for doubtful accounts of $12,000 in
1997 and $111,000 in March 1998 and
148,000 in June 1998 .............. 725,211 1,066,560 2,240,252
Prepaid and other current assets.... 120,064 272,902 413,967
Financing costs..................... -- -- 1,200,000
----------- ------------ ------------
Total current assets.............. 3,926,545 2,786,173 10,030,372
Property and equipment, net........... 3,478,705 5,993,848 7,612,044
Other assets, net..................... 33,950 142,286 280,963
----------- ------------ ------------
$ 7,439,200 $ 8,922,307 $ 17,923,379
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................... $ 581,737 $ 2,056,689 $ 3,708,715
Accrued expenses.................... 479,329 601,040 1,206,881
Line of Credit...................... -- -- 1,055,725
Term Loan........................... -- -- 6,000,000
Current portion of capital lease
obligations........................ 972,579 1,549,585 1,771,690
Deferred revenue.................... 1,257,559 1,541,635 2,017,205
----------- ------------ ------------
Total current liabilities......... 3,291,204 5,748,949 15,760,216
Capital lease obligations, net of cur-
rent portion......................... 1,945,663 3,444,217 4,429,091
----------- ------------ ------------
Total liabilities................. 5,236,867 9,193,166 20,189,307
Commitments
Redeemable convertible preferred
stock, $0.001 par value; 7,432,810
shares authorized; 5,763,030 shares
issued and outstanding as of March
31, 1997 and 6,363,030 shares issued
and outstanding as of March 31, 1998
and June 30, 1998; aggregate
liquidation preference of $10,458,261
in 1998.............................. 8,084,068 12,143,303 12,480,047
Stockholders' deficit:
Convertible Series A preferred
stock; $0.001 par value; 1,400,000
shares authorized, issued and
outstanding; aggregate liquidation
preference of $49,000 as of
March 31, 1997, 1998 and June 30,
1998............................... 1,400 1,400 1,400
Common stock, $0.001 par value;
40,000,000 shares authorized;
2,001,722 and 2,050,536 shares
issued and outstanding as of March
31, 1997 and 1998, respectively and
2,272,656 shares issued and
outstanding as of June 30, 1998.... 2,002 2,051 2,273
Additional paid-in capital.......... 105,897 1,168,148 4,685,942
Deferred stock compensation......... -- (890,943) (2,771,677)
Accumulated deficit................. (5,991,034) (12,694,818) (16,663,913)
----------- ------------ ------------
Total stockholders' deficit....... (5,881,735) (12,414,162) (14,745,975)
----------- ------------ ------------
$ 7,439,200 $ 8,922,307 $ 17,923,379
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PILOT NETWORK SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31, JUNE 30,
------------------------------------- -----------------------
1996 1997 1998 1997 1998
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Service revenues........ $ 2,524,965 $ 6,300,238 $11,317,302 $2,461,557 $ 3,720,166
Cost of service
revenues............... 1,424,068 4,181,426 9,825,413 1,745,575 4,023,569
----------- ----------- ----------- ---------- -----------
Gross margin............ 1,100,897 2,118,812 1,491,889 715,982 (303,403)
Operating costs and
expenses:
Sales and marketing... 1,791,823 3,109,058 4,306,466 867,584 2,133,917
Engineering and
development.......... 162,236 274,627 798,687 141,745 298,508
General and
administrative....... 765,549 1,064,401 1,550,562 340,604 688,336
----------- ----------- ----------- ---------- -----------
Operating expenses.. 2,719,608 4,448,086 6,655,715 1,349,933 3,120,761
----------- ----------- ----------- ---------- -----------
Operating loss...... (1,618,711) (2,329,274) (5,163,826) (633,951) (3,424,164)
Interest income......... 20,234 27,620 96,949 32,047 12,250
Interest expense........ (151,832) (350,012) (567,673) (115,524) (220,437)
----------- ----------- ----------- ---------- -----------
Net loss............ (1,750,309) (2,651,666) (5,634,550) (717,428) (3,632,351)
Accretion on redeemable
convertible preferred
stock.................. (262,593) (478,304) (1,069,234) (132,156) (336,744)
----------- ----------- ----------- ---------- -----------
Net loss attributable to
common stockholders.... $(2,012,902) $(3,129,970) $(6,703,784) $ (849,584) $(3,969,095)
=========== =========== =========== ========== ===========
Basic and diluted net
loss per share......... $ (1.07) $ (1.58) $ (3.31) (0.42) (1.81)
=========== =========== =========== ========== ===========
Shares used in computing
basic and diluted net
loss per share......... 1,889,048 1,982,422 2,025,470 2,005,398 2,197,882
=========== =========== =========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PILOT NETWORK SERVICES, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS ENDED MARCH 31, 1996, 1997 AND 1998
AND THREE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE COMMON TOTAL
PREFERRED STOCK STOCK ADDITIONAL DEFERRED STOCKHOLDERS'
---------------- ----------------- PAID-IN STOCK ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIT)
--------- ------ --------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of March 31,
1995................... 1,400,000 $1,400 1,777,390 $1,778 $ 79,331 $ -- $ (848,162) $ (765,653)
Issuance of common
stock................. -- -- 182,250 182 16,221 -- -- 16,403
Accretion on Series B,
C, D, E, and F
redeemable convertible
preferred stock....... -- -- -- -- -- -- (262,593) (262,593)
Net loss............... -- -- -- -- -- -- (1,750,309) (1,750,309)
--------- ------ --------- ------ ---------- ----------- ------------ ------------
Balance as of March 31,
1996................... 1,400,000 $1,400 1,959,640 $1,960 $ 95,552 $ -- $ (2,861,064) $ (2,762,152)
Issuance of common
stock................. -- -- 96,916 97 15,225 -- -- 15,322
Repurchase of common
stock................. -- -- (54,834) (55) (4,880) -- -- (4,935)
Accretion on Series B,
C, D, E, and F
redeemable convertible
preferred stock....... -- -- -- -- -- -- (478,304) (478,304)
Net loss............... -- -- -- -- -- -- (2,651,666) (2,651,666)
--------- ------ --------- ------ ---------- ----------- ------------ ------------
Balance as of March 31,
1997................... 1,400,000 $1,400 2,001,722 $2,002 $ 105,897 $ -- $ (5,991,034) $ (5,881,735)
Issuance of common
stock................. -- -- 72,706 73 8,815 -- -- 8,888
Repurchase of common
stock................. -- -- (23,892) (24) (1,844) -- -- (1,868)
Accretion on Series B,
C, D, E, and F
redeemable convertible
preferred stock....... -- -- -- -- -- -- (1,069,234) (1,069,234)
Deferred compensation
related to grant of
common stock options.. -- -- -- -- 1,055,280 (1,055,280) -- --
Amortization of
deferred
compensation.......... -- -- -- -- -- 164,337 -- 164,337
Net loss............... -- -- -- -- -- -- (5,634,550) (5,634,550)
--------- ------ --------- ------ ---------- ----------- ------------ ------------
Balance as of March 31,
1998................... 1,400,000 $1,400 2,050,536 $2,051 $1,168,148 $ (890,943) $(12,694,818) $(12,414,162)
Issuance of common
stock(1).............. -- -- 222,120 222 142,794 -- -- 143,016
Accretion on Series B,
C, D, E, and F
redeemable convertible
preferred stock(1).... -- -- -- -- -- -- (336,744) (336,744)
Issuance of common
stock warrants in
connection with bridge
financing(1).......... -- -- -- -- 1,200,000 -- -- 1,200,000
Deferred compensation
related to grant of
common stock
options(1)............ -- -- -- -- 2,175,000 (2,175,000) -- --
Amortization of
deferred
compensation.......... -- -- -- -- -- 294,266 -- 294,266
Net loss(1)............ -- -- -- -- -- -- (3,632,351) (3,632,351)
--------- ------ --------- ------ ---------- ----------- ------------ ------------
Balance as of June 30,
1998(1)................ 1,400,000 $1,400 2,272,656 $2,273 $4,685,942 $(2,771,677) $(16,663,913) $(14,745,975)
========= ====== ========= ====== ========== =========== ============ ============
</TABLE>
- --------
(1) Unaudited
See accompanying notes to financial statements.
F-5
<PAGE>
PILOT NETWORK SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
------------------------------------- -----------------------------
1996 1997 1998 1997 1998
----------- ----------- ----------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(1,750,309) $(2,651,666) $(5,634,550) $ (717,428) $ (3,632,351)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 449,649 1,221,919 2,273,612 451,581 851,947
Amortization of
deferred
compensation......... -- -- 164,337 5,795 294,266
Changes in operating
assets and
liabilities:
Trade receivables.... (323,213) (238,528) (341,349) (722,741) (1,173,692)
Prepaid and other
assets.............. (172,743) 78,428 (261,174) (12,947) (279,742)
Accounts payable..... 106,037 352,460 1,474,952 (134,773) 1,652,026
Accrued expenses..... 224,208 197,650 121,711 150,538 605,841
Deferred revenue..... 660,033 528,376 284,076 899,683 475,570
----------- ----------- ----------- ------------- --------------
Net cash used in
operating
activities......... (806,338) (511,361) (1,918,385) (80,292) (1,206,135)
----------- ----------- ----------- ------------- --------------
Cash flows used in
investing activities--
capital expenditures.. (596,609) (650,865) (1,470,162) (16,061) (768,220)
----------- ----------- ----------- ------------- --------------
Cash flows from
financing activities:
Net proceeds from sale
of redeemable
convertible preferred
stock................ 902,700 4,501,266 2,990,000 -- --
Principal payments of
obligations under
capital leases....... (244,507) (688,616) (1,243,032) (260,982) (494,944)
Proceeds from working
capital line of
credit............... -- -- -- -- 1,055,725
Proceeds from term
loan................. -- -- -- -- 6,000,000
Proceeds from the
issuance of common
stock................ 16,403 15,322 8,888 378 143,016
Repurchase of common
stock................ -- (4,935) (1,868) -- --
----------- ----------- ----------- ------------- --------------
Net cash provided by
financing
activities......... 674,596 3,823,037 1,753,988 (260,604) 6,703,797
----------- ----------- ----------- ------------- --------------
Net increase (decrease)
in cash and cash
equivalents........... (728,351) 2,660,811 (1,634,559) (356,957) 4,729,442
Cash and cash
equivalents at
beginning of period... 1,148,810 420,459 3,081,270 3,081,270 1,446,711
----------- ----------- ----------- ------------- --------------
Cash and cash
equivalents at end of
period................ $ 420,459 $ 3,081,270 $ 1,446,711 $ 2,724,313 $ 6,176,153
=========== =========== =========== ============= ==============
Supplemental disclosure
of cash flow
information:
Cash paid during the
period-interest...... $ 136,413 $ 330,407 $ 567,673 $ 115,524 $ 220,439
=========== =========== =========== ============= ==============
Noncash financing
activities:
Assets acquired under
capital lease
obligations.......... $ 1,319,530 $ 2,244,512 $ 3,318,592 $ 498,762 $ 1,629,407
=========== =========== =========== ============= ==============
Accretion of
redeemable preferred
stock................ $ 262,593 $ 478,304 $ 1,069,234 $ 132,156 $ 336,744
=========== =========== =========== ============= ==============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PILOT NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Pilot Network Services, Inc. (the Company), was incorporated in California
in August 1992. Pilot Network Services provides comprehensive security
services that incorporate high-bandwidth connectivity and enable secure
electronic commerce over the Internet.
Interim Financial Information
The financial information presented as of June 30, 1998 and for the three
months ended June 30, 1997 and June 30, 1998 is unaudited. In the opinion of
management, this unaudited financial information contains all adjustments
(which consist only of normal, recurring adjustments) necessary for a fair
presentation. Operating results for the three months ended June 30, 1998 are
not necessarily indicative of results that may be expected for the full year.
Revenue Recognition
Revenues consist primarily of monthly fees for secure access and hosting
services, installation and management services. Secure access and hosting
service fees are recognized ratably over the term of the contract, generally
one year. Installation fees are recognized over the installation period,
generally 60 days. Management services, which include security audits and
consulting arrangements, are recognized as the service is performed.
Cash Equivalents
The Company considers all highly liquid instruments with a remaining
maturity of 90 days or less at the date of purchase to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method based on estimated useful lives, generally over three
years. Depreciation expense includes amortization of assets recorded under
capital lease. Equipment held under capital leases is amortized over the
shorter of the lease term or the estimated useful life of the asset.
Software Development Costs
Software development costs are expensed as incurred until the technological
feasibility of the related product has been established. After technological
feasibility is established, any additional software development costs would be
capitalized in accordance with Financial Accounting Standards Board Statement
of Financial Accounting Standards ("SFAS") No. 86, Capitalization of Software
Development Costs. Through March 31, 1998, the Company's process for
developing software was essentially completed concurrently with the
establishment of technological feasibility in the form of a working model,
and, accordingly, no software costs have been capitalized to date. Software
development costs incurred prior to achieving technological feasibility are
charged to engineering and development expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years that those differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Accounting for Stock-Based Compensation
The Company uses the intrinsic value method to account for its stock-based
employee compensation plans.
F-7
<PAGE>
PILOT NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company evaluates the recoverability of its identifiable tangible assets
under SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. This statement requires identifiable
assets to be evaluated for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. If an asset is considered to be impaired, the carrying amount of
that asset is reduced to its fair value, resulting in a charge to income.
Assets to be disposed of are reported at the lower of the carrying amounts or
fair value less costs to sell. As of March 31, 1998, the Company did not
consider any of its assets to be impaired.
Advertising
Advertising costs are expensed as incurred and are included in sales and
marketing expense. The Company had no advertising expense for the years ended
March 31, 1996 and 1997, and approximately $24,000 during the year ended March
31, 1998.
Net Loss Per Share
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net loss per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using either the as-if-
converted method for convertible preferred stock or the treasury stock method
for options and warrants. The effect of including convertible preferred stock,
options and warrants would have been antidilutive during all periods presented
and, as a result, such effect has been excluded from the computation of
diluted net loss per share. Pursuant to SEC Staff Accounting Bulletin No. 98,
common stock and convertible preferred stock issued for nominal consideration
and options and warrants granted for nominal consideration prior to the
anticipated effective date of the initial public offering (IPO) are included
in the calculation of basic and diluted net loss per share, as if they were
outstanding for all periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.
Excluded from the computation of diluted earnings per share for the year
ended March 31, 1998 are options to acquire 1,125,312 shares of Common Stock
with a weighted-average exercise price of $0.68 because their effects would be
anti-dilutive. Also excluded from the computation of diluted earnings per
share for the year ended March 31, 1998 are 7,329,696 common share equivalents
resulting from the assumed conversion of the Series A, B, C, D, E and F
preferred stock because their effects would be anti-dilutive.
F-8
<PAGE>
PILOT NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Had the outstanding shares of Redeemable Convertible Preferred Stock and the
Series A Preferred Stock converted to common stock as of April 1, 1997 or the
date of issuance, if later, pro forma basic and diluted earnings per share
would have been as follows:
<TABLE>
<CAPTION>
UNAUDITED
---------------------------------------
YEAR ENDED MARCH 31, 1998
AND THREE MONTHS ENDED JUNE 30, 1998
---------------------------------------
WEIGHTED AVERAGE
NET LOSS SHARES PER SHARE
----------- ---------------- ---------
<S> <C> <C> <C>
MARCH 31, 1998
Basic and diluted loss per share...... $(6,703,784) 2,025,470 $(3.31)
Pro forma adjustment for accretion and
conversion of preferred stock........ 1,069,234 7,329,696 --
----------- --------- ------
Pro forma basic and diluted loss per
share................................ $(5,634,550) 9,355,166 $(0.60)
=========== ========= ======
JUNE 30, 1998
Basic and diluted loss per share...... $(3,969,095) 2,197,882 $(1.81)
Pro forma adjustment for accretion and
conversion of preferred stock........ 336,744 7,763,030 --
----------- --------- ------
Pro forma basic and diluted loss per
share................................ $(3,632,351) 9,960,912 $(0.36)
=========== ========= ======
</TABLE>
Concentration of Risk
The Company provides its services throughout the United States to a wide
user base. During the years presented no single customer accounted for greater
than 5% of total service revenue. The Company performs credit evaluations of
its customers' financial condition and, generally, does not require collateral
from its customers. Management makes estimates as to its credit losses and to
date its estimates have not differed materially from actual results. Overall,
credit risk is limited due to the large number of customers in differing
industries and geographic areas.
The Company purchases its network management hardware from a limited number
of suppliers.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value due to the short
maturity of those instruments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") recently issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components in financial
statements. It does not, however, require a specific format, but requires the
Company to display an amount representing total comprehensive income for the
period in its financial
F-9
<PAGE>
PILOT NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
statements. The Company is in the process of determining its preferred format.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
The FASB also recently issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The Company sells its services in one
industry segment. Therefore, the Company has determined that it currently does
not have any separately reportable business segments.
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------- JUNE 30,
1997 1998 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Network and computer equipment.......... $4,616,932 $ 8,273,673 $ 9,450,321
Furniture and fixtures.................. 265,116 456,829 529,744
Purchased software...................... 162,271 576,712 761,361
Leasehold improvements.................. 200,901 718,941 1,754,879
---------- ----------- -----------
5,245,220 10,026,155 12,496,305
Less accumulated depreciation and
amortization........................... 1,766,515 4,032,307 4,884,261
---------- ----------- -----------
$3,478,705 $ 5,993,848 $ 7,612,044
========== =========== ===========
</TABLE>
The gross amount of capitalized leased assets included in property and
equipment was approximately $3,856,000 and $4,994,000 and related accumulated
amortization was approximately $1,445,000 and $3,182,000 as of March 31, 1997
and 1998, respectively.
(3) COMMITMENTS
Leases
The Company has entered into equipment leases with various leasing
institutions providing for financing of equipment purchases of up to
$5,000,000 at varying interest rates. Borrowings under the leases are
generally repayable in monthly installments over periods ranging from 36 to 48
months and a mandatory buyout, and are secured by a lien on the leased
equipment.
The Company is obligated under certain noncancelable operating leases for
office space and equipment expiring at various dates through 2001. Rent
expense for the years ended March 31, 1996, 1997 and 1998 was $201,519,
$464,503 and $636,031, respectively.
F-10
<PAGE>
PILOT NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule of future minimum payments required under
capital and operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of March 31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
YEAR ENDING MARCH 31:
1999............................................... $2,206,861 $1,104,225
2000............................................... 1,844,261 1,127,691
2001............................................... 1,366,650 622,669
2002............................................... 847,931 291,928
2003............................................... 52,039 219,461
Thereafter......................................... -- 752,501
---------- ----------
Total minimum lease payments..................... 6,317,742 $4,118,475
==========
Less amount representing interest (at rates ranging
from 14.5% to 14.7%).............................. 1,323,940
----------
4,993,802
Less current portion of capital lease obligations.. 1,549,585
----------
Capital lease obligations, net of current portion.. $3,444,217
==========
</TABLE>
Agreement
On June 18, 1996, the Company entered into an agreement with AmeriData
Technologies Inc. (Subsequently purchased by GE Capital Information
Technologies Solutions, Inc.) ("AmeriData") whereby the Company granted
AmeriData options to purchase 200,000 shares of the Company's Common Stock at
$2.00 per share and AmeriData agreed to sell the Company's secure Internet
services to AmeriData customers in exchange for a commission on the monthly
recurring revenue received in the first two years of these new customer
contract. The commissions incurred through March 31, 1998 have not been
material. The fair value of the options granted to AmeriData was immaterial
using the following assumptions: no dividend yield; risk free interest rate of
6.5%: volatility of 60%; expected life for the option of five years; and a
fair value of common stock of $0.40.
401(k) Retirement Plan
Effective July 1, 1995 the Company established a 401(k) defined contribution
retirement plan (the "Retirement Plan") covering all full-time employees with
greater than one months' service. The Retirement Plan provides for voluntary
employee contributions from 1% to 15% of annual compensation, subject to a
maximum limit allowed by Internal Revenue Service guidelines. The Company may
contribute such amounts to the accounts of participants in the Retirement Plan
as determined by the Board of Directors. However, to date, the Company has not
made any contribution to the Retirement Plan.
F-11
<PAGE>
PILOT NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards................ $ 1,816,595 $ 3,522,247
Plant and equipment--depreciation differences... (13,855) 48,932
Research credit carryforwards................... -- 34,070
Other reserves and accruals..................... 207,164 200,050
----------- -----------
Total gross deferred tax assets............... 2,009,904 3,805,299
Less valuation allowance........................ (2,009,904) (3,805,299)
----------- -----------
Net deferred tax assets....................... $ -- $ --
=========== ===========
</TABLE>
The net increase in the valuation allowance was approximately $1,150,000 and
$1,795,000 for the years ended March 31, 1997 and 1998, respectively. Due to
recent operating losses the Company believes that sufficient uncertainty
exists with respect to future realization of these deferred tax assets;
therefore, it has established a valuation allowance against all net deferred
tax assets.
The Company has net operating loss carryforwards for federal income tax
return purposes of approximately $9,500,000 which can be used to reduce future
taxable income. These carryforwards expire in 2008 through 2012. As of March
31, 1998, the Company had California operating loss carryforwards of
approximately $3,800,000 available to offset future income subject to
California franchise tax. The difference between the federal loss
carryforwards and the California loss carryforwards results primarily from a
50% limitation on California loss carryforwards, and certain research and
development costs that were deferred for California tax purposes. The
California net operating loss carryforwards expire in various amounts from
1998 through 2002. The Company also has federal and California tax credit
carryforwards of approximately $20,000 and $14,000, respectively, as of March
31, 1998. These tax credits expire through 2012.
Under the Tax Reform Act of 1986, the amounts of any benefit from net
operating losses and credits that can be carried forward may be limited in the
event of an ownership change as defined in the Internal Revenue Code, Section
382.
(5) STOCKHOLDERS' DEFICIT
Convertible Preferred Stock and Redeemable Convertible Preferred Stock
The Company has outstanding six series of preferred stock: Series A, B, C,
D, E and F. Each share of preferred stock is convertible, at the option of the
holder, into fully paid shares of common stock. The conversion rate is one-
for-one, subject to adjustments for stock dividends, stock splits and capital
reorganizations and dilution.
In January 1994 the Company issued 1,661,646 shares of Series B Redeemable
Convertible Preferred Stock at $0.365 per share. In March 1995, the Company
issued 1,488,200 shares of Series D Redeemable Convertible Preferred Stock at
$0.875 per share. In December 1995 and January 1996, the Company issued
1,210,068 shares of Series C Redeemable Convertible Preferred Stock at $0.73
per share upon the exercise of warrants outstanding. In July 1996, the Company
issued 783,118 shares of Series E Redeemable Convertible Preferred
F-12
<PAGE>
PILOT NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock at $2.00 per share. From March 1997 through February 1998, the Company
issued 1,220,000 shares of Series F Redeemable Convertible Preferred Stock and
warrants to purchase 600,000 shares of Series F Preferred Stock for $5.00 per
share and an exercise price on the warrants of $6.00 per share.
The preferred stock automatically converts to common stock upon the closing
of an underwritten public offering of shares of the Company's common stock
resulting in total proceeds of at least $7,500,000 and with a minimum share
price of at least $5.00. The holders of the preferred stock are entitled to
vote on an "as if converted" basis on all matters brought to a vote of the
Company's stockholders.
The Series B, C, D, E and F preferred stock are redeemable after January 28,
1999 upon written request of the holders of the majority of such shares,
acting as a single class. The redemption price is equal to the original
purchase price plus 12% per annum for the period the preferred stock was
outstanding, less dividends previously paid.
Shares of Series A, B, C, D, E and F preferred stock have liquidation
preferences of $0.035, $0.365, $0.73, $0.875, $2.00 and $5.00, respectively,
plus all declared but unpaid dividends.
The holders of Series A, B, C, D, E and F preferred stock are entitled to
noncumulative dividends at annual rates of $0.005, $0.03, $0.06, $0.088, $0.20
and $0.50 per share, respectively, when and if declared by the Board of
Directors.
In the event of a liquidation, consolidation, merger or winding up of the
Company prior to conversion, holders of preferred stock are entitled to
receive, in preference to the holders of common stock, an amount equal to
their liquidation preference or a pro rata share of the remaining assets,
based on their ownership of the Company.
Preferred stock issued and outstanding as of March 31, 1998 was as follows:
<TABLE>
<CAPTION>
SHARES ISSUED
SHARES AND REDEMPTION
DESIGNATED OUTSTANDING AMOUNT
---------- ------------- -----------
<S> <C> <C> <C>
Series A................................ 1,400,000 1,400,000 $ --
Series B................................ 1,913,424 1,661,644 909,385
Series C................................ 1,210,068 1,210,068 1,117,450
Series D................................ 1,686,200 1,488,200 1,767,851
Series E................................ 783,118 783,118 1,883,854
Series F................................ 1,840,000 1,220,000 6,464,763
--------- --------- -----------
8,832,810 7,763,030 $12,143,303
========= ========= ===========
</TABLE>
Warrants
In connection with lease financings, the Company has issued warrants for the
purchase of 27,124 and 115,786 shares of Series B and Series D Redeemable
Preferred Stock, at weighted average exercise prices of $0.365 and $1.53,
respectively.
During 1997 and 1998, the Company issued warrants to purchase 600,000 shares
of Series F Redeemable Preferred Stock to the purchases of Series F Redeemable
Preferred Stock at an exercise price of $6.00 per share in conjunction with
the issuance of the Series F Redeemable Preferred Stock.
F-13
<PAGE>
PILOT NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The fair value of all warrant issuances calculated using the Black-Scholes
option pricing model was not material, using the following assumptions:
dividend yield--none; expected life--contractual term; risk free interest
rate--6%; volatility--60%. Automatic termination will occur for any remaining
warrants upon the closing of the sale of the Company's common stock in a
public offering, in which the gross proceeds exceed $7,500,000 and the
offering price of the common stock exceeds $5.00 per share.
Stock Option Plan
During fiscal 1995, the Company adopted its 1994 Stock Option Plan and the
1994 Restricted Stock Purchase Plan. On April 17, 1997, the plans were merged
into a single plan and the authorized shares were increased resulting in an
aggregate 1,200,000 shares reserved for issuance. The plan, as amended, allows
the Board of Directors to issue nonqualified stock options, incentive stock
options or restricted stock to employees, officers, directors, advisors or
contractors of the Company.
The plan expires 10 years from the date of adoption. Options and restricted
stock are granted at fair market value at date of grant for incentive stock
options or no less than 85% of fair market value at the date of grant for
nonqualified options. Options and restricted stock generally vest over 4
years, with 25% vesting after one year and monthly thereafter, and expire 10
years from grant date.
As of March 31, 1998, 94,722 shares of restricted common stock held by
management were subjected to repurchase by the Company at prices ranging from
$0.035 to $0.20 per share.
The following table summarizes stock option and restricted stock activity as
if the plans had been combined at the beginning of the periods presented:
<TABLE>
<CAPTION>
WEIGHTED
AVAILABLE AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
---------- ----------- --------------
<S> <C> <C> <C>
Balances, March 31, 1995............. 825,054 67,416 $0.07
Granted............................ (598,250) 598,250 0.09
Exercised.......................... -- (182,250) 0.09
Canceled........................... 167,000 (167,000) 0.09
---------- --------- -----
Balances, March 31, 1996............. 393,804 316,416 0.09
Granted............................ (412,000) 412,000 0.31
Exercised.......................... -- (96,916) 0.16
Canceled........................... 169,542 (169,542) 0.22
Repurchased........................ 54,834 -- 0.09
---------- --------- -----
Balances, March 31, 1997............. 206,180 461,958 0.23
Authorized......................... 830,140 -- --
Granted............................ (1,020,000) 1,020,000 0.82
Exercised.......................... -- (72,706) 0.12
Canceled........................... 283,940 (283,940) 0.57
Repurchased........................ 23,892 -- 0.08
---------- --------- -----
Balances, March 31, 1998............. 324,152 1,125,312 0.68
Authorized......................... 1,000,000 -- --
Granted............................ (681,000) 681,000 3.69
Exercised.......................... -- (222,120) 0.64
Canceled........................... 27,252 (27,252) 1.39
---------- --------- -----
Balances, June 30, 1998.............. 670,404 1,556,940 1.99
========== ========= =====
Exercisable as of March 31, 1998..... -- 137,806 0.22
========= =====
Exercisable as of June 30, 1998...... 217,938 0.89
========= =====
</TABLE>
F-14
<PAGE>
PILOT NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about fixed stock options
outstanding at March 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING NUMBER OF
EXERCISE NUMBER OF CONTRACTUAL SHARES
PRICES SHARES LIFE EXERCISABLE
-------- --------- ----------- -----------
<S> <C> <C> <C>
$0.035................................... 27,416 6.5 23,990
0.09.................................... 93,542 7.4 58,294
0.20.................................... 58,354 8.2 21,104
0.40.................................... 43,000 8.6 15,980
0.75.................................... 830,000 9.5 18,438
1.50.................................... 73,000 9.8 --
--------- -------
0.035-1.50.............................. 1,125,312 137,806
========= =======
</TABLE>
The Company accounts for the plan using the intrinsic value method. As such,
compensation expense is recorded if on the date of grant the current fair
value per share of the underlying stock exceeds the exercise price per share.
With respect to certain options granted during fiscal 1998, the Company has
recorded deferred compensation of $1,055,280 for the difference at the grant
date between the exercise price per share and the fair value per share, based
upon independent valuations and management's estimate of the fair value of the
Company's stock on the various grant dates of the common stock underlying the
options. This amount is being amortized on an accelerated basis over the
vesting period of the individual options, generally four years.
Had compensation cost for the Company's stock-based compensation plan been
determined consistent with SFAS No. 123, the Company's net loss would have
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss attributable to common
stockholders:
As reported........................ $(2,012,902) $(3,129,970) $(6,703,784)
Pro forma.......................... (2,105,200) (3,132,204) (6,727,281)
Net loss per share:
As reported basic and diluted net
loss per share.................... $ (1.07) $ (1.58) $ (3.31)
Pro forma basic and diluted net
loss per share.................... $ (1.07) $ (1.58) $ (3.32)
Shares used in computing reported
and pro forma basic and diluted
net loss per share................ 1,889,048 1,982,422 2,025,470
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted average assumptions; no
dividend yield; risk free interest rate of 6.5%; and expected life for the
options of five years.
The effect of applying SFAS No. 123 for disclosing compensation costs may
not be representative of the effects on pro forma net loss for future years
because pro forma net loss reflects compensation costs only for stock options
granted in fiscal 1996, 1997 and 1998 and does not consider compensation costs
for stock options granted prior to April 1, 1995.
F-15
<PAGE>
PILOT NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(6) SUBSEQUENT EVENTS
Equipment Financing
On April 1, 1998, the Company increased its equipment financing commitment
with a financial institution for financing of equipment purchases up to
$5,000,000 at interest rates of approximately 15%. The Company's ability to
draw more than $2,000,000 of this line is subject to receiving $3,000,000 of
new equity investment. Borrowing under the financing is repayable in monthly
installments of principal and interest over 48 months and is secured by a lien
on the leased equipment.
Debt Financing
On May 11, 1998, the Company negotiated a line of credit with a financial
institution for an aggregate amount of $1,500,000. The line of credit bears
interest at a minimum of 11% per annum and is secured by assets of the
Company.
On June 30, 1998 the Company completed a borrowing agreement with two
lenders providing $6.0 million of short term financing. The loan expires in
June 1999 and bears interest at 13.5% per year. The loan may be pre-paid at
the Company's option after 6 months and at the option of the lenders at any
time after the Company's initial public offering. As additional consideration,
the Company issued 150,000 warrants to purchase Common Stock at any exercise
price of 80% of the initial public offering price. The Company has determined
that the warrants have a fair value of $1.2 million. The Company has
capitalized the cost of the warrants and expects to write off such amount over
the one-year term of the loan.
Stock Based Compensation Plans
On June 12, 1998, the Stockholders approved the Company's 1998 Stock Option
Plan (the 1998 Plan). The 1998 plan reserves 1,000,000 shares plus annual
increases limited to the lesser of 500,000 shares, 3% of the Company's
outstanding common stock, or the number determined by the Board of Directors.
Also on June 12, 1998, the shareholders approved the 1998 Directors Stock
Option Plan which reserves 200,000 shares of Common Stock and a 1998 Employee
Stock Purchase Plan which reserves 200,000 shares of Common Stock. The 1998
Employee Stock Purchase Plan provides for automatic annual increases of the
lesser of 100,000 shares, 1/2% of the Company's outstanding Common Stock or an
amount determined by the Board of Directors.
Reincorporation
On June 12, 1998, the Board of Directors approved the Company's
reincorporation in the state of Delaware and a 2 for 1 split of common and
preferred stock. Following shareholder approval, the Certificate of
Incorporation of the Delaware successor corporation will authorize 40,000,000
shares of common stock, $.001 par value per share, and 9,432,810 shares of
preferred stock, $.001 par value per share. The accompanying financial
statements have been retroactively restated to give effect to the
reincorporation and stock split.
Initial Public Offering
In June 1998, the Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission that would permit the
Company and certain stockholders of the Company to sell shares of the
Company's common stock in connection with a proposed initial public offering
("IPO"). If the offering is consummated under the terms presently anticipated,
all the then outstanding shares of the Company's redeemable convertible
preferred stock will automatically convert into shares of common stock on a
one-for-one basis upon the closing of the proposed IPO.
F-16
<PAGE>
PILOT'S GLOBAL EXPANSION
[Chart shows current Network Security Centers in San Francisco, Los Angeles,
Chicago and New York and New Centers in Boston, Minneapolis, Washington, D.C.
and London commencing operations in 1998 and identified on a globe. Chart
indicates:
Arrows pointing to Europe and Asia to indicate anticipated
international expansion. Legend indicates the following types of
operations:]
-- Pilot Network Security Centers
-- New Centers in 1998
-- Anticipated International Expansion
The Company currently has Network Security Centers in the San Francisco, Los
Angeles, New York and Chicago, and is commencing operations in the Boston,
Washington D.C., Minneapolis and London metropolitan areas during 1998. The
Company intends to establish additional Network Security Centers in the United
States, Europe and Asia, although the Company has not identified specific
locations for expansion. In addition, there can be no assurance with respect
to the timing or extent of such expansion or that the Company will be
successful in expanding its operations. See "Risk Factors--Risks of Business
Expansion and Management Growth."
<PAGE>
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDER-
WRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 30
Management............................................................... 43
Certain Relationships and Related Transactions........................... 53
Principal and Selling Stockholders....................................... 56
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 63
Notice to Canadian Residents............................................. 65
Legal Matters............................................................ 66
Experts.................................................................. 66
Additional Information................................................... 66
Index to Financial Statements............................................ F-1
</TABLE>
-----------
UNTIL , (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDER-
WRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO OF PILOT NETWORKS SERVICES]
3,250,000 Shares
Common Stock
($0.001 par value)
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the registrant in connection with the sale
of the Common Stock being registered hereby. All amounts shown are estimates,
except the Securities and Exchange Commission registration fee, the NASD
filing fee and the Nasdaq National Market listing fee:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee....................... $ 16,539
NASD filing fee..................................................... 6,107
Nasdaq National Market listing fee.................................. 87,000
Blue Sky fees and expenses.......................................... 2,000
Printing and engraving expenses..................................... 130,000
Legal fees and expenses............................................. 300,000
Accounting fees and expenses........................................ 250,000
Directors and Officers Insurance expenses........................... 130,000
Transfer Agent and Registrar fees................................... 15,000
Miscellaneous....................................................... 63,354
----------
Total............................................................. $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers, as well as other
employees and individuals, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation--a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with
the defense or settlement of such actions, and the statute requires court
approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, bylaws, disinterested director vote, stockholder vote,
agreement or otherwise.
The Company's Restated Certificate of Incorporation limits the liability of
directors to the full extent permitted by Delaware law. Delaware law provides
that a corporation's certificate of incorporation may contain a provision
eliminating or limiting the personal liability of directors for monetary
damages for breach of their fiduciary duties as directors, except for
liability (i) for any breach of their duty of loyalty to the corporation or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit. The Company's Bylaws provide
that the Company shall indemnify its directors and officers and may indemnify
its employees and agents to the fullest extent permitted by law. The Company
believes that indemnification under its Bylaws covers at least negligence and
gross negligence on the part of indemnified parties.
The Company intends to enter into agreements which indemnify its directors
and executive officers. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by such persons in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or
II-1
<PAGE>
officer of the Company, any subsidiary of the Company or any other company or
enterprise to which the person provides services at the request of the
Company. The Company believes that these provisions and agreements are
necessary to attract and retain qualified directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 1, 1995, the registrant has issued and sold unregistered
securities as follows:
(1) In December 1995, the Registrant issued and sold shares of Series B
Preferred Stock convertible into an aggregate of 48,218 shares of Common
Stock for an aggregate purchase price of $17,600 to one individual
pursuant to the exercise of a warrant previously issued.
(2) In December 1995 and January 1996, the Registrant issued and sold shares
of Series C Preferred Stock convertible into an aggregate of 1,210,068
shares of Common Stock to a total of five investors for an aggregate
purchase price of $888,349.64.
(3) In May 1996, the Registrant issued warrants to purchase shares of Series
D Preferred Stock convertible into an aggregate of 45,000 shares of
Common Stock to a total of two entities at an exercise price of $2.00 per
share in connection with an equipment financing.
(4) In February and March 1997, the Registrant issued warrants to purchase
shares of Series D Preferred Stock convertible into an aggregate of
22,500 shares of Common Stock to a total of two entities at an exercise
price of $2.00 per share in connection with an equipment financing.
(5) In July 1996, the Registrant issued and sold shares of Series E Preferred
Stock convertible into an aggregate of 783,118 shares of Common Stock to
a total of nine investors for an aggregate purchase price of $1,566,236.
(6) In March 1997, the Registrant issued and sold shares of Series F
Preferred Stock convertible into an aggregate of 600,000 shares of Common
Stock for an aggregate purchase price of $3,000,000 and a warrant to
purchase shares of Series F Preferred Stock convertible into an aggregate
of 300,000 shares of Common Stock at an exercise price of $6.00 per share
to one investor.
(7) In March 1997, the Registrant issued to an investment management company
shares of Series F Preferred Stock convertible into an aggregate of
20,000 shares of Common Stock in consideration of services rendered in
connection with the Registrant's issuance and sale of Series F Preferred
Stock.
(8) In December 1997, the Registrant issued and sold shares of Series F
Preferred Stock convertible into an aggregate of 400,000 shares of Common
Stock for an aggregate purchase price of $2,000,000 and a warrant to
purchase shares of Series F Preferred Stock convertible into an aggregate
of 200,000 shares of Common Stock at an exercise price of $6.00 per share
to one investor.
(9) In February 1998, the Registrant issued and sold shares of Series F
Preferred Stock convertible into 200,000 shares of Common Stock for an
aggregate purchase price of $1,000,000 and a warrant to purchase shares
of Series F Preferred Stock convertible into 100,000 shares of Common
Stock at an exercise price of $6.00 per share to one investor.
(10) In June 1998, the Registrant issued warrants to purchase an aggregate of
150,000 shares of Common Stock to a total of two entities at an exercise
price equal to $11.20 per share (assuming an initial public offering
price of $14.00 per share).
Each of the foregoing purchases and sales were exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to Section 4(2) thereof on the basis that the transactions did
not involve public offerings.
(11) From June 1, 1995 through June 30, 1998, the Registrant granted stock
options to purchase 2,359,000 shares of Common Stock, with exercise
prices ranging from $0.09 to $6.00 per share, to employees, consultants,
and officers pursuant to its 1994 Stock Plan and stock options to
purchase 20,000 shares of Common Stock at an exercise price of $13.00 per
share to a director of the Company pursuant to its 1998 Stock plan. Of
these options, 576,378 have been canceled without being exercised,
options for 269,556
II-2
<PAGE>
shares have been exercised and options for 1,533,066 shares remain
outstanding. From June 1, 1995 through June 30, 1998, the Registrant also
granted stock options outside of any plan to purchase 200,000 shares of
the Registrant's Common Stock, with an exercise price of $2.00 per share.
Of these options, none have been canceled, none have been exercised and
200,000 remain outstanding. From June 1, 1995 through June 30, 1998, the
Registrant issued an aggregate of 160,000 shares of Common Stock, with
purchase prices ranging from $0.09 to $0.20 per share, to employees,
consultants and officers pursuant to its 1994 Stock Purchase Plan.
The sales and issuances of these securities were exempt from registration
under the Securities Act pursuant to either Rule 701 promulgated
thereunder on the basis that these options were offered and sold either
pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to consideration, as provided by Rule 701, or pursuant
to Section 4(2) thereof on the basis that the transactions did not involve
a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A)EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Form of Agreement and Plan of Merger between the Registrant and
Pilot Network Services, Inc., a California corporation.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1 Form of the Registrant's Common Stock Certificate.
5.1 Form of Opinion of Venture Law Group, A Professional Corporation.
10.1** Form of Indemnification Agreement.
10.2** 1994 Stock Plan, as amended, including form of stock agreements.
10.3 1998 Stock Option Plan, including form of stock option agreement.
10.4 1998 Directors' Stock Option Plan, including form of stock option
agreement.
10.5 1998 Employee Stock Purchase Plan, including form of subscription
agreement.
10.6 Amended and Restated Investors' Rights Agreement dated March 31,
1997, as amended, between the Registrant and certain holders of
the Registrant's securities.
10.7 (a)** Sublease dated April 25, 1995, between the Registrant and
Computer Associates International, Inc.; (b) Lease dated June 26,
1992 between Alameda Real Estate Investments and ASK Computers
Systems, Inc.
10.8 (a)** Sublease dated March 17, 1998 between the Registrant and
TCSI Corporation; (b) Sublease between TCSI Corporation and
Computer Associates International, Inc.; (c) Lease dated June 26,
1992 between Alameda Real Estate Investments and ASK Computers
Systems, Inc. (included in Exhibit 10.7(b)).
10.9** Industrial Complex Lease dated July 11, 1997 between the
Registrant and Great Oak, L.L.C.
10.10** Standard Office Lease dated January 14, 1998 between the
Registrant and Pacific Corporate Towers LLC., as amended February
1998.
10.11 (a)** Sublease dated October 25, 1995, as amended, between the
Registrant and RFG Co., Ltd.; (b)** Master Lease dated June 14,
1988 between Newport Office Center I Co., and Recruit U.S.A., Inc.
10.12 (a)** Sublease dated April 30, 1997 between Nippon Travel Agency
Pacific, Inc. and the Registrant; (b)** Sublease dated January 23,
1992 between the Newport Office Services and Nippon Travel Agency
Pacific, Inc.; (c)** Master Lease dated June 14, 1988 between
Newport Office Center I Co., and Recruit U.S.A., Inc. (included in
Exhibit 10.11(b)).
10.13** Loan and Security Agreement dated May 11, 1998 between the
Registrant and Transamerica Business Credit Union.
10.14 Master Loan and Security Agreement dated September 1, 1997 between
the Registrant and Transamerica Business Credit Corporation, as
amended.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.15** Series F Preferred Stock Purchase Warrant dated March 31, 1997
between the Registrant and the Trustees of The General Electric
Pension Trust.
10.16** Series F Preferred Stock Purchase Warrant dated December 22, 1997
between the Registrant and General Electric Capital Corporation.
10.17** Management Bonus Plan.
10.18** Stock Purchase and Restriction Agreement dated January 28, 1994,
as amended, between the Registrant, Marketta Silvera and certain
of the Registrant's stockholders.
10.19** Stock Purchase and Restriction Agreement dated March 14, 1995,
between the Registrant, Marketta Silvera and certain of the
Registrant's stockholders.
10.20** Stock Purchase and Restriction Agreement dated June 15, 1996
between the Registrant, Marketta Silvera and certain of the
Registrant's stockholders.
10.21** Stock Option Agreement dated May 20, 1998 between the Registrant
and William C. Leetham.
10.22 Loan and Security Agreement dated June 30, 1998 between the
Registrant, MMC/GATX Partnership No. 1 and Transamerica Business
Credit Corporation, including related secured promissory notes and
warrants.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1** Power of Attorney.
27** Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424 (b) (1) or
(4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE UNDERSIGNED
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON
FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN THE CITY OF ALAMEDA, STATE OF CALIFORNIA, ON JULY 16, 1998.
Pilot Network Services, Inc.
/s/ M. Marketta Silvera
By: _________________________________
M. Marketta Silvera
President and Chief Executive
Officer
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT ON FORM S-1 HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ M. Marketta Silvera President, Chief
- ------------------------------------- Executive Officer and July 16, 1998
(M. MARKETTA SILVERA) Director (Principal
Executive Officer)
Sr. Vice President,
* Finance and
- ------------------------------------- Administration, Chief
(WILLIAM C. LEETHAM) Financial Officer,
Treasurer and Secretary
(Principal Financial
Officer)
* Vice President, Finance
- ------------------------------------- and Administration
(ROBERT G. CARRADE) (Principal Accounting
Officer)
* Director
- -------------------------------------
(SHANDA BAHLES)
* Director
- -------------------------------------
(WILLIAM B. ELMORE)
* Director
- -------------------------------------
(K. FLYNN MCDONALD)
* Director
- -------------------------------------
(THOMAS O'ROURKE)
/s/ M. Marketta Silvera July 16, 1998
*By: ___________________________
(M. MARKETTA SILVERA)
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Form of Agreement and Plan of Merger between the Registrant and
Pilot Network Services, Inc., a California corporation.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1 Form of the Registrant's Common Stock Certificate.
5.1 Form of Opinion of Venture Law Group, A Professional Corporation.
10.1** Form of Indemnification Agreement.
10.2** 1994 Stock Plan, as amended, including form of stock agreements.
10.3 1998 Stock Option Plan, including form of stock option agreement.
10.4 1998 Directors' Stock Option Plan, including form of stock option
agreement.
10.5 1998 Employee Stock Purchase Plan, including form of subscription
agreement.
10.6 Amended and Restated Investors' Rights Agreement dated March 31,
1997, as amended, between the Registrant and certain holders of
the Registrant's securities.
10.7 (a)** Sublease dated April 25, 1995, between the Registrant and
Computer Associates International, Inc.; (b) Lease dated June 26,
1992 between Alameda Real Estate Investments and ASK Computers
Systems, Inc.
10.8 (a)** Sublease dated March 17, 1998 between the Registrant and
TCSI Corporation; (b) Sublease between TCSI Corporation and
Computer Associates International, Inc.; (c) Lease dated June 26,
1992 between Alameda Real Estate Investments and ASK Computers
Systems, Inc. (included in Exhibit 10.7(b)).
10.9** Industrial Complex Lease dated July 11, 1997 between the
Registrant and Great Oak, L.L.C.
10.10** Standard Office Lease dated January 14, 1998 between the
Registrant and Pacific Corporate Towers LLC., as amended February
1998.
10.11 (a)** Sublease dated October 25, 1995, as amended, between the
Registrant and RFG Co., Ltd.; (b)** Master Lease dated June 14,
1988 between Newport Office Center I Co., and Recruit U.S.A., Inc.
10.12 (a)** Sublease dated April 30, 1997 between Nippon Travel Agency
Pacific, Inc. and the Registrant; (b)** Sublease dated January 23,
1992 between the Newport Office Services and Nippon Travel Agency
Pacific, Inc.; (c)** Master Lease dated June 14, 1988 between
Newport Office Center I Co., and Recruit U.S.A., Inc. (included in
Exhibit 10.11(b)).
10.13** Loan and Security Agreement dated May 11, 1998 between the
Registrant and Transamerica Business Credit Union.
10.14 Master Loan and Security Agreement dated September 1, 1997 between
the Registrant and Transamerica Business Credit Corporation, as
amended.
10.15** Series F Preferred Stock Purchase Warrant dated March 31, 1997
between the Registrant and the Trustees of The General Electric
Pension Trust.
10.16** Series F Preferred Stock Purchase Warrant dated December 22, 1997
between the Registrant and General Electric Capital Corporation.
10.17** Management Bonus Plan.
10.18** Stock Purchase and Restriction Agreement dated January 28, 1994,
as amended, between the Registrant, Marketta Silvera and certain
of the Registrant's stockholders.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.19** Stock Purchase and Restriction Agreement dated March 14, 1995,
between the Registrant, Marketta Silvera and certain of the
Registrant's stockholders.
10.20** Stock Purchase and Restriction Agreement dated June 15, 1996
between the Registrant, Marketta Silvera and certain of the
Registrant's stockholders.
10.21** Stock Option Agreement dated May 20, 1998 between the Registrant
and William C. Leetham.
10.22 Loan and Security Agreement dated June 30, 1998 between the
Registrant, MMC/GATX Partnership No. 1 and Transamerica Business
Credit Corporation, including related secured promissory notes and
warrants.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1** Power of Attorney.
27** Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Previously filed.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
OF PILOT NETWORK SERVICES, INC.
A DELAWARE CORPORATION,
AND
PILOT NETWORK SERVICES, INC.
A CALIFORNIA CORPORATION
This Agreement and Plan of Merger dated as of July___, 1998 (the
"Agreement") is between Pilot Network Services, Inc. a California corporation
---------
("Pilot-California"), and Pilot Network Services, Inc., a Delaware corporation
----------------
("Pilot-Delaware"). Pilot-Delaware and Pilot-California are sometimes referred
--------------
to in this Agreement as the "Constituent Corporations."
------------------------
RECITALS
--------
A. Pilot-Delaware is a corporation duly organized and existing under the
laws of the State of Delaware and has an authorized capital of 50,832,810
shares, 40,000,000 of which are designated "Common Stock," $0.001 par value, and
------------
10,832,810 shares of Preferred Stock, of which 1,400,000 shares have been
designated Series A Preferred Stock, 1,913,424 shares have been designated
Series B Preferred Stock, 1,210,068 shares have been designated Series C
Preferred Stock, 1,686,200 have been designated Series D Preferred Stock,
783,118 shares have been designated Series E Preferred Stock, and 1,840,000
shares have been designated Series F Preferred Stock (collectively the
"Preferred Stock"). As of July ____, 1998, 100 shares of Pilot-Delaware Common
---------------
Stock were issued and outstanding, all of which are held by Pilot-California,
and no shares of Preferred Stock were issued and outstanding.
B. Pilot-California is a corporation duly organized and existing under
the laws of the State of California and has an authorized capital of 30,000,000
shares, 20,000,000 of which are designated "Common Stock," $0.001 par value,
------------
10,000,000 of which are designated "Preferred Stock," $0.001 par value, of which
---------------
700,000 shares have been designated Series A Preferred Stock, 956,712 shares
have been designated Series B Preferred Stock, 605,034 shares have been
designated Series C Preferred Stock, 843,100 shares have been designated Series
D Preferred Stock, 391,559 shares have been designated Series E Preferred Stock,
and 920,000 shares have been designated Series F Preferred Stock (collectively
the "Preferred Stock"). 1,025,268 shares of Common Stock, 700,000 shares of
---------------
Series A Preferred Stock, 830,822 shares of Series B Preferred Stock, 605,034
shares of Series C Preferred Stock, 744,100 shares of Series D Preferred Stock,
391,559 shares of Series E Preferred Stock and 610,000 shares of Series F
Preferred Stock are issued and outstanding.
C. The Board of Directors of Pilot-California has determined that, for
the purpose of effecting the reincorporation of Pilot-California in the State of
Delaware, it is advisable and in the best interests of Pilot-California that
Pilot-California merge with and into Pilot-Delaware upon the terms and
conditions provided in this Agreement.
<PAGE>
D. The respective Boards of Directors of Pilot-Delaware and Pilot-
California have approved this Agreement and have directed that this Agreement be
submitted to a vote of their respective stockholders and executed by the
undersigned officers.
AGREEMENT
---------
In consideration of the mutual agreements and covenants set forth herein,
Pilot-Delaware and Pilot-California hereby agree, subject to the terms and
conditions hereinafter set forth, as follows:
1. MERGER.
------
1.1 MERGER. In accordance with the provisions of this Agreement, the
------
Delaware General Corporation Law and the California General Corporation Law,
Pilot-California shall be merged with and into Pilot-Delaware (the "Merger"),
------
the separate existence of Pilot-California shall cease and Pilot Network
Services, Inc. -Delaware shall be, and is sometimes referred to below as, the
"Surviving Corporation," and the name of the Surviving Corporation shall be
---------------------
Pilot Network Services, Inc.
1.2 FILING AND EFFECTIVENESS. The Merger shall become effective upon
------------------------
completion of the following actions:
(a) Adoption and approval of this Agreement and the Merger by
the stockholders of each Constituent Corporation in accordance with the
applicable requirements of the Delaware General Corporation Law and the
California General Corporation Law;
(b) The satisfaction or waiver of all of the conditions
precedent to the consummation of the Merger as specified in this Agreement; and
(c) The filing with the Secretary of State of Delaware of an
executed Certificate of Merger or an executed counterpart of this Agreement
meeting the requirements of the Delaware General Corporation Law.
The date and time when the Merger becomes effective is referred to in this
Agreement as the "Effective Date of the Merger."
----------------------------
1.3 EFFECT OF THE MERGER. Upon the Effective Date of the Merger, the
--------------------
separate existence of Pilot-California shall cease and Pilot-Delaware, as the
Surviving Corporation, (a) shall continue to possess all of its assets, rights,
powers and property as constituted immediately prior to the Effective Date of
the Merger, (b) shall be subject to all actions previously taken by its and
Pilot-California's Board of Directors, (c) shall succeed, without other
transfer, to all of the assets, rights, powers and property of Pilot-California
in the manner more fully set forth in Section 259 of the Delaware General
Corporation Law, (d) shall continue to be subject to all of the debts,
liabilities and obligations of Pilot-Delaware as constituted immediately prior
to the Effective Date of the Merger, and (e) shall succeed, without other
transfer, to all of the debts, liabilities and obligations of Pilot-California
in the same
-2-
<PAGE>
manner as if Pilot-Delaware had itself incurred them, all as more fully provided
under the applicable provisions of the Delaware General Corporation Law and the
California General Corporation Law.
2. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
-----------------------------------------
2.1 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
----------------------------
Pilot-Delaware as in effect immediately prior to the Effective Date of the
Merger shall continue in full force and effect as the Certificate of
Incorporation of the Surviving Corporation until duly amended in accordance with
the provisions thereof and applicable law.
2.2 BYLAWS. The Bylaws of Pilot-Delaware as in effect immediately prior
------
to the Effective Date of the Merger shall continue in full force and effect as
the Bylaws of the Surviving Corporation until duly amended in accordance with
the provisions thereof and applicable law.
2.3 DIRECTORS AND OFFICERS. The directors and officers of Pilot-Delaware
----------------------
immediately prior to the Effective Date of the Merger shall be the directors and
officers of the Surviving Corporation until their successors shall have been
duly elected and qualified or as otherwise provided by law, the Certificate of
Incorporation of the Surviving Corporation or the Bylaws of the Surviving
Corporation.
3. MANNER OF CONVERSION OF STOCK
-----------------------------
3.1 PILOT NETWORK SERVICES, INC. -CALIFORNIA COMMON STOCK. Upon the
-----------------------------------------------------
Effective Date of the Merger, each one share of Pilot-California Common Stock
issued and outstanding immediately prior thereto shall, by virtue of the Merger
and without any action by the Constituent Corporations, the holder of such share
or any other person, be converted into and exchanged for two fully paid and
nonassessable share of Common Stock, $0.001 par value, of the Surviving
Corporation.
3.2 PILOT NETWORK SERVICES, INC. -CALIFORNIA PREFERRED STOCK. Upon the
--------------------------------------------------------
Effective Date of the Merger, each share of Pilot-California Series A, B, C, D,
E and F Preferred Stock, issued and outstanding immediately prior thereto, which
shares are convertible into such number of shares of Pilot-California Common
Stock as set forth in the Pilot-California Articles of Incorporation, as
amended, shall, by virtue of the Merger and without any action by the
Constituent Corporations, the holder of such shares or any other person, be
converted into and exchanged for two fully paid and non-assessable shares of
Series A, B, C, D, E and F Preferred Stock of the Surviving Corporation, $0.001
par value, respectively, having such rights, preferences and privileges as set
forth in the Certification of Incorporation of the Surviving Corporation.
3.3 PILOT NETWORK SERVICES, INC. -CALIFORNIA OPTIONS, STOCK PURCHASE
----------------------------------------------------------------
RIGHTS AND CONVERTIBLE SECURITIES.
- ---------------------------------
-3-
<PAGE>
(a) Upon the Effective Date of the Merger, the Surviving Corporation
shall assume the obligations of Pilot-California under Pilot-California's 1994
Stock Plan, 1998 Stock Option Plan, 1998 Employee Stock Purchase Plan and 1998
Directors' Stock Option Plan and all other employee benefit plans of Pilot-
California. Each outstanding and unexercised option, other right to purchase, or
security convertible into, Pilot-California Common Stock or Preferred Stock (a
"Right") shall become, subject to the provisions in paragraph (c) hereof, an
-----
option, right to purchase, or a security convertible into the Surviving
Corporation's Common Stock or Preferred Stock, respectively, on the basis of two
shares of the Surviving Corporation's Common Stock or Preferred Stock, as the
case may be, for each one share of Pilot-California Common Stock or Preferred
Stock, issuable pursuant to any such Right, on the same terms and conditions and
at an exercise price per share appropriately adjusted to reflect the exchange
ratio applicable to the shares issuable upon exercise of any such Pilot-
California Right at the Effective Date of the Merger.
(b) A number of shares of the Surviving Corporation's Common Stock
and Preferred Stock shall be reserved for issuance upon the exercise or
conversion of Rights equal to two times the number of shares of Pilot-California
Common Stock and Preferred Stock so reserved immediately prior to the Effective
Date of the Merger.
3.4 PILOT NETWORK SERVICES, INC. -DELAWARE COMMON STOCK. Upon the
---------------------------------------------------
Effective Date of the Merger, each share of Common Stock, $0.001 par value, of
Pilot Network Services, Inc.-Delaware issued and outstanding immediately prior
thereto shall, by virtue of the Merger and without any action by Pilot-Delaware,
the holder of such shares or any other person, be canceled and returned to the
status of authorized but unissued shares.
3.5 EXCHANGE OF CERTIFICATES. After the Effective Date of the Merger,
------------------------
each holder of an outstanding certificate representing shares of Pilot-
California Common Stock or Preferred Stock may be asked to surrender the same
for cancellation to an exchange agent, whose name will be delivered to holders
prior to any requested exchange (the "Exchange Agent"), and each such holder
--------------
shall be entitled to receive in exchange therefor a certificate or certificates
representing the number of shares of the appropriate class and series of the
Surviving Corporation's capital stock into which the surrendered shares were
converted as herein provided. Until so surrendered, each outstanding
certificate theretofore representing shares of Pilot-California capital stock
shall be deemed for all purposes to represent the number of whole shares of the
appropriate class and series of the Surviving Corporation's capital stock into
which such shares of Pilot-California capital stock were converted in the
Merger.
The registered owner on the books and records of the Surviving Corporation
or the Exchange Agent of any such outstanding certificate shall, until such
certificate shall have been surrendered for transfer or conversion or otherwise
accounted for to the Surviving Corporation or the Exchange Agent, have and be
entitled to exercise any voting and other rights with respect to and to receive
dividends and other distributions upon the shares of capital stock of the
Surviving Corporation represented by such outstanding certificate as provided
above.
-4-
<PAGE>
Each certificate representing capital stock of the Surviving Corporation so
issued in the Merger shall bear the same legends, if any, with respect to the
restrictions on transferability as the certificates of Pilot-California so
converted and given in exchange therefor, unless otherwise determined by the
Board of Directors of the Surviving Corporation in compliance with applicable
laws.
If any certificate for shares of Surviving Corporation's stock is to be
issued in a name other than that in which the certificate surrendered in
exchange therefor is registered, it shall be a condition of issuance thereof
that the certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer, that such transfer otherwise be proper and comply with
applicable securities laws and that the person requesting such transfer pay to
the Exchange Agent any transfer or other taxes payable by reason of the issuance
of such new certificate in a name other than that of the registered holder of
the certificate surrendered or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not payable.
4. GENERAL
-------
4.1 COVENANTS OF PILOT NETWORK SERVICES, INC. -DELAWARE. Pilot-Delaware
---------------------------------------------------
covenants and agrees that it will, on or before the Effective Date of the
Merger:
(a) Qualify to do business as a foreign corporation in the State of
California and irrevocably appoint an agent for service of process as required
under the provisions of Section 2105 of the California General Corporation Law.
(b) File any and all documents with the California Franchise Tax
Board necessary for the assumption by Pilot-Delaware of all of the franchise tax
liabilities of Pilot-California; and
(c) Take such other actions as may be required by the California
General Corporation Law.
4.2 FURTHER ASSURANCES. From time to time, as and when required by Pilot-
------------------
Delaware or by its successors or assigns, there shall be executed and delivered
on behalf of Pilot-California such deeds and other instruments, and there shall
be taken or caused to be taken by it such further and other actions, as shall be
appropriate or necessary in order to vest or perfect in or conform of record or
otherwise by Pilot-Delaware the title to and possession of all the property,
interests, assets, rights, privileges, immunities, powers, franchises and
authority of Pilot-California and otherwise to carry out the purposes of this
Agreement, and the officers and directors of Pilot-Delaware are fully authorized
in the name and on behalf of Pilot-California or otherwise to take any and all
such action and to execute and deliver any and all such deeds and other
instruments.
4.3 ABANDONMENT. At any time before the Effective Date of the Merger,
-----------
this Agreement may be terminated and the Merger may be abandoned for any reason
whatsoever by the Board of Directors of either Pilot-California or Pilot-
Delaware, or both, notwithstanding the
-5-
<PAGE>
approval of this Agreement by the shareholders of Pilot-California or by the
sole stockholder of Pilot-Delaware, or by both.
4.4 AMENDMENT. The Boards of Directors of the Constituent Corporations
---------
may amend this Agreement at any time prior to the filing of this Agreement (or
certificate in lieu thereof) with the Secretary of State of the State of
Delaware, provided that an amendment made subsequent to the adoption of this
Agreement by the stockholders of either Constituent Corporation shall not: (a)
alter or change the amount or kind of shares, securities, cash, property and/or
rights to be received in exchange for or on conversion of all or any of the
shares of any class or series thereof of such Constituent Corporation, (b) alter
or change any term of the Certificate of Incorporation of the Surviving
Corporation to be effected by the Merger, or (c) alter or change any of the
terms and conditions of this Agreement if such alteration or change would
adversely affect the holders of any class of shares or series of capital stock
of such Constituent Corporation.
4.5 REGISTERED OFFICE. The registered office of the Surviving Corporation
-----------------
in the State of Delaware is located at The Prentice-Hall Corporation System,
Inc., 1013 Centre Road, in the City of Wilmington, Delaware 19801, County of New
Castle, and The Prentice-Hall Corporation System is the registered agent of the
Surviving Corporation at such address.
4.6 FIRPTA NOTIFICATION.
-------------------
(a) On the Effective Date of the Merger, Pilot-California shall
deliver to Pilot-Delaware, as agent for the shareholders of Pilot-California, a
properly executed statement (the "Statement") in substantially the form attached
---------
hereto as Exhibit A. Pilot-Delaware shall retain the Statement for a period of
---------
not less than seven years and shall, upon request, provide a copy thereof to any
person that was a shareholder of Pilot-California immediately prior to the
Merger. In consequence of the approval of the Merger by the shareholders of
Pilot-California, (i) such shareholders shall be considered to have requested
that the Statement be delivered to Pilot-Delaware as their agent and (ii) Pilot-
Delaware shall be considered to have received a copy of the Statement at the
request of the Pilot-California shareholders for purposes of satisfying Pilot-
Delaware's obligations under Treasury Regulation Section 1.1445-2(c)(3).
(b) Pilot-California shall deliver to the Internal Revenue Service a
notice regarding the Statement in accordance with the requirements of Treasury
Regulation Section 1.897-2(h)(2).
4.7 AGREEMENT. Executed copies of this Agreement will be on file at the
---------
principal place of business of the Surviving Corporation at 1080 Marina Village
Parkway, Alameda, CA 94501 and copies thereof will be furnished to any
stockholder of either Constituent Corporation, upon request and without cost.
4.8 GOVERNING LAW; JURISDICTION. This Agreement and all acts and
---------------------------
transactions pursuant hereto and the rights and obligations of the parties
hereto shall be governed, construed and interpreted in accordance with the laws
of the State of California, without giving effect to principles of conflicts of
law. Each of the parties to this Agreement consents to the exclusive
-6-
<PAGE>
jurisdiction and venue of the courts of the state and federal courts of Alameda
County, California.
4.9 COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
-7-
<PAGE>
The undersigned authorized representatives of the Constituent Corporation
have executed and acknowledged this Agreement as of the date first set forth
above.
Pilot Network Services, Inc., a Delaware
corporation
___________________________________
M. Marketta Silvera,
President and Chief Executive Officer
Pilot Network Services, Inc., a California
corporation
___________________________________
M. Marketta Silvera,
President and Chief Executive Officer
-8-
<PAGE>
EXHIBIT A -- FORM OF FIRPTA CERTIFICATE
July ____, 1998
Assistant Commissioner (International)
Director, Office of Compliance
OP:I:C:E:666
950 L'Enfant Plaza South, S.W.
COMSAT Building
Washington, D.C. 20024
NOTICE TO THE INTERNAL REVENUE SERVICE OF PILOT NETWORK SERVICES, INC.
UNITED STATES REAL PROPERTY HOLDING CORPORATION STATUS UNDER TREASURY
REGULATION 1.897-2(H)(2)
Dear Sir:
1. This Notice is being filed by Pilot Network Services, Inc., ("Target")
pursuant to section 1.897-2(h)(2) of the Treasury Regulations promulgated under
the Internal Revenue Code of 1986, as amended (the "Code").
2. The undersigned, on behalf of Target hereby declares that stock of
Target is not a United States real property interest within the meaning of
section 897 of the Code because Target is not and has not been a United States
real property holding corporation as that term is defined in section 897(c)(2)
of the Code during the applicable period specified in section 897(c)(1)(A)
(ii) of the Code.
3. Target's United States taxpayer identifying number is: [_________]
4. Target's address is:
1080 Marina Village Parkway
Alameda, California 94501
5. In connection with the acquisition of Target by Pilot Network
Services, Inc. ("Acquiror"), the undersigned provided the attached statement to
Acquiror declaring that an interest in Target is not a United States real
property interest. The statement was voluntarily provided in response to a
request from the transferee, Acquiror under Regulation 1. 1445-2(c)(3)(i).
Acquiror's United States taxpayer identifying number is:[____________]
<PAGE>
Acquiror's address is:
[________________
________________
________________]
6. No supplemental statements pursuant to Treasury Regulations section
1.897-2(h)(5) are required to be filed herewith.
7. Under penalties of perjury the undersigned declares that she has
examined this certification, and the attachment hereto, and to the best of his
knowledge and belief they are true, correct and complete. The undersigned
further declares that she is a responsible officer and that she has authority to
sign this document on behalf of Target.
A copy of the statement provided pursuant to Treasury Regulation
(S)(S)1.897-2(h)(2) and 1.1445-2(c)(3)(i) is attached.
_________________________________
M. Marketta Silvera, President
-2-
<PAGE>
PILOT NETWORK SERVICES, INC.
A California Corporation
OFFICERS' CERTIFICATE OF APPROVAL OF THE MERGER
M. Marketta Silvera and William Leetham certify that:
1. They are the President and Chief Executive Officer and the Secretary,
respectively, of Pilot Network Services, Inc. a corporation organized under the
laws of the State of California.
2. The corporation has authorized two classes of stock, designated
"Common Stock" and "Preferred Stock," respectively.
3. There were _______ shares of Common Stock and _______ shares of
Preferred Stock outstanding as of the record date (the "Record Date") and
entitled to vote by written consent of the shareholders whereby the Agreement
and Plan of Merger attached hereto (the "Merger Agreement") was approved.
4. The principal terms of the Merger Agreement were approved by the Board
of Directors and by the vote of a number of shares of each class and series of
stock which equaled or exceeded the vote required.
5. The percentage vote required was more than 50% of the outstanding
shares of Common Stock and more than 50% of the outstanding shares of Preferred
Stock, voting as a single class.
M. Marketta Silvera and William Leetham further declare under penalty of
perjury under the laws of the States of California and Delaware that each has
read the foregoing certificate and knows the contents thereof and that the same
is true and correct of his/ her own knowledge.
Executed in ____________________, California on July____, 1998.
_______________________________________
M. Marketta Silvera, President and
Chief Executive Officer
_______________________________________
William Leetham, Secretary
<PAGE>
PILOT NETWORK SERVICES, INC.
A Delaware Corporation
OFFICERS' CERTIFICATE OF APPROVAL OF MERGER
M. Marketta Silvera and William Leetham certify that:
1. They are the President and Chief Executive Officer and the Secretary,
respectively, of Pilot Network Services, Inc., a corporation organized under the
laws of the State of Delaware.
2. The corporation has authorized two classes of stock, designated
"Common Stock" and "Preferred Stock," respectively.
3. There are 100 shares of Common Stock outstanding and entitled to vote
on the Agreement and Plan of Merger attached hereto (the "Merger Agreement").
There are no shares of Preferred Stock outstanding.
4. The principal terms of the Merger Agreement were approved by the Board
of Directors and by the vote of a number of shares of each class and series of
stock which equaled or exceeded the vote required.
5. The percentage vote required was more than 50% of the votes entitled
to be cast by holders of outstanding shares of Common Stock.
M. Marketta Silvera and William Leetham further declare under penalty of
perjury under the laws of the States of Delaware and California that each has
read the foregoing certificate and knows the contents thereof and that the same
is true and correct of each's own knowledge.
Executed in ________________________, California on July ___, 1998.
_______________________________________
M. Marketta Silvera, President and
Chief Executive Officer
_______________________________________
William Leetham, Secretary
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF PILOT NETWORK SERVICES, INC.
ARTICLE I
The name of the Corporation is Pilot Network Services, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, County of New Castle. The name of its
registered agent at such address is The Prentice-Hall Corporation System, Inc.
ARTICLE III
(a) AUTHORIZED STOCK. This Corporation is authorized to issue two
classes of shares to be designated respectively "Common Stock" and "Preferred
Stock," and each class shall have a par value of $0.001 per share. The total
number of shares of Common Stock authorized is 40,000,000, and the total number
of shares of Preferred Stock authorized is 10,832,810.
(b) SERIES A, SERIES B, SERIES C, SERIES D, SERIES E AND SERIES F
PREFERRED STOCK. The Preferred Stock may be divided into such number of series
as the Board of Directors of the Corporation (the "Board") may determine. The
rights, preferences, privileges and restrictions granted to or imposed upon the
first of such series, designated "Series A Preferred Stock" (the "Series A"), of
which the Corporation is authorized to issue 1,400,000 shares; the second of
such series, designated "Series B Preferred Stock" (the "Series B"), of which
the Corporation is authorized to issue 1,913,424 shares; the third of such
series, designated "Series C Preferred Stock" (the "Series C"), of which the
Corporation is authorized to issue 1,210,068 shares; the fourth of such series,
designated "Series D Preferred Stock" (the "Series D"), of which the Corporation
is authorized to issue 1,686,200 shares; the fifth of such series, designated
"Series E Preferred Stock" (the "Series E"), of which the Corporation is
authorized to issue 783,118 shares; and the sixth of such series, designated
"Series F Preferred Stock" (the "Series F"), of which the Corporation is
authorized to issue 1,840,000 shares, are set forth in Article IV below.
(C) ADDITIONAL SERIES. Subject to the restrictions set forth in
Article IV, Subsection (g) below, any shares of Preferred Stock, other than the
Series A, Series B, Series C, Series D, Series E and Series F, may be issued
from time to time in one or more series. The Board is authorized to determine
the designation and the number of shares of any such series. The Board is also
authorized to determine or alter the rights,
<PAGE>
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock, including, without limitation, the dividend
rights (and whether dividends are cumulative), conversion rights, if any, voting
rights, rights and terms of redemption (including sinking fund provisions, if
any), redemption price and liquidation preferences, and, within the limits and
restrictions stated in any resolution or resolutions of the Board originally
fixing the number of shares constituting any series, to increase or decrease
(but not below the number of shares of such series then outstanding) the number
of shares of any such series subsequent to the issuance of shares of that
series. In case the number of shares of any series shall be so decreased, the
shares constituting such decrease shall resume the status which they had prior
to the adoption of the resolution originally fixing the number of shares of such
series.
ARTICLE IV
The relative rights, preferences, privileges and restrictions granted to or
imposed upon the respective classes or series of Common Stock or Preferred Stock
or holders thereof are as follows:
(A) DIVIDENDS.
(I) Dividends will be paid if and when declared by the Board, in
its sole discretion. The holders of outstanding shares of Series B, Series C,
Series D, Series E and Series F (as a single class) shall be entitled to
receive, when and if declared by the Board out of any assets of the Corporation
at the time legally available therefor, dividends in cash at the rate of $.03
per share per annum for each share of Series B, $.06 per share per annum for
each share of Series C, $.0875 per share per annum for each share of Series D,
$.20 per share per annum for each share of Series E and $0.50 per share per
annum for each share of Series F (in each case as appropriately adjusted for
stock dividends, stock splits, recapitalizations and the like). Such Series B,
Series C, Series D, Series E and Series F dividends shall be prior and in
preference to any declaration or payment of any Distribution (as defined below)
on the Series A or Common Stock of this Corporation. Subject to the holders of
outstanding shares of Series B, Series C, Series D, Series E and Series F first
receiving the dividend preference amount stated above, the holders of
outstanding shares of Series A shall then be entitled to receive, when and if
declared by the Board out of any assets of the Corporation at the time legally
available therefor, dividends in cash at the rate of $.005 per share per annum
for each share of Series A (as appropriately adjusted for stock dividends, stock
splits, recapitalizations and the like). Such Series A dividends shall be prior
and in preference to any declaration or payment of any Distribution on the
Common Stock of this Corporation. Subject to Subsection (g) "Protective
Provisions" below, Distributions may be declared and paid upon shares of Common
Stock in any fiscal year of the Corporation only if dividends shall have been
paid to, or declared and set apart for, all outstanding shares of Series A,
Series B, Series C, Series D, Series E and Series F in the preference amounts
stated above. The right to such dividends on the Series A, Series B, Series C,
Series D, Series E and Series F shares shall not be cumulative and no right
shall accrue to holders of
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Series A, Series B, Series C, Series D, Series E or Series F by reason of the
fact that dividends on said shares have not been declared in any prior year, nor
shall any undeclared or unpaid dividends bear or accrue interest.
(II) For purposes of this Subsection (a), unless the context
otherwise requires, "Distribution" shall mean the transfer of cash or property
without consideration, whether by way of dividend or otherwise, payable other
than in stock, or the purchase or redemption of shares of capital stock of the
Corporation (other than redemptions set forth in Subsection (b) or, subject to
Subsection (g), repurchases of Common Stock held by employees of the Corporation
upon termination of their employment pursuant to agreements providing for such
repurchases) for cash or property, including any such transfer, purchase or
redemption by a subsidiary of the Corporation, if any.
(III) Each holder of shares of Series A, Series B, Series C,
Series D, Series E and Series F shall be deemed to have consented to
Distributions made by the Corporation in connection with the repurchase of
shares of Common Stock issued to or held by certain employees upon termination
of their employment pursuant to agreements providing for such repurchase.
(B) REDEMPTION.
(I) Upon the written request of the holders of a majority of
the then outstanding shares of Series B, Series C, Series D, Series E and Series
F, requesting as a single class, received by the Company at any time after July
28, 1999 (the "Redemption Request"), ninety (90) days after the date of the
Redemption Request (the "Redemption Date") while any shares of Series B, Series
C, Series D, Series E and Series F are outstanding, the Corporation shall redeem
pro rata as a class as follows: (x) one third of the shares of Series B, Series
C, Series D, Series E and Series F outstanding on the Redemption Date (the
"Redemption Amount"), (y) the number of shares of Series B, Series C, Series D,
Series E and Series F equal to the Redemption Amount on the first anniversary of
the Redemption Date and (z) the remainder of the shares of Series B, Series C,
Series D, Series E and Series F outstanding on the second anniversary of the
Redemption Date, by paying therefor in cash an amount equal to the Series B
Redemption Price for each share of Series B redeemed, the Series C Redemption
Price for each share of Series C redeemed, the Series D Redemption Price for
each share of Series D redeemed, the Series E Redemption Price for each share of
Series E redeemed and the Series F Redemption Price for each share of Series F
redeemed. The Corporation shall designate pro rata (as a single class) the
shares of Series B, Series C, Series D, Series E and Series F to be redeemed;
and, if there are insufficient funds to redeem the number of shares of Series B,
Series C, Series D, Series E and Series F required to be redeemed by this
Subsection (b), the Series B, Series C, Series D, Series E and Series F shall be
redeemed pro rata as a single class.
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(II) Each outstanding share of the Series B shall be redeemed
at a cash price equal to $.365 per share to be redeemed (the "Series B Original
Purchase Price"), plus a rate of return equal to twelve percent (12%) per annum
on the Series B Original Purchase Price per share to be redeemed for the period
such share (and the related share of the California predecessor corporation) was
outstanding, but less an amount equal to all dividends previously paid on each
such share to be redeemed (the "Series B Redemption Price"). Each outstanding
share of the Series C shall be redeemed at a cash price equal to $0.73 per share
to be redeemed (the "Series C Original Purchase Price"), plus a rate of return
equal to twelve percent (12%) per annum on the Series C Original Purchase Price
per share to be redeemed for the period such share (and the related share of the
California predecessor corporation) was outstanding, but less an amount equal to
all dividends previously paid on each such share to be redeemed (the "Series C
Redemption Price"). Each outstanding share of the Series D shall be redeemed at
a cash price equal to $0.875 per share to be redeemed (the "Series D Original
Purchase Price"), plus a rate of return equal to twelve percent (12%) per annum
on the Series D Original Purchase Price per share to be redeemed for the period
such share (and the related share of the California predecessor corporation) was
outstanding, but less an amount equal to all dividends previously paid on each
such share to be redeemed (the "Series D Redemption Price"). Each outstanding
share of the Series E shall be redeemed at a cash price equal to $2.00 per share
to be redeemed (the "Series E Original Purchase Price"), plus a rate of return
equal to twelve percent (12%) per annum on the Series E Original Purchase Price
per share to be redeemed for the period such share (and the related share of the
California predecessor corporation) was outstanding, but less an amount equal to
all dividends previously paid on each such share to be redeemed (the "Series E
Redemption Price"). Each outstanding share of the Series F shall be redeemed at
a cash price equal to $5.00 per share to be redeemed (the "Series F Original
Purchase Price"), plus a rate of return equal to twelve percent (12%) per annum
on the Series F Original Purchase Price per share to be redeemed for the period
such share (and the related share of the California predecessor corporation) was
outstanding, but less an amount equal to all dividends previously paid on each
such share to be redeemed (the "Series F Redemption Price") (collectively, the
Series B Redemption Price, the Series C Redemption Price, the Series D
Redemption Price, the Series E Redemption Price and the Series F Redemption
Price are referred to herein as, the "Redemption Price"); provided, however,
that payment of any Redemption Price shall only be made from funds of the
Corporation legally available therefor.
(III) At least thirty (30) days prior to the Redemption Date,
written notice shall be mailed, postage prepaid, to each holder of record of the
Series B, Series C, Series D, Series E and Series F Preferred Stock to be
redeemed; provided that, such notice shall be mailed only to the non-requesting
holders of Series B, Series C, Series D, Series E and Series F Preferred Stock,
at the holder's post office address last shown on the records of the
Corporation, notifying such holder of the intent of the Corporation to redeem
such shares, specifying the Redemption Date and the date on which such holder's
Conversion Rights (as hereinafter defined) as to such shares terminate and
calling upon such holder to surrender to the Corporation, in the manner and
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at the place designated, the holder's certificate or certificates representing
the shares to be redeemed (such notice is hereinafter referred to as the
"Redemption Notice"). On or prior to the Redemption Date, each holder of the
Series B, Series C, Series D, Series E and Series F Preferred Stock to be
redeemed shall surrender such holder's certificate or certificates representing
such shares to the Corporation, in the manner and at the place designated in the
Redemption Notice, and thereupon the aggregate Redemption Price (the Redemption
Price per share to be redeemed multiplied by the number of shares to be
redeemed) for the shares to be redeemed shall be payable to the order of the
person whose name appears on such certificate or certificates as the owner
thereof and each surrendered certificate shall be canceled. In calculating the
aggregate Redemption Price, the number of shares shall be reduced by the number
of which have been converted pursuant to Subsection (e) hereof between the date
of such notice of redemption and the date on which conversion rights to such
shares terminate. In the event less than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares. From and after the Redemption Date, unless there shall have
been a default in payment of the aggregate Redemption Price for shares to be
redeemed (whether because there is no source of funds legally available for such
redemption or because such funds shall not be paid or made available for
payment), all rights of the holders of the Series B, Series C, Series D, Series
E and Series F Preferred Stock designated for redemption in the Redemption
Notice as holders of such series of the Preferred Stock of the Corporation
(except the right to receive the aggregate Redemption Price without interest
upon surrender of their certificate or certificates) shall cease with respect to
such shares, and such shares shall not thereafter be transferred on the books of
the Corporation or be deemed to be outstanding for any purpose whatsoever.
(IV) On or prior to the Redemption Date, the Corporation shall
deposit the aggregate Redemption Price of all shares of Series B, Series C,
Series D, Series E and Series F Preferred Stock designated for redemption in the
Redemption Notice and not yet redeemed with a bank or trust company having
aggregate capital and surplus in excess of $100,000,000 as a trust fund for the
benefit of the respective holders of the shares designated for redemption and
not yet redeemed, with irrevocable instruction and authority to the bank or
trust company to pay the Redemption Price for such shares to their respective
holders on or after the Redemption Date upon receipt of notification from the
Corporation that such holder has surrendered its share certificate to the
Corporation pursuant to Subsection (b) (iii) above. Such instructions shall also
provide that any monies deposited by the Corporation pursuant to this Subsection
(b)(iv) for the redemption of shares thereafter converted into shares of the
Corporation's Common Stock pursuant to Subsection (e)(i) hereof on or prior to
the first business day preceding the Redemption Date shall be returned to the
Corporation forthwith upon such conversion. The balance of any monies deposited
by the Corporation pursuant to this Subsection (b)(iv) remaining unclaimed at
the expiration of two (2) years following the Redemption Date shall thereafter
be returned to the Corporation upon its request.
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(V) There shall be no redemption of any shares of Series B,
Series C, Series D, Series E and Series F where such redemption would be in
violation of applicable law.
(VI) If the Corporation shall at any time subdivide the
outstanding shares of Preferred Stock or make a distribution of stock on its
outstanding Preferred Stock, the Redemption Price in effect immediately prior to
such subdivision or any such distribution shall be proportionately decreased
and, in case the Corporation shall at any time combine the outstanding shares of
Preferred Stock, the Redemption Price (of the Series A, Series B, Series C,
Series D, Series E and Series F) in effect immediately prior to such combination
shall be proportionately increased, effective at the close of business on the
date of such subdivision, dividend or combination, as the case may be.
(C) PREFERENCE ON LIQUIDATION.
(i) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, subject to the rights of holders
of any other series of Preferred Stock which may be issued by the Corporation
from time to time, the holders of shares of the Series A, Series B, Series C,
Series D, Series E and Series F (hereinafter referred to as the "Preferred
Stock") then outstanding shall be entitled to be paid, out of the assets of the
Corporation available for distribution to its shareholders, whether from
capital, surplus or earnings, before any payment shall be made in respect of the
Common Stock, an amount equal to $.0357 per share of Series A, $.365 per share
of Series B, $.73 per share of Series C, $.875 per share of Series D, $2.00 per
share of Series E and $5.00 per share of Series F, plus all declared and unpaid
dividends thereon to the date fixed for distribution of assets (respectively,
the Series A, Series B, Series C, Series D, Series E and Series F "Liquidation
Preference Amount"). If upon liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation available for distribution to its
shareholders shall be insufficient to pay the holders of the Preferred Stock the
full amount to which they shall be entitled, the holders of the Preferred Stock
shall share ratably in any distribution of assets according to the respective
amounts which would be payable in respect of the shares held by them upon such
distribution if all amounts payable on or with respect to said shares were paid
in full. If the assets of the Corporation are sufficient to pay the Liquidation
Preference Amounts to the holders of all outstanding shares of Preferred Stock ,
then the holders of all outstanding shares of Common Stock shall be entitled to
be paid, out of the remaining assets of the Corporation available for
distribution to its shareholders, whether from capital, surplus or earnings, an
amount equal to $.0005 per share (the Common Stock "Liquidation Preference
Amount") before any payment is made pursuant to Subsection (c)(ii) below. If
upon liquidation, dissolution or winding up of the Corporation, the remaining
assets of the Corporation available for distribution to its shareholders shall
be insufficient to pay the holders of the Common Stock the full amount to which
they shall be entitled, the holders of the Common Stock shall share ratably in
any distribution of assets according to the respective amounts which would be
payable in respect of the shares held by them upon such distribution if all
amounts payable on or with respect to said shares were paid in full. The
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merger or consolidation of the Corporation into or with another entity in which
the shareholders of the Corporation shall own less than 50% of the voting
securities of the surviving corporation or the sale, transfer or lease (but not
including a transfer or lease by pledge or mortgage to a bona fide lender) of
all or substantially all of the assets of the Corporation shall be deemed to be
a liquidation, dissolution or winding up of the Corporation as those terms as
used in this Subsection (c).
(II) In the event of any liquidation, dissolution or winding up
of this Corporation, after the distributions to holders of Preferred Stock and
Common Stock in an amount equal to their respective Liquidation Preference
Amounts have been paid, subject to the rights of holders of any other series of
Preferred Stock which may be issued by the Corporation from time to time, the
remaining assets of the Corporation available for distribution to shareholders
shall be distributed among the holders of the Preferred Stock and Common Stock
pro rata based on the number of shares of Common Stock held by each or the
number of shares of Common Stock that would be held by each assuming conversion
of all of the outstanding shares of Preferred Stock; provided, however, that the
holders of Preferred Stock shall be allowed to participate in such distribution
only up until the first $25.0 million has been distributed to holders of
Preferred Stock and Common Stock in accordance with this Subsection (c), and any
amounts in excess of $25.0 million shall be distributed to only the holders of
Common Stock.
(D) VOTING.
(I) Except as otherwise required under applicable law or as set
forth herein, the shares of Preferred Stock shall be voted with the shares of
Common Stock at any annual or special meeting of shareholders of the
Corporation, or may act by written consent in the same manner as the Common
Stock, upon the following basis: each holder of shares of the Preferred Stock
shall be entitled to such number of votes for the Preferred Stock held by it on
the record date fixed for such meeting, or on the effective date of such written
consent, as shall be equal to the largest number of whole shares of the Common
Stock into which all of its shares of Preferred Stock are convertible
immediately after the close of business on the record date fixed for such
meeting or the effective date of such written consent.
(II) Notwithstanding the foregoing Subsection (d)(i), the
holders of the Series A, voting separately as a single class (with each share
being entitled to one vote) and to the exclusion of all other classes of the
capital stock of the Corporation, shall be entitled, at any election of
directors to the Corporation's Board, to elect one (1) director; the holders of
the Series B and Series C, voting separately as a single class (with each share
being entitled to one vote) and to the exclusion of all other classes of the
capital stock of the Corporation, shall be entitled, at any election of
directors to the Corporation's Board, to elect one (1) director; the holders of
Series D, voting separately as a single class (with each share being entitled to
one vote) and to the exclusion of all other classes of the capital stock of the
Corporation, shall be entitled, at any election of directors of the
Corporation's Board to elect one (1) director; and the
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holders of the Corporation's Common Stock, voting separately as a class and to
the exclusion of all other classes of the capital stock of the Corporation,
shall be entitled to elect one (1) director. The remaining directors shall be
elected by all classes voting together as a single class in accordance with
Subsection (d)(i) above.
(E) CONVERSION RIGHTS.
(I) Each share of Preferred Stock shall be convertible on or
prior to the first business day preceding the Redemption Date, at the option of
the holder thereof, at any time after the issuance of such share into fully paid
and nonassessable shares of Common Stock. Each share of Preferred Stock shall
automatically be converted into fully paid and nonassessable shares of Common
Stock immediately upon (x) the closing of a sale by the Corporation of Common
Stock in an underwritten (firm commitment) public offering registered under the
Securities Act of 1933, as amended (the "Securities Act"), with proceeds to the
Corporation of at least $7,500,000 and an offering price per share (prior to
underwriting commissions and expenses) to the public equal to or greater than
$5.00, adjusted for stock dividends, stock splits, stock combinations and the
like, or (y) in the event that the holders of at least two-thirds of the then
outstanding shares of Series A, Series B and Series C, and Series D and Series
E, and a majority of the Series F (with Series A voting separately as a class,
Series B and C voting together as a single class, Series D and E voting together
as a single class, and Series F voting separately as a class), consent in
writing to conversion of such Series A, Series B, Series C, Series D, Series E
and Series F, to Common Stock, as the case may be. The number of shares of
Common Stock into which each share of the Series A, Series B, Series C, Series
D, Series E and Series F may be converted shall be determined by dividing
$..0357, $.365, $.73, $.875, $2.00 and $5.00, respectively, by the Conversion
Price (determined as hereinafter provided) in effect at the time of conversion.
(II) The Conversion Price per share at which shares of Common
Stock shall be issuable upon conversion of any shares of Series A, Series B,
Series C, Series D, Series E and Series F shall initially be $.0357, $.365,
$.73, $.875, $2.00 and $5.00, respectively, which amount shall be subject to
adjustment from time to time as provided in Subsection (f) hereof.
(III) The holder of any shares of the Preferred Stock may
exercise its conversion rights as to such shares or any part thereof by
delivering during regular business hours to the Corporation, at the office of
any transfer agent of the Corporation for the Preferred Stock, the principal
office of the Corporation or such other place as may be designated by the
Corporation, the certificate or certificates for the shares to be converted,
duly endorsed for transfer to the Corporation (if required by it), accompanied
by written notice stating that the holder elects to convert such shares.
Conversion shall be deemed to have occurred on the date when such delivery is
made, and such date is referred to herein as the "Conversion Date". As promptly
as practicable thereafter, the Corporation shall issue and deliver to or upon
the written order of such holder, at such office or other place designated by
the Corporation, a certificate or
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certificates for the number of full shares of Common Stock to which such holder
is entitled and a check for cash with respect to any fractional interest in a
share of Common Stock as provided in Subsection (e)(iv). The holder shall be
deemed to have become a shareholder of record on the applicable Conversion Date
unless the transfer books of the Corporation are closed on such date, in which
event such holder shall be deemed to have become a shareholder of record on the
next succeeding date on which the transfer books are open, but the Conversion
Price shall nevertheless be that in effect on the Conversion Date. Upon
conversion of only a portion of the number of shares of Preferred Stock
represented by a certificate surrendered for conversion, the Corporation shall
issue and deliver to or upon the written order of the holder of the certificate
so surrendered for conversion, at the expense of the Corporation, a new
certificate covering the number of shares of Preferred Stock representing the
unconverted portion of the certificate so surrendered.
(IV) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of the Preferred Stock. If more than one share
of the Series A, Series B, Series C, Series D, Series E or Series F shall be
surrendered for conversion at any one time by the same holder, the number of
full shares of Common Stock issuable upon conversion thereof shall be computed
on the basis of the aggregate number of Series A, Series B, Series C, Series D,
Series E or Series F so surrendered. Instead of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of any shares of
Preferred Stock, the Corporation shall pay a cash adjustment in respect of such
fractional interest equal to the fair market value of such fractional interest
as determined (in good faith) by the Board.
(V) The Corporation shall pay any and all expenses of any
issuance or delivery of shares of Common Stock upon conversion of the Preferred
Stock pursuant hereto. The Corporation shall not, however, be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of shares of Common Stock in a name other than that in which the
shares of Preferred Stock so converted were registered, and no such issuance or
delivery shall be made unless and until the person requesting such issuance has
paid to the Corporation the amount of any such tax, or has established to the
satisfaction of the Corporation that such tax either has been paid or is not
payable.
(VI) The Corporation shall at all times reserve and keep
available, out of its authorized but unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Stock, the full number of
shares of Common Stock deliverable upon the conversion of all Preferred Stock
from time to time outstanding. The Corporation shall from time to time (subject
to obtaining any necessary director and shareholder action) increase the
authorized amount of its Common Stock if at any time the authorized number of
shares of its Common Stock remaining unissued shall not be sufficient to permit
the conversion of all of the shares of Preferred Stock at the time outstanding.
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(VII) If any shares of Common Stock to be reserved for the
purpose of conversion of shares of Preferred Stock require registration or
listing with, or approval of, any governmental authority, stock exchange or
other regulatory body under any federal or state law or regulation or otherwise,
before such shares may be validly issued or delivered upon conversion, the
Corporation shall, in good faith and as expeditiously as possible, endeavor to
secure such registration, listing or approval, as the case may be.
(VIII) All shares of Common Stock which may be issued upon
conversion of the shares of Preferred Stock shall upon issuance by the
Corporation be validly issued, fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issuance thereof.
(F) ADJUSTMENT OF CONVERSION PRICE. The Conversion Price of the
Preferred Stock in effect shall be subject to adjustment from time to time as
follows:
(I) STOCK SPLITS, DIVIDENDS AND COMBINATIONS. If the
Corporation shall at any time subdivide the outstanding shares of Common Stock
or make a distribution of stock on its outstanding Common Stock, the Conversion
Price in effect immediately prior to such subdivision or such distribution shall
be proportionately decreased and, in case the Corporation shall at any time
combine the outstanding shares of Common Stock, the Conversion Price (of the
Series A, Series B, Series C, Series D, Series E and Series F) in effect
immediately prior to such combination shall be proportionately increased,
effective at the close of business on the date of such subdivision, dividend or
combination, as the case may be.
(II) RECLASSIFICATION AND REORGANIZATION. If the Common Stock
issuable upon conversion of the Preferred Stock shall be changed into the same
or a different number of shares of any other class or classes of stock, whether
by capital reorganization, reclassification or otherwise (other than a
subdivision or combination of shares provided for in Subsection (f)(i) above or
a merger or other reorganization referred to in Subsection (c)(i) above), the
Series A, Series B, Series C, Series D, Series E and Series F Conversion Price
then in effect shall, concurrently with the effectiveness of such reorganization
or reclassification, be proportionately adjusted so that the Series A, Series B,
Series C, Series D, Series E and Series F shall be convertible into, in lieu of
the number of shares of Common Stock which the holders would otherwise have been
entitled to receive, a number of shares of such other class or classes of stock
equivalent to the number of shares of Common Stock that would have been subject
to receipt by the holders upon conversion of the Preferred Stock immediately
before that change.
(III) ISSUANCES AT LESS THAN THE CONVERSION PRICE. Upon issuance
by the Corporation of Common Stock, or any right or option to purchase Common
Stock or stock convertible into Common Stock, or any obligation or any share of
stock convertible into or exchangeable for Common Stock for a price per share
that is less than the Conversion Price (of the Preferred Stock, respectively) in
effect immediately
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prior to the time of such issuance or sale, other than (a) an issuance of stock
or securities pursuant to Subsections (f)(i) or (ii), (b) the issuance of shares
of Common Stock upon conversion of any Preferred Stock, (c) the grant of options
to purchase, or the issuance of, Common Stock to officers, consultants,
employees or directors of the Corporation and its subsidiaries pursuant to stock
option or stock purchase plans or agreements approved by the Board of Directors,
whether "qualified" for tax purposes or not, up to a maximum of 3,400,000 shares
of stock (as adjusted to reflect stock dividends, stock splits or like
transactions), including without limitation, options granted by the Board of
Directors in April 1998, (d) the repurchase of shares from the Corporation's
employees, consultants, officers or directors at such person's cost (or at such
other price as may be agreed to by the Board), (e) the issuance of warrants
issued as of the date hereof which are exercisable for shares of stock of the
Company and the issuance of warrants exercisable for up to an additional 20,000
(as adjusted to reflect stock dividends, stock splits or like transactions)
shares of stock of the Company, and the issuance of stock upon exercise of such
warrants, in connection with any equipment or tooling lease or purchase approved
by the Board, and (f) the issuance of warrants or convertible debt issued as of
the date hereof, and the issuance of warrants or convertible debt exercisable
for up to an additional 100,000 (as adjusted to reflect stock dividends, stock
splits or like transactions) shares of stock of the Company, or the issuance of
shares of Common Stock upon exercise of such securities, to banks or similar
financial institutions in connection with debt financing transactions, (g)
shares of stock issuable upon exercise of options granted to AmeriData
Technologies, Inc., and (h) the issuance of Series C upon exercise of warrants
issued in connection with the Series B financing, then forthwith upon such
issuance or sale the Conversion Price (of the Series A, Series B, Series C,
Series D, Series E or Series F, respectively) in effect immediately prior to
such issuance shall be reduced, as of the closing or consummation of such
issuance, to a price (calculated to the nearest cent) determined by dividing:
(1) an amount equal to the sum of (x) the number of shares
of Common Stock outstanding immediately prior to such issuance or sale
multiplied by the then existing Conversion Price (of the Series A, Series
B, Series C, Series D, Series E or Series F, respectively), (y) the number
of shares of Common Stock issuable upon conversion or exchange of any
obligations or shares of stock of the Corporation outstanding immediately
prior to such issuance or sale multiplied by the then existing Conversion
Price of the Series A, Series B, Series C, Series D, Series E or Series F,
respectively, and (z) an amount equal to the aggregate "consideration
actually received" (as defined below) by the Corporation upon such issuance
or sale, by
(2) the sum of (x) the number of shares of Common Stock
outstanding immediately after such issuance or sale, and (y) the number of
shares of Common Stock issuable upon conversion or exchange of any
obligations or shares of stock of the Corporation outstanding immediately
after such issuance or sale.
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(3) In the event of an issuance or sale for cash of shares
of the Common Stock, the "consideration actually received" by the Corporation
thereof or shall mean the amount of cash received, before deducting therefrom
any commissions or expenses paid by the Corporation.
(4) In the event of an issuance (otherwise than upon
conversion or exchange of obligations or shares of stock of the Corporation) of
additional shares of Common Stock for a consideration other than cash (either in
whole or in part), the amount of the consideration other than cash received by
the Corporation for such shares shall be deemed to be the value of such
consideration as determined (in good faith) by the Board.
(5) In the event of an issuance in any manner by the
Corporation of any rights to subscribe for or to purchase shares of Common
Stock, or any options for the purchase of shares of Common Stock or stock
convertible into Common Stock, all shares of Common Stock or stock convertible
into Common Stock to which the holders of such rights or options shall be
entitled to subscribe for or purchase pursuant to such rights or options shall
be deemed "outstanding" as of the date of the offering of such rights or the
granting of such options, as the case may be, and the minimum aggregate
consideration named in such rights or options for the shares of Common Stock or
stock convertible into Common Stock covered thereby, plus the consideration, if
any, received by the Corporation for such rights or options, shall be deemed to
be the "consideration actually received" by the Corporation (as of the date of
the offering of such rights or the granting of such options, as the case may be)
for the issuance of such shares.
(6) In the event of an issuance in any manner by the
Corporation of any obligations or of any shares of stock of the Corporation that
shall be convertible into or exchangeable for Common Stock, all shares of Common
Stock issuable upon the conversion or exchange of such obligations or shares
shall be deemed issued as of the date such obligations or shares are issued, and
the amount of the "consideration actually received" by the Corporation for such
additional shares of Common Stock shall be deemed to be the sum of (x) the
amount of consideration received by the Corporation upon the issuance of such
obligations or shares, as the case may be, and (y) the minimum aggregate
consideration, if any, other than such obligations or shares, receivable by the
Corporation upon such conversion or exchange, except in adjustment of
distributions.
(7) The amount of the "consideration actually received" by
the Corporation upon the issuance of any rights or options referred to in
Subsection (iii)(5) above or upon the issuance of any obligations or shares
which are convertible or exchangeable as described in Subsection (iii)(6) above,
and the amount of the consideration, if any, other than such obligations or
shares so convertible or exchangeable, which is receivable by the Corporation
upon the exercise, conversion or exchange thereof shall be determined in the
same manner provided in Subsections (iii)(3) and (iii)(4) above with respect to
the consideration received by the Corporation in case of
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the issuance of additional shares of Common Stock; provided, however, that for
purposes of Subsection (iii)(4), if such obligations or shares of stock so
convertible or exchangeable are issued in payment or satisfaction of any
distribution upon any stock of the Corporation other than Common Stock, the
amount of the "consideration actually received" by the Corporation upon the
original issuance of such obligations or shares of stock so convertible or
exchangeable shall be deemed to be the value of such obligations or shares of
stock as of the date of the adoption of the resolution declaring such
distribution, as determined (in good faith) by the Board at or as of that date.
Upon the expiration of any rights or options referred to in Subsection (iii)(5),
or the termination of any right of conversion or exchange referred to in
Subsection (iii)(6), or any change in the number of shares of Common Stock
deliverable upon exercise of such options or rights or upon conversion or
exchange of such convertible or exchangeable securities, the Conversion Price of
the Series A, Series B, Series C, Series D, Series E or Series F then in effect
shall forthwith be readjusted to such Conversion Price as would have been
obtained had the adjustments made upon the issuance of such options, rights or
convertible or exchangeable securities been made upon the basis of the delivery
of only the number of shares of Common Stock actually delivered or to be
delivered upon the exercise of such rights or options or upon the conversion or
exchange of such securities.
(8) In the event the Corporation shall declare a distribution
payable in securities of other persons, evidences of indebtedness issued by the
Corporation or other persons or options or rights not referred to in Subsection
(f)(iii)(5), then, in each such case, the holders of the Series A, Series B,
Series C, Series D, Series E and Series F shall be entitled to the distributions
at the rate provided for in Subsection (a) above before any distribution shall
be made to the holders of the Corporation's Common Stock, and no adjustment to
the Conversion Prices provided for in this Subsection (f) shall be applicable.
(9) In the event the Corporation shall issue another series of
Preferred Stock on more than one date, the Conversion Price of the Series A,
Series B, Series C, Series D, Series E and Series F shall be adjusted only once
for the issuance of such other series of Preferred Stock, such adjustment to
occur upon the final closing of the issuance thereof, provided that all such
issuances occur during a period of not more than 120 days.
(10) The Corporation shall not, by amendment of its Certificate
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issuance or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but shall at
all times in good faith assist in the carrying out of all the provisions of this
Subsection (f) and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Preferred Stock against impairment of any kind.
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<PAGE>
(11) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of the Series A, Series B, Series C, Series D, Series E or
Series F pursuant to this Subsection (f), the Corporation shall, upon written
request of any holder of such stock and at the Corporation's expense, compute
such adjustment or readjustment in accordance with the terms hereof, and prepare
and furnish to such holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any other holder of Preferred Stock, furnish or cause to be furnished to
such holder a like certificate setting forth (x) such adjustment or
readjustment, (y) the Conversion Price in effect, and (z) the number of shares
of Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of its shares.
(G) PROTECTIVE PROVISIONS. So long as any shares of Preferred Stock
are outstanding, the Corporation shall not, without first obtaining the approval
by vote or written consent, in the manner provided under applicable law, of the
holders of at least a majority of the total number of shares (as if converted)
of Preferred Stock outstanding, voting together as one class, (i) amend any of
provisions of this Certificate of Incorporation or the bylaws of the
Corporation; or (ii) increase or decrease the number of authorized directors of
the Corporation; or (iii) create any new class or series of shares of Preferred
Stock senior to or on a parity with the Series A, Series B, Series C, Series D,
Series E or Series F as to voting rights, redemption rights, dividends or a
distribution of assets of the Corporation in liquidation; or (iv) purchase,
redeem, or otherwise acquire (or pay into or set aside for a sinking fund for
such purpose), or direct or permit any subsidiary of the Corporation to purchase
or otherwise acquire, any of the Common Stock; provided, however, that this
restriction shall not apply to the repurchase of shares of Common Stock from
employees pursuant to agreements under which the Corporation has the option to
repurchase such shares (at cost) upon the occurrence of certain events, such as
the termination of employment; or (v) sell, lease, convey, exchange, transfer or
otherwise dispose of all or substantially all of its assets (other than for the
purposes of securing payment of any contract or obligation); (vi) merge or
consolidate with or into any other Corporation except into or with a wholly-
owned subsidiary; or (vii) declare or pay any dividend on Common Stock.
So long as any shares of Series D are outstanding, the Corporation
shall not, without first obtaining the approval by vote or written consent, in
the manner provided under applicable law, of the holders of at least a majority
of the total number of then outstanding Series D, voting together as a class,
(i) sell, lease, convey, exchange, transfer or otherwise dispose of all or
substantially all of its assets (other than for the purposes of securing payment
of any contract or obligation) or (ii) merge or consolidate with or into any
other corporation, except into or with a wholly-owned subsidiary, unless the
proceeds to be received by the Company's shareholders in such transaction are
distributed in accordance with the provision of Subsection (c) hereof.
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<PAGE>
So long as any shares of Series E are outstanding, the
Corporation shall not, without first obtaining the approval by vote or written
consent, in the manner provided under applicable law, of the holders of at least
a majority of the total number of then outstanding Series E, voting together as
a class, (i) sell, lease, convey, exchange, transfer or otherwise dispose of all
or substantially all of its assets (other than for the purposes of securing
payment of any contract or obligation) or (ii) merge or consolidate with or into
any other corporation, except into or with a wholly-owned subsidiary, unless the
proceeds to be received by the Company's shareholders in such transaction are
distributed in accordance with the provision of Subsection (c) hereof.
So long as any shares of Series F are outstanding, the Corporation
shall not, without first obtaining the approval by vote or written consent, in
the manner provided under applicable law of the holders of at least a majority
of the total number of then outstanding Series F, voting together as a class,
(i) sell, lease, convey, exchange, transfer or otherwise dispose of all or
substantially all of its assets (other than for the purposes of securing payment
of any contract or obligation), (ii) merge or consolidate with or into any other
corporation, except into or with a wholly-owned subsidiary, unless the proceeds
to be received by the Company's shareholders in such transaction are distributed
in accordance with the provision of Subsection (c) hereof, or (iii) amend any
provision of this Certificate of Incorporation in a manner which adversely
affects the rights, preferences, privileges or restrictions of the Series F.
(H) STATUS OF CONVERTED OR REDEEMED SHARES. In case shares of Series
A, Series B, Series C, Series D, Series E or Series F Preferred Stock shall be
converted or redeemed, the shares so converted or redeemed shall be canceled,
retired and eliminated from the shares which the Corporation is authorize to
issue.
(I) RESTATED CERTIFICATE. Upon conversion of all outstanding shares
of the Series A, Series B, Series C, Series D, Series E and Series F Preferred
Stock, this Article IV shall be of no further force or effect, and this
Certificate of Incorporation may be restated by a resolution of the Board of
Directors (and without further action by the stockholders) to delete this
Article IV and to delete all references in this Certificate of Incorporation to
the Series A, Series B, Series C, Series D, Series E and Series F Preferred
Stock.
ARTICLE V
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may now or hereafter be organized under the
General Corporation Law of Delaware.
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<PAGE>
ARTICLE VI
The Corporation is to have perpetual existence.
ARTICLE VII
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, adopt, alter, amend or
repeal the Bylaws of the Corporation, subject to the right of the stockholders
entitled to vote with respect thereto to amend or repeal Bylaws made by the
Board of Directors as provided for in this Amended and Restated Certificate of
Incorporation. The affirmative vote of 66-2/3% of the total number of votes of
the then outstanding shares of capital stock of this Corporation entitled to
vote generally in the election of directors, voting together as a single class,
shall be required for the adoption, amendment or repeal of the following
sections of the Corporation's Bylaws: 2.3 (Special Meeting), 2.5 (Advance
Notice of Stockholder Nominees) and 2.6 (Advance Notice of Stockholder Business)
by the stockholders of this Corporation.
ARTICLE VIII
The number of directors which shall constitute the whole Board of Directors
of the Corporation shall be as specified in the Bylaws of the Corporation.
ARTICLE IX
The election of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statute) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XI
If at any time this Corporation shall have a class of stock registered
pursuant to the provisions of the Securities Exchange Act of 1934, for so long
as such class is so registered, any action by the stockholders of such class
must be taken at an annual or special meeting of stockholders and may not be
taken by written consent. This provision shall supersede any provision to the
contrary in the Bylaws of the Corporation.
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<PAGE>
ARTICLE XII
Advance notice of new business and stockholder nominations for the election
of directors shall be given in the manner and to the extent provided in the
Bylaws of the Corporation.
ARTICLE XIII
Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or the Bylaws (and notwithstanding the fact that a
lesser percentage may be specified by law, this Amended and Restated Certificate
of Incorporation or the Bylaws of this Corporation), the affirmative vote of 66-
2/3% of the total number of the then outstanding shares of capital stock of this
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to amend or repeal, or to adopt
any provision inconsistent with the purpose or intent of, Articles VII through
XV. Notice of any such proposed amendment, repeal or adoption, shall be
contained in the notice of the meeting at which it is to be considered. Subject
to the provisions set forth herein, this Corporation reserves the right to
amend, alter, change or repeal any provision contained in this Amended and
Restated Certificate of Incorporation, in the manner now or hereafter prescribed
by statute, and all rights conferred upon stockholders herein are granted
subject to this reservation.
ARTICLE XIV
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or as may hereafter be amended, a director of the Corporation
shall not be personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. Neither any
amendment nor repeal of this Article XIV, nor the adoption of any provision of
this Amended and Restated Certificate of Incorporation inconsistent with this
Article XIV, shall eliminate or reduce the effect of this Article XIV in respect
of any matter occurring, or any cause of action, suit or claim that, but for
this Article XIV, would accrue or arise, prior to such amendment, repeal or
adoption of any inconsistent provision.
ARTICLE XV
"Listing Event" as used in this Amended and Restated Certificate of
-------------
Incorporation shall mean the Corporation becoming a "Listed Corporation" within
------------------
the meaning of Section 301.5 of the California Corporations Code. For the
management of the business and for the conduct of the affairs of the
Corporation, and in further definition, limitation and regulation of the powers
of the Corporation, its directors and its stockholders or any class thereof, as
the case may be, it is further provided that, effective upon the occurrence of
the Listing Event:
(i) The number of directors which shall constitute the entire Board of
Directors, and the number of directors in each class, shall be fixed exclusively
by one or
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<PAGE>
more resolutions adopted from time to time by the Board of Directors. Until
changed by a resolution of the Board of Directors, Class I shall consist of
three directors, each of whom shall be designated by the Board of Directors, and
Class II shall consist of two directors, each of whom shall be designated by the
Board of Directors.
The Board of Directors shall be divided into two classes, designated as
Class I and Class II, respectively. Directors shall be assigned to each class
in accordance with a resolution or resolutions adopted by the Board of
Directors. At the first annual meeting of stockholders following the Listing
Event, the terms of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of two years. At the second annual
meeting of stockholders following the Listing Event, the term of office of the
Class II directors shall expire and Class II directors shall be elected for a
full term of two years. At each succeeding annual meeting of stockholders,
directors shall be elected for a full term of two years to succeed the directors
of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his or her successor is duly elected and qualified or until
his or her death, resignation, or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
Any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal, or other causes shall be filled by either (i) the
affirmative vote of the holders of a majority of the voting power of the then-
outstanding shares of voting stock of the corporation entitled to vote generally
in the election of directors (the "Voting Stock") voting together as a single
------------
class; or (ii) by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board of Directors. Newly
created directorships resulting from any increase in the number of directors
shall, unless the Board of Directors determines by resolution that any such
newly created directorship shall be filled by the stockholders, be filled only
by the affirmative vote of the directors then in office, even though less than a
quorum of the Board of Directors. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
class of directors in which the new directorship was created or the vacancy
occurred and until such director's successor shall have been elected and
qualified.
(ii) There shall be no right with respect to shares of stock of the
Corporation to cumulate votes in the election of directors.
(iii) Any director, or the entire Board of Directors, may be removed
from office at any time (i) with cause by the affirmative vote of the holders of
at least a majority of the voting power of the then-outstanding shares of the
Voting Stock, voting together as a single class; or (ii) without cause by the
affirmative vote of the holders of at least 66-2/3% of the voting power of the
then-outstanding shares of the Voting Stock.
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<PAGE>
ARTICLE XVI
The name and mailing address of the incorporator are as follows:
Donald M. Keller, Jr.
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, CA 94025
Executed this ___ day of ____________________.
__________________________________________
Donald M. Keller, Jr., Incorporator
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<PAGE>
EXHIBIT 3.2
BYLAWS
OF
PILOT NETWORK SERVICES, INC.
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<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I - CORPORATE OFFICES...................................... 1
1.1 Registered Office............................................. 1
1.2 Other Offices................................................. 1
MEETINGS OF STOCKHOLDERS........................................... 1
2.1 Place Of Meetings............................................. 1
2.2 Annual Meeting................................................ 1
2.3 Special Meeting............................................... 1
2.4 Notice Of Stockholders' Meetings.............................. 2
2.5 Advance Notice Of Stockholder Nominees........................ 2
2.6 Advance Notice Of Stockholder Business........................ 3
2.7 Manner Of Giving Notice; Affidavit Of Notice.................. 3
2.8 Quorum........................................................ 4
2.9 Adjourned Meeting; Notice..................................... 4
2.10 Conduct Of Business.......................................... 4
2.11 Voting....................................................... 4
2.12 Waiver Of Notice............................................. 4
2.13 Stockholder Action By Written Consent Without A Meeting...... 5
2.14 Record Date For Stockholder Notice; Voting; Giving Consents.. 5
2.15 Proxies...................................................... 6
ARTICLE III - DIRECTORS............................................ 6
3.1 Powers........................................................ 6
3.2 Number of Directors........................................... 6
3.3 Election, Qualification and Term of Office of Directors....... 6
3.4 Resignation and Vacancies..................................... 7
3.5 Place of Meetings; Meetings by Telephone...................... 7
3.6 Regular Meetings.............................................. 8
3.7 Special Meetings; Notice...................................... 8
3.8 Quorum........................................................ 8
3.9 Waiver of Notice.............................................. 9
3.10 Board Action by Written Consent Without a Meeting............ 9
3.11 Fees and Compensation of Directors........................... 9
3.12 Approval of Loans to Officers................................ 9
3.13 Removal of Directors......................................... 9
3.14 Chairman of the Board of Directors........................... 10
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
ARTICLE IV - COMMITTEES............................................ 10
4.1 Committees of Directors....................................... 10
4.2 Committee Minutes............................................. 11
4.3 Meetings and Action of Committees............................. 11
ARTICLE V - OFFICERS............................................... 11
5.1 Officers...................................................... 11
5.2 Appointment of Officers....................................... 11
5.3 Subordinate Officers.......................................... 11
5.4 Removal and Resignation of Officers........................... 12
5.5 Vacancies In Offices.......................................... 12
5.6 Chief Executive Officer....................................... 12
5.7 President..................................................... 12
5.8 Vice Presidents............................................... 13
5.9 Secretary..................................................... 13
5.10 Chief Financial Officer...................................... 13
5.11 Representation Of Shares Of Other Corporations............... 14
5.12 Authority And Duties Of Officers............................. 14
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, AND OTHER AGENTS........................................ 14
6.1 Indemnification Of Directors And Officers..................... 14
6.2 Indemnification Of Others..................................... 14
6.3 Payment Of Expenses In Advance................................ 15
6.4 Indemnity Not Exclusive....................................... 15
6.5 Insurance..................................................... 15
6.6 Conflicts..................................................... 15
ARTICLE VII - RECORDS AND REPORTS.................................. 16
7.1 Maintenance And Inspection Of Records......................... 16
7.2 Inspection By Directors....................................... 16
7.3 Annual Statement To Stockholders.............................. 16
ARTICLE VIII - GENERAL MATTERS..................................... 17
8.1 Checks........................................................ 17
8.2 Execution Of Corporate Contracts And Instruments.............. 17
8.3 Stock Certificates; Partly Paid Shares........................ 17
8.4 Special Designation On Certificates........................... 18
8.5 Lost Certificates............................................. 18
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
8.6 Construction; Definitions..................................... 18
8.7 Dividends..................................................... 18
8.8 Fiscal Year................................................... 19
8.9 Seal.......................................................... 19
8.10 Transfer Of Stock............................................ 19
8.11 Stock Transfer Agreements.................................... 19
8.12 Registered Stockholders...................................... 19
ARTICLE IX - AMENDMENTS............................................ 20
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<PAGE>
BYLAWS
OF
PILOT NETWORK SERVICES, INC.
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE.
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is Prentice-Hall Corporation System,
Inc.
1.2 OTHER OFFICES.
-------------
The Board of Directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS.
------------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the Board of Directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING.
---------------
The annual meeting of stockholders shall be held on any date, time and
place, either within or without the State of Delaware, as may be designated by
resolution of the Board of Directors from time to time. At the meeting,
directors shall be elected and any other proper business may be transacted.
2.3 SPECIAL MEETING.
----------------
A special meeting of the stockholders may be called at any time by the
Board of Directors, the Chairman of the Board, the President, or the holders of
shares entitled to cast not less than ten percent of the votes at the meeting.
No other person or persons are permitted to call a special meeting. No business
may be conducted at a special meeting other than the business
<PAGE>
brought before the meeting by the Board of Directors, the Chairman of the Board,
the President or the holders of shares entitled to cast not less than ten
percent of the votes at the meeting.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.
---------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called. Upon request by any person
or persons entitled to call a special meeting, the Chairman of the Board,
President, Vice President or Secretary shall cause within twenty (20) days after
receipt of the request cause notice to be given to the shareholders entitled to
vote that a special meeting will be held at a time requested by the person or
persons calling the meeting, but not less than thirty-five (35) nor more than
sixty (60) days after receipt of the request.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES.
---------------------------------------
Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the discretion of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this Section. Such nominations, other than those made
by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the corporation not less than twenty (20) days
nor more than sixty (60) days prior to the meeting; provided, however, that in
-------- -------
the event less than thirty (30) days notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on the
tenth day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made. Such stockholder's notice shall set
forth (a) as to each person, if any, whom the stockholder proposes to nominate
for election or re-election as a director: (i) the name, age, business address
and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
corporation which are beneficially owned by such person, (iv) any other
information relating to such person that is required by law to be disclosed in
solicitations of proxies for election of directors, and (v) such person's
written consent to being named as a nominee and to serving as a director if
elected; and (b) as to the stockholder giving the notice: (i) the name and
address, as they appear on the corporation's books, of such stockholder, and
(ii) the class and number of shares of the corporation which are beneficially
owned by such stockholder, and (iii) a description of all arrangements or
understandings between such stockholder and each nominee and any other person or
persons (naming such person or persons) relating to the nomination. At the
request of the Board of Directors any person nominated by the Board for election
as a director shall furnish to the Secretary of the corporation that information
required to be set forth in the stockholder's notice of nomination which
pertains to the nominee.
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<PAGE>
No person shall be of eligible for election as a director of the corporation
unless nominated in accordance with the procedures set forth in this Section.
The chairman of the meeting shall, if the facts warrant, determine and declare
at the meeting that a nomination was not made in accordance with the procedures
prescribed by these bylaws, and if he should so determine, he shall so declare
at the meeting and the defective nomination shall be disregarded.
2.6 ADVANCE NOTICE OF STOCKHOLDER BUSINESS.
---------------------------------------
At any meeting of the stockholders, only such business shall be conducted
as shall have been properly brought before the meeting. To be properly brought
before a meeting, business must be: (a) as specified in the notice of meeting
(or any supplement thereto) given by or at the direction of the Board of
Directors, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (c) otherwise properly brought before
the meeting by a stockholder. Business to be brought before a meeting by a
stockholder shall not be considered properly brought if the stockholder has not
given timely notice thereof in writing to the Secretary of the corporation. To
be timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than twenty (20) nor
more than sixty (60) days prior to the meeting; provided, however, that in the
event less than thirty (30) days notice or prior public disclosure of the date
of the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. A stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the
meeting: (i) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting, (ii)
the name and address of the stockholder proposing such business, (iii) the
class and number of shares of the corporation, which are beneficially owned by
the stockholder, (iv) any material interest of the stockholder in such
business, and (v) any other information that is required by law to be provided
by the stockholder in his capacity as a proponent of a stockholder proposal.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at any meeting except in accordance with the procedures set forth in
this Section. The chairman of the meeting shall, if the facts warrant,
determine and declare at the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section, and, if he
should so determine, he shall so declare at the meeting that any such business
not properly brought before the meeting shall not be transacted.
2.7 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.
---------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
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<PAGE>
2.8 QUORUM.
-------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then either (i) the Chairman of the meeting or (ii) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.9 ADJOURNED MEETING; NOTICE.
--------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.10 CONDUCT OF BUSINESS.
--------------------
The Chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.
2.11 VOTING.
-------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.14 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder.
2.12 WAIVER OF NOTICE.
-----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of
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notice of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.13 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
--------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of the corporation, or any action that may be taken at any annual
or special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
2.14 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.
------------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the Board of Directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be the day on which the first
written consent is expressed.
(iii) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
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A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
2.15 PROXIES.
--------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section 212
of the General Corporation Law of Delaware.
ARTICLE III
DIRECTORS
---------
3.1 POWERS.
------
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors.
3.2 NUMBER OF DIRECTORS.
-------------------
Unless otherwise determined by the Board of Directors of the Company,
the Board of Directors shall consist of five persons until changed by a proper
amendment of this Section 3.2. No reduction of the authorized number of
directors shall have the effect of removing any director before that director's
term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.
-------------------------------------------------------
Except as provided in Section 3.4 of these Bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
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Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES.
-------------------------
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.
----------------------------------------
The Board of Directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
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Unless otherwise restricted by the certificate of incorporation or
these Bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS.
----------------
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
3.7 SPECIAL MEETINGS; NOTICE.
------------------------
Special meetings of the Board of Directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM.
------
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
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3.9 WAIVER OF NOTICE.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these Bylaws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
--------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee. Written consents representing actions taken by the
board or committee may be executed by telex, telecopy or other facsimile
transmission, and such facsimile shall be valid and binding to the same extent
as if it were an original.
3.11 FEES AND COMPENSATION OF DIRECTORS.
----------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
3.12 APPROVAL OF LOANS TO OFFICERS.
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 REMOVAL OF DIRECTORS.
--------------------
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without
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cause, by the holders of a majority of the shares then entitled to vote at an
election of directors; provided, however, that if the stockholders of the
corporation are entitled to cumulative voting, if less than the entire Board of
Directors is to be removed, no director may be removed without cause if the
votes cast against his removal would be sufficient to elect him if then
cumulatively voted at an election of the entire Board of Directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
3.14 CHAIRMAN OF THE BOARD OF DIRECTORS.
----------------------------------
The corporation may also have, at the discretion of the Board of
Directors, a chairman of the Board of Directors who shall not be considered an
officer of the corporation.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS.
-----------------------
The Board of Directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors or in the Bylaws of the corporation, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority to (i) amend the certificate
of incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (v) amend the Bylaws of the corporation; and, unless the board
resolution establishing the committee, the Bylaws or the certificate of
incorporation expressly so provide,
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no such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES.
-----------------
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES.
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Section 3.5 (place of meetings and
meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.10 (action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute the committee and
its members for the Board of Directors and its members; provided, however, that
the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS.
--------
The officers of the corporation shall be a chief executive officer, a
president, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the Board of Directors, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these Bylaws. Any number of offices may be held by the same
person.
5.2 APPOINTMENT OF OFFICERS.
-----------------------
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS.
--------------------
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the corporation may
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require, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these Bylaws or as the Board of
Directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS.
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the Secretary of the corporation. Any resignation shall take
effect at the date of the receipt of that notice or at any later time specified
in that notice; and, unless otherwise specified in that notice, the acceptance
of the resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
5.5 VACANCIES IN OFFICES.
--------------------
Any vacancy occurring in any office of the corporation shall be filled
by the Board of Directors.
5.6 CHIEF EXECUTIVE OFFICER.
-----------------------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board, if any, the chief executive
officer of the corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these bylaws.
5.7 PRESIDENT.
---------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board (if any) or the chief executive
officer, the president shall have general supervision, direction, and control of
the business and other officers of the corporation. He or she shall have the
general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
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5.8 VICE PRESIDENTS.
---------------
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
5.9 SECRETARY.
---------
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show
the time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required to be given by law or
by these Bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 CHIEF FINANCIAL OFFICER.
-----------------------
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the
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financial condition of the corporation, and shall have other powers and perform
such other duties as may be prescribed by the Board of Directors or the bylaws.
5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.
----------------------------------------------
The chairman of the board, the chief executive officer, the president,
any vice president, the chief financial officer, the secretary or assistant
secretary of this corporation, or any other person authorized by the Board of
Directors or the chief executive officer or the president or a vice president,
is authorized to vote, represent, and exercise on behalf of this corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this corporation. The authority granted herein may be
exercised either by such person directly or by any other person authorized to do
so by proxy or power of attorney duly executed by the person having such
authority.
5.12 AUTHORITY AND DUTIES OF OFFICERS.
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
--------------------------------------------------------------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
-----------------------------------------
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS.
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation.
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For purposes of this Section 6.2, an "employee" or "agent" of the corporation
(other than a director or officer) includes any person (i) who is or was an
employee or agent of the corporation, (ii) who is or was serving at the request
of the corporation as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, or (iii) who was an employee or agent
of a corporation which was a predecessor corporation of the corporation or of
another enterprise at the request of such predecessor corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE.
------------------------------
Expenses incurred in defending any action or proceeding for which
indemnification is required pursuant to Section 6.1 or for which indemnification
is permitted pursuant to Section 6.2 following authorization thereof by the
Board of Directors shall be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of the indemnified party to repay such amount if it shall ultimately be
determined that the indemnified party is not entitled to be indemnified as
authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE.
-----------------------
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the certificate of
incorporation
6.5 INSURANCE.
---------
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
6.6 CONFLICTS.
---------
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(a) That it would be inconsistent with a provision of the certificate
of incorporation, these Bylaws, a resolution of the stockholders or an agreement
in effect at the time of the accrual of the alleged cause of the action asserted
in the proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification; or
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(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS.
-------------------------------------
The corporation shall, either at its principal executive offices or at
such place or places as designated by the Board of Directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS.
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order
the corporation to permit the director to inspect any and all books and records,
the stock ledger, and the stock list and to make copies or extracts therefrom.
The Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.
--------------------------------
The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
-16-
<PAGE>
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 CHECKS.
------
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.
------------------------------------------------
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.
--------------------------------------
The shares of a corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the Board
of Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the Board of Directors, or the chief executive officer or the president or vice-
president, and by the chief financial officer or an assistant treasurer, or the
secretary or an assistant secretary of such corporation representing the number
of shares registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if he or she were such officer, transfer agent or registrar at the
date of issue.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon
-17-
<PAGE>
partly paid shares of the same class, but only upon the basis of the percentage
of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES.
-----------------------------------
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES.
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS.
-------------------------
Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS.
---------
The directors of the corporation, subject to any restrictions
contained in (i) the General Corporation Law of Delaware or (ii) the certificate
of incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
-18-
<PAGE>
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR.
-----------
The fiscal year of the corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.
8.9 SEAL.
----
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK.
-----------------
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS.
-------------------------
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS.
-----------------------
The corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
-19-
<PAGE>
ARTICLE IX
AMENDMENTS
----------
The Bylaws of the corporation may be adopted, amended or repealed by the
stockholders entitled to vote; provided, however, that the corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal Bylaws.
-20-
<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
PILOT NETWORK SERVICES, INC.
ADOPTION BY INCORPORATOR
------------------------
The undersigned person appointed in the certificate of incorporation to act
as the Incorporator of Pilot Network Services, Inc. hereby adopts the foregoing
bylaws as the Bylaws of the corporation.
Executed this _____ day of ____________________.
________________________________________
Donald M. Keller, Jr., Incorporator
CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR
----------------------------------------------------
The undersigned hereby certifies that the undersigned is the duly elected,
qualified, and acting Secretary of Pilot Network Services, Inc., and that the
foregoing Bylaws were adopted as the Bylaws of the corporation on , by the
person appointed in the certificate of incorporation to act as the Incorporator
of the corporation.
Executed this _____ day of ______________________.
________________________________________
William Leetham, Secretary
<PAGE>
EXHIBIT 4.1
[LOGO OF PILOT NETWORK SERVICES APPEARS HERE]
<TABLE>
<S> <C>
COMMON STOCK COMMON STOCK
[SEAL] [SEAL]
SEE REVERSE FOR CERTAIN DEFINITIONS AND A
STATEMENT AS TO THE RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS OF SHARES
</TABLE>
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 721596104
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE OF $0.001 PER
SHARE, OF
______________________ _____________________
________________________ PILOT NETWORK SERVICES, INC. _________________________
______________________ _____________________
hereinafter called the "Corporation", transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney, upon
surrender of this certificate properly enclosed
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
[SEAL OF PILOT NETWORK SERVICES APPEARS HERE]
SECRETARY PRESIDENT
<PAGE>
PILOT NETWORK SERVICES, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations of restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
incorporation of the Corporation and by any certificate of designation, and the
number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Corporation at its principal office.
The following abbreviations, when used in the inscription of the face of
this certificate, shall be continued as though they were written out in full
according to applicable laws or regulations;
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT --............Custodian............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right Under Uniform Gifts to Minors
of survivorship and not as Act..............................
tenants in common (State)
UNIF TRF MIN ACT --........Custodian (until age.....)
(Cust)
..............under Uniform Transfers
(Minor)
to Minors Act.....................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,______________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_________________________________________
_________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated______________________
_____________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER
Signature(s) Guaranteed
By____________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS STOCKHOLDERS,
SAVINGS AND LOAN ASSOCIATION AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-15
[STAMP OF AMERICAN BANK NOTE COMPANY APPEAR HERE]
<PAGE>
EXHIBIT 5.1
July __, 1998
Pilot Network Services, Inc.
1080 Marina Village Parkway
Alameda, California 94501
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 57453)
---------------------------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 57453)
(the "Registration Statement") filed by you, Pilot Network Services, Inc., with
----------------------
the Securities and Exchange Commission on June 22, 1998, and as amended by
Amendment No. 1 to the Registration Statement filed July 16, 1998, in
connection with the registration under the Securities Act of 1933, as amended,
of shares of your Common Stock (the "Shares"). As your counsel in connection
------
with this transaction, we have examined the proceedings taken and we are
familiar with the proceedings proposed to be taken by you in connection with the
sale and issuance of the Shares.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares when issued and sold in the manner
described in the Registration Statement will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and in any amendment thereto.
Very truly yours,
VENTURE LAW GROUP
A Professional Corporation
<PAGE>
EXHIBIT 10.3
PILOT NETWORK SERVICES, INC.
1998 STOCK OPTION PLAN
----------------------
1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.
Options granted hereunder may be either Incentive Stock Options (as
defined under Section 422 of the Code) or Nonstatutory Stock Options, at the
discretion of the Board and as reflected in the terms of the written option
agreement.
2. DEFINITIONS. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" shall mean the Board or any of its Committees
-------------
appointed pursuant to Section 4 of the Plan.
(b) "Affiliate" shall mean an entity other than a Subsidiary (as
---------
defined below) in which the Company owns an equity interest.
(c) "Applicable Laws" shall have the meaning set forth in Section 4(a)
---------------
below.
(d) "Board" shall mean the Board of Directors of the Company.
-----
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" shall mean the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) of the Plan, if one is appointed.
(g) "Common Stock" shall mean the Common Stock of the Company.
------------
(h) "Company" shall mean Pilot Network Services, Inc., a California
-------
corporation.
(i) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(j) "Continuous Status as an Employee or Consultant" shall mean the
----------------------------------------------
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Administrator; provided that such leave is for
--------
a period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute. For purposes of this Plan, a change
in status from an
<PAGE>
Employee to a Consultant or from a Consultant to an Employee will not constitute
a termination of employment.
(k) "Director" shall mean a member of the Board.
--------
(l) "Employee" shall mean any person (including any Named Executive,
--------
Officer or Director) employed by the Company or any Parent, Subsidiary or
Affiliate of the Company. The payment by the Company of a director's fee to a
Director shall not be sufficient to constitute "employment" of such Director by
the Company.
(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(n) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock as quoted on such system on the date of determination (if
for a given day no sales were reported, the closing bid on that day shall be
used), as such price is reported in The Wall Street Journal or such other source
as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the bid and asked prices for the Common Stock or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(o) "Incentive Stock Option" shall mean an Option intended to qualify
----------------------
as an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.
(p) "Named Executive" shall mean any individual who, on the last day
---------------
of the Company's fiscal year, is the chief executive officer of the Company (or
is acting in such capacity) or among the four highest compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(q) "Nonstatutory Stock Option" shall mean an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
-2-
<PAGE>
(r) "Officer" shall mean a person who is an officer of the Company
-------
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(s) "Option" shall mean a stock option granted pursuant to the Plan.
------
(t) "Optioned Stock" shall mean the Common Stock subject to an Option.
--------------
(u) "Optionee" shall mean an Employee or Consultant who receives an
--------
Option.
(v) "Parent" shall mean a "parent corporation," whether now or
------
hereafter existing, as defined in Section 424(e) of the Code.
(w) "Plan" shall mean this 1998 Stock Option Plan.
----
(x) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange
----------
Act as the same may be amended from time to time, or any successor provision.
(y) "Share" shall mean a share of the Common Stock, as adjusted in
-----
accordance with Section 14 of the Plan.
(z) "Subsidiary" shall mean a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 14 of
-------------------------
the Plan, the maximum aggregate number of shares that may be optioned and sold
under the Plan is 500,000 Shares of Common Stock (without giving effect to the
two-for-one stock split to be effected upon reincorporation of the Company under
the laws of the state of Delaware), plus an annual increase on the first day of
each of the Company's fiscal years in 1999, 2000, 2001, 2002 and 2003 equal to
the lesser of (i) 250,000 Shares (without giving effect to the two-for-one stock
split to be effected upon reincorporation of the Company under the laws of the
state of Delaware), (ii) three percent (3%) of the Shares outstanding on the
last day of the immediately preceding fiscal year, or (iii) such lesser number
of Shares as the Board shall determine. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares that were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. Notwithstanding any other provision of the Plan, shares
issued under the Plan and later repurchased by the Company shall not become
available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
--------------------------
(a) COMPOSITION OF ADMINISTRATOR.
----------------------------
-3-
<PAGE>
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3,
------------------------------
and by the legal requirements relating to the administration of incentive stock
option plans, if any, of applicable securities laws and the Code (collectively,
the "Applicable Laws"), grants under the Plan may (but need not) be made by
---------------
different administrative bodies with respect to Directors, Officers who are not
directors and Employees who are neither Directors nor Officers.
(ii) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS. With
-----------------------------------------------------
respect to grants of Options to Employees or Consultants who are also Officers
or Directors of the Company, grants under the Plan shall be made by (A) the
Board, if the Board may make grants under the Plan in compliance with Rule 16b-3
and Section 162(m) of the Code as it applies so as to qualify grants of Options
to Named Executives as performance-based compensation, or (B) a Committee
designated by the Board to make grants under the Plan, which Committee shall be
constituted in such a manner as to permit grants under the Plan to comply with
Rule 16b-3, to qualify grants of Options to Named Executives as performance-
based compensation under Section 162(m) of the Code and otherwise so as to
satisfy the Applicable Laws.
(iii) ADMINISTRATION WITH RESPECT TO OTHER PERSONS. With respect
--------------------------------------------
to grants of Options to Employees or Consultants who are neither Directors nor
Officers of the Company, the Plan shall be administered by (A) the Board or (B)
a Committee designated by the Board, which Committee shall be constituted in
such a manner as to satisfy the Applicable Laws.
(iv) GENERAL. If a Committee has been appointed pursuant to
-------
subsection (ii) or (iii) of this Section 4(a), such Committee shall continue to
serve in its designated capacity until otherwise directed by the Board. From
time to time the Board may increase the size of any Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies (however caused) and remove
all members of a Committee and thereafter directly administer the Plan, all to
the extent permitted by the Applicable Laws and, in the case of a Committee
appointed under subsection (ii), to the extent permitted by Rule 16b-3 and to
the extent required under Section 162(m) of the Code to qualify grants of
Options to Named Executives as performance-based compensation.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(m) of the Plan;
(ii) to select the Employees and Consultants to whom Options may
from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
-4-
<PAGE>
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or any vesting
acceleration or waiver of forfeiture restrictions regarding any Option and/or
the shares of Common Stock relating thereto, based in each case on such factors
as the Administrator shall determine, in its sole discretion);
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options.
5. ELIGIBILITY.
-----------
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options may be granted
--------------------
to Employees and Consultants. Incentive Stock Options may be granted only to
Employees, provided, however, that Employees of an Affiliate shall not be
-------- -------
eligible to receive Incentive Stock Options. An Employee or Consultant who has
been granted an Option may, if he or she is otherwise eligible, be granted an
additional Option or Options.
(b) TYPE OF OPTION. Each Option shall be designated in the written
--------------
option agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of Shares with respect to which Incentive Stock
Options are exercisable for the first time by an Optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
For purposes of this Section 5(b), Incentive Stock Options shall be taken into
account in the order in which they were granted, and the Fair Market Value of
the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(c) NO EMPLOYMENT RIGHTS. The Plan shall not confer upon any Optionee
--------------------
any right with respect to continuation of employment or consulting relationship
with the Company, nor shall it interfere in any way with his or her right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by the shareholders of the
Company as described in Section 20 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 16 of the Plan.
-5-
<PAGE>
7. TERM OF OPTION. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
-------- -------
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement. However, in the case of an Incentive Stock
Option granted to an Optionee who, at the time the Incentive Stock Option is
granted, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the term of
the Incentive Stock Option shall be five (5) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
8. LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as provided
---------------------------------
in this Plan, the maximum number of Shares which may be subject to options
granted to any one Employee under this Plan for any fiscal year of the Company
shall be 500,000 (without giving effect to the two-for-one stock split to be
effected upon reincorporation of the Company under the laws of the state of
Delaware).
9. OPTION EXERCISE PRICE AND CONSIDERATION.
---------------------------------------
(a) EXERCISE PRICE. The per Share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be such price as is determined by
the Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary (a "10% Shareholder"), the per Share exercise price shall be no less
---------------
than 110% of the Fair Market Value per Share on the date of grant; or
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a 10% Shareholder prior to the date, if any,
upon which any security of the Company is listed or approved for listing on a
national securities exchange or designated or approved for designation as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., the per Share exercise price
shall be no less than 110% of the Fair Market Value per Share on the date of
grant;
(B) granted to a person who, at the time of the grant of
such Option, is a Named Executive of the Company, the per share Exercise Price
shall be no less than 100% of the Fair Market Value on the date of grant; or
-6-
<PAGE>
(C) granted to any person other than a Named Executive, the
per Share exercise price shall be no less than 85% of the Fair Market Value per
Share on the date of grant.
(b) PERMISSIBLE CONSIDERATION. The consideration to be paid for the
-------------------------
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Administrator (and, in the case of an Incentive Stock
Option, shall be determined at the time of grant) and may consist entirely of
(1) cash, (2) check, (3) promissory note, (4) other Shares that (x) in the case
of Shares acquired upon exercise of an Option either have been owned by the
Optionee for more than six months on the date of surrender or were not acquired,
directly or indirectly, from the Company, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (5) authorization from the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (6) delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds required to pay the exercise price, (7) any
combination of the foregoing methods of payment, or (8) such other consideration
and method of payment for the issuance of Shares to the extent permitted under
Applicable Laws. In making its determination as to the type of consideration to
accept, the Administrator shall consider if acceptance of such consideration may
be reasonably expected to benefit the Company.
10. EXERCISE OF OPTION.
------------------
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan; provided however that any Option granted hereunder prior to the
date, if any, upon which any security of the Company is listed or approved for
listing on a national securities exchange or designated or approved for
designation as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. to a person who
is not either an Officer, a Director or a Consultant of the Company shall become
exercisable at a rate of at least 20% per year over five years from the date of
grant.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate
-7-
<PAGE>
evidencing such Shares, no right to vote or receive dividends or any other
rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. In the event
--------------------------------------------------
of termination of an Optionee's Continuous Status as an Employee or Consultant,
such Optionee may, but only within thirty (30) days (or such other period of
time, not exceeding three (3) months in the case of an Incentive Stock Option or
six (6) months in the case of a Nonstatutory Stock Option, as is determined by
the Administrator, with such determination in the case of an Incentive Stock
Option being made at the time of grant of the Option) after the date of such
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option Agreement), exercise his or her Option to
the extent that he or she was entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise the
Option at the date of such termination, or if the optionee does not exercise
such Option (which he or she was entitled to exercise) within the time specified
herein, the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding Section 10(b) above, in
----------------------
the event of termination of an Optionee's Continuous Status as an Employee or
Consultant as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within six (6) months
(or such other period of time not exceeding twelve (12) months as is determined
by the Administrator, with such determination in the case of an Incentive Stock
Option being made at the time of grant of the Option) from the date of such
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option Agreement), exercise his or her Option to
the extent he or she was entitled to exercise it at the date of such
termination. To the extent that he or she was not entitled to exercise the
Option at the date of termination, or if he does not exercise such Option (which
he was entitled to exercise) within the time specified herein, the Option shall
terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee:
-----------------
(i) during the term of the Option who is at the time of his
death an Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of grant of the
Option, the Option may be exercised, at any time within six (6) months (or such
other period of time, not exceeding twelve (12) months, as is determined by the
Administrator, with such determination in the case of an Incentive Stock Option
being made at the time of grant of the Option) following the date of death (but
in no event later than the date of expiration of the term of such Option as set
forth in the Option Agreement), by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest
-8-
<PAGE>
or inheritance but only to the extent of the right to exercise that would have
accrued had the Optionee continued living and remained in Continuous Status as
an Employee or Consultant three (3) months (or such other period of time as is
determined by the Administrator as provided above) after the date of death,
subject to the limitation set forth in Section 5(b); or
(ii) within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option) after the termination of Continuous Status as an Employee
or Consultant, the Option may be exercised, at any time within six (6) months
following the date of death (but in no event later than the date of expiration
of the term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
had accrued at the date of termination.
(e) RULE 16B-3. Options granted to persons subject to Section 16(b)
----------
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
11. WITHHOLDING TAXES. As a condition to the exercise of Options granted
-----------------
hereunder, the Optionee shall make such arrangements as the Administrator may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with the exercise, receipt or
vesting of such Option. The Company shall not be required to issue any Shares
under the Plan until such obligations are satisfied.
12. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, or (b) out of Optionee's current
compensation, or (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than the applicable taxes, or (d) by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option that number of Shares having a fair market value equal to the amount
required to be withheld. For this purpose, the fair market value of the Shares
to be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined (the "Tax Date").
--------
Any surrender by an Officer or Director of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3.
-9-
<PAGE>
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
13. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution; provided that, after the date,
if any, upon which any security of the Company is listed or approved for listing
on a national securities exchange or designated or approved for designation as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., the Administrator may in its
discretion grant transferable Nonstatutory Stock Options pursuant to option
agreements specifying (i) the manner in which such Nonstatutory Stock Options
are transferable and (ii) that any such transfer shall be subject to the
Applicable Laws. The designation of a beneficiary by an Optionee will not
constitute a transfer. An Option may be exercised, during the lifetime of the
Optionee, only by the Optionee or a transferee permitted by this Section 13.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
------------------------------------------------------------------
(a) ADJUSTMENT. Subject to any required action by the shareholders of
----------
the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of shares of Common Stock that have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, the maximum number of shares of Common Stock for which Options may be
granted to any employee under Section 8 of the Plan, the number of shares of
Common Stock set forth in Section 3(i) above, and the price per share of Common
Stock covered by each such outstanding Option, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock (including any such change in the number
of shares of Common Stock effected in connection with a change in domicile of
the Company), or any other increase or decrease in the number of issued shares
of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be
-10-
<PAGE>
deemed to have been "effected without receipt of consideration." Such adjustment
shall be made by the Administrator, whose determination in that respect shall be
final, binding and conclusive. Except as expressly provided herein, no issuance
by the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Common Stock
subject to an Option.
(b) CORPORATE TRANSACTIONS. In the event of the proposed dissolution
----------------------
or liquidation of the Company, the Option will terminate immediately prior to
the consummation of such proposed action, unless otherwise provided by the
Administrator. The Administrator may, in the exercise of its sole discretion in
such instances, declare that any Option shall terminate as of a date fixed by
the Administrator and give each Optionee the right to exercise his or her Option
as to all or any part of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. In the event of a (i) proposed sale
of all or substantially all of the assets of the Company, or (ii) a merger,
consolidation or other capital reorganization of the Company (other than one in
which the holders of more than fifty percent (50%) of the shares of capital
stock of the Company outstanding immediately prior to such transaction continue
to hold (either by the voting securities remaining outstanding or by being
converted into voting securities of the surviving entity) more than fifty
percent (50%) of the total voting power represented by the voting securities of
the Company, or such surviving entity, outstanding immediately after such merger
or consolidation), the Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the Administrator determines, in the exercise of
its sole discretion and in lieu of such assumption or substitution, that the
Optionee shall have the right to exercise the Option as to some or all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable. If the Administrator makes an Option exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee that the Option shall be exercisable for
a period of fifteen (15) days from the date of such notice, and the Option will
terminate upon the expiration of such period. For purposes of this Section
14(b), an Option shall be considered assumed, without limitation, if, at the
time of issuance of the stock or other consideration upon such merger or sale of
assets, each Optionee would be entitled to receive upon exercise of an Option
the same number and kind of shares of stock or the same amount of property, cash
or securities as the Optionee would have been entitled to receive upon the
occurrence of such transaction if the Optionee had been, immediately prior to
such transaction, the holder of the number of Shares of Common Stock covered by
the Option at such time (after giving effect to any adjustments in the number of
Shares covered by the Option as provided for in this Section 14).
15. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option or such other date as is determined by the Administrator;
provided however that in the case of any Incentive Stock Option, the grant date
- -------- -------
shall be the later of the date on which the Administrator makes the
determination granting such Incentive Stock Option or the date of commencement
of the Optionee's employment relationship with the Company. Notice of the
-11-
<PAGE>
determination shall be given to each Employee or Consultant to whom an Option is
so granted within a reasonable time after the date of such grant.
16. AMENDMENT AND TERMINATION OF THE PLAN.
-------------------------------------
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval of
the shareholders of the Company in the manner described in Section 20 of the
Plan:
(i) any increase in the number of Shares subject to the Plan,
other than an adjustment under Section 14 of the Plan;
(ii) any change in the designation of the class of persons
eligible to be granted Options; or
(iii) any change in the limitation on grants to employees as
described in Section 8 of the Plan or other changes which would require
shareholder approval to qualify options granted hereunder as performance-based
compensation under Section 162(m) of the Code.
(b) SHAREHOLDER APPROVAL. If any amendment requiring shareholder
--------------------
approval under Section 16(a) of the Plan is made subsequent to the first
registration of any class of equity securities by the Company under Section 12
of the Exchange Act, such shareholder approval shall be solicited as described
in Section 20 of the Plan.
(c) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
17. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
-12-
<PAGE>
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
19. OPTION AGREEMENT. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
20. SHAREHOLDER APPROVAL.
--------------------
(a) Continuance of the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after the date
the Plan is adopted. Such shareholder approval shall be obtained in the manner
and to the degree required under applicable federal and state law and the rules
of any stock exchange upon which the Shares are listed.
(b) In the event that the Company registers any class of equity
securities pursuant to Section 12 of the Exchange Act, any required approval of
the shareholders of the Company obtained after such registration shall be
solicited substantially in accordance with Section 14(a) of the Exchange Act and
the rules and regulations promulgated thereunder.
(c) If any required approval by the shareholders of the Plan itself or
of any amendment thereto is solicited at any time otherwise than in the manner
described in Section 20(b) hereof, then the Company shall, at or prior to the
first annual meeting of shareholders held subsequent to the later of (1) the
first registration of any class of equity securities of the Company under
Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an
officer or director after such registration, do the following:
(i) furnish in writing to the holders entitled to vote for the
Plan substantially the same information that would be required (if proxies to be
voted with respect to approval or disapproval of the Plan or amendment were then
being solicited) by the rules and regulations in effect under Section 14(a) of
the Exchange Act at the time such information is furnished; and
(ii) file with, or mail for filing to, the Securities and
Exchange Commission four copies of the written information referred to in
subsection (i) hereof not later than the date on which such information is first
sent or given to shareholders.
-13-
<PAGE>
EXHIBIT 10.4
PILOT NETWORK SERVICES, INC.
1998 DIRECTORS' STOCK OPTION PLAN
---------------------------------
1. PURPOSES OF THE PLAN. The purposes of this Directors' Stock Option
--------------------
Plan are to attract and retain the best available personnel for service as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. DEFINITIONS. As used herein, the following definitions shall apply:
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean Pilot Network Services, Inc., a California
-------
corporation.
(e) "Continuous Status as a Director" shall mean the absence of any
-------------------------------
interruption or termination of service as a Director.
(f) "Director" shall mean a member of the Board.
--------
(g) "Employee" shall mean any person, including any officer or
--------
director, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(i) "Option" shall mean a stock option granted pursuant to the Plan.
------
All options shall be nonstatutory stock options (i.e., options that are not
intended to qualify as incentive stock options under Section 422 of the Code).
(j) "Optioned Stock" shall mean the Common Stock subject to an Option.
--------------
(k) "Optionee" shall mean an Outside Director who receives an Option.
--------
(l) "Outside Director" shall mean a Director who is not an Employee.
----------------
(m) "Parent" shall mean a "parent corporation," whether now or
------
hereafter existing, as defined in Section 424(e) of the Code.
-1-
<PAGE>
(n) "Plan" shall mean this 1998 Directors' Stock Option Plan.
----
(o) "Share" shall mean a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(p) "Subsidiary" shall mean a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 100,000 Shares (without giving effect to the two-for-one stock
split to be effected upon reincorporation of the Company under the laws of the
state of Delaware) of Common Stock (the "Pool"). The Shares may be authorized,
----
but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. If Shares which were acquired upon exercise of an Option
are subsequently repurchased by the Company, such Shares shall not in any event
be returned to the Plan and shall not become available for future grant under
the Plan.
4. ADMINISTRATION OF AND GRANTS OF OPTIONS UNDER THE PLAN.
------------------------------------------------------
(a) ADMINISTRATOR. Except as otherwise required herein, the Plan
-------------
shall be administered by the Board.
(b) PROCEDURE FOR GRANTS. All grants of Options hereunder shall be
--------------------
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director who is an Outside Director on the
effective date of this Plan shall automatically be granted an Option to purchase
2,500 Shares (without giving effect to the two-for-one stock split to be
effected upon reincorporation of the Company under the laws of the state of
Delaware) on the effective date of this Plan (the "Initial Option").
--------------
(iii) Each Outside Director who becomes an Outside Director after
the effective date of this Plan shall be automatically granted an Option to
purchase 12,500 Shares (without giving effect to the two-for-one stock split to
be effected upon reincorporation of the Company under the laws of the state of
Delaware) (the "First Option") on the date on which such person first becomes an
------------
Outside Director, whether through election by the stockholders of the Company or
appointment by the Board of Directors to fill a vacancy.
(iv) Each Outside Director shall thereafter be automatically
granted an Option to purchase 2,500 Shares (without giving effect to the
two-for-one stock split to be effected
-2-
<PAGE>
upon reincorporation of the Company under the laws of the state of Delaware) (a
"Subsequent Option") on the date of each Annual Meeting of the Company's
-----------------
stockholders immediately following which such Outside Director is serving on the
Board, provided that, on such date, he or she shall have served on the Board for
at least six (6) months prior to the date of such Annual Meeting.
(v) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, in the event that a grant would cause the number of Shares subject
to outstanding Options plus the number of Shares previously purchased upon
exercise of Options to exceed the Pool, then each such automatic grant shall be
for that number of Shares determined by dividing the total number of Shares
remaining available for grant by the number of Outside Directors receiving an
Option on such date on the automatic grant date. Any further grants shall then
be deferred until such time, if any, as additional Shares become available for
grant under the Plan through action of the stockholders to increase the number
of Shares which may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.
(vi) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, any grant of an Option made before the Company has obtained
stockholder approval of the Plan in accordance with Section 17 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 17 hereof.
(vii) The terms of each Initial Option granted hereunder shall
be as follows:
(1) the Initial Option shall be exercisable only which
the Outside Director remains a Directors of the Company, except as set forth in
Section 9 hereof;
(2) the exercise price per Share shall be equal to the
price at which Shares are first sold to the public pursuant to the Company's
registration statement under the Securities Act of 1933, as amended, relating to
the Company's initial public offering of securities; and
(3) the Initial Option shall become exercisable on the
first anniversary of the date of grant of the Initial Option.
(viii) The terms of each First Option granted hereunder shall
be as follows:
(1) the First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 hereof;
(2) the exercise price per Share shall be 100% of the
fair market value per Share on the date of grant of the First Option, determined
in accordance with Section 8 hereof; and
-3-
<PAGE>
(3) the First Option shall become exercisable in
installments cumulatively as to 25% of the Shares subject to the First Option on
each of the first, second, third and fourth anniversaries of the date of grant
of the Option.
(ix) The terms of each Subsequent Option granted hereunder
shall be as follows:
(1) the Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Section 9 hereof;
(2) the exercise price per Share shall be 100% of the
fair market value per Share on the date of grant of the Subsequent Option,
determined in accordance with Section 8 hereof; and
(3) the Subsequent Option shall become exercisable as to
one hundred percent (100%) of the Shares subject to the Subsequent Option on the
first anniversary of the date of grant of the Subsequent Option.
(c) POWERS OF THE BOARD. Subject to the provisions and restrictions
-------------------
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per share of Options to be granted, which exercise price
shall be determined in accordance with Section 8(a) of the Plan; (iii) to
interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan; (v) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) EFFECT OF BOARD'S DECISION. All decisions, determinations and
--------------------------
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) SUSPENSION OR TERMINATION OF OPTION. If the President or his or
-----------------------------------
her designee reasonably believes that an Optionee has committed an act of
misconduct, the President may suspend the Optionee's right to exercise any
option pending a determination by the Board of Directors (excluding the Outside
Director accused of such misconduct). If the Board of Directors (excluding the
Outside Director accused of such misconduct) determines an Optionee has
committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation
owed to the Company, breach of fiduciary duty or deliberate disregard of the
Company rules resulting in loss, damage or injury to the Company, or if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his or her estate shall be
entitled to exercise any option whatsoever. In making such determination, the
Board of Directors (excluding the Outside Director accused of such
-4-
<PAGE>
misconduct) shall act fairly and shall give the Optionee an opportunity to
appear and present evidence on Optionee's behalf at a hearing before the Board
or a committee of the Board.
5. ELIGIBILITY. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) hereof. An Outside Director who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective on the
----------------------------
effectiveness of the registration statement under the Securities Act of 1933, as
amended, relating to the Company's initial public offering of securities. It
shall continue in effect for a term of ten (10) years unless sooner terminated
under Section 13 of the Plan.
7. TERM OF OPTIONS. The term of each Option shall be ten (10) years from
---------------
the date of grant thereof.
8. EXERCISE PRICE AND CONSIDERATION.
--------------------------------
(a) EXERCISE PRICE. The per Share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be 100% of the fair market value
per Share on the date of grant of the Option.
(b) FAIR MARKET VALUE. The fair market value shall be determined by
-----------------
the Board; provided, however, that where there is a public market for the Common
-------- -------
Stock, the fair market value per Share shall be the mean of the bid and asked
prices of the Common Stock in the over-the-counter market on the date of grant,
as reported in The Wall Street Journal (or, if not so reported, as otherwise
-----------------------
reported by the National Association of Securities Dealers Automated Quotation
("Nasdaq") System) or, in the event the Common Stock is traded on the Nasdaq
National Market or listed on a stock exchange, the fair market value per Share
shall be the closing price on such system or exchange on the date of grant of
the Option (or, in the event that the Common Stock is not traded on such date,
on the immediately preceding trading date), as reported in The Wall Street
---------------
Journal. With respect to any Options granted hereunder concurrently with the
- -------
initial effectiveness of the Plan, the fair market value shall be the Price to
Public as set forth in the final prospectus relating to such initial public
offering.
(c) FORM OF CONSIDERATION. The consideration to be paid for the
---------------------
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised (which, if acquired from the Company, shall have been
held for at least six months), or any combination of such methods of payment
and/or
-5-
<PAGE>
any other consideration or method of payment as shall be permitted under
applicable corporate law.
9. EXERCISE OF OPTION.
------------------
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) hereof; provided, however, that no Options shall be exercisable prior to
stockholder approval of the Plan in accordance with Section 17 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a stockholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF STATUS AS A DIRECTOR. If an Outside Director
-----------------------------------
ceases to serve as a Director, he or she may, but only within ninety (90) days
after the date he or she ceases to be a Director of the Company, exercise his or
her Option to the extent that he or she was entitled to exercise it at the date
of such termination. Notwithstanding the foregoing, in no event may the Option
be exercised after its term set forth in Section 7 has expired. To the extent
that such Outside Director was not entitled to exercise an Option at the date of
such termination, or does not exercise such Option (which he or she was entitled
to exercise) within the time specified herein, the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding Section 9(b) above, in
----------------------
the event a Director is unable to continue his or her service as a Director with
the Company as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within six (6) months
(or such other period of time not exceeding twelve (12) months as is determined
by the Board) from the date of such termination, exercise his or her Option to
the extent he or she was entitled to exercise it at the date of such
termination. Notwithstanding the foregoing, in no event may the Option be
exercised after its term set forth in Section 7 has expired. To the extent that
he or she was not entitled to exercise the Option at the date of termination, or
if
-6-
<PAGE>
he or she does not exercise such Option (which he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee:
-----------------
(i) During the term of the Option who is, at the time of his or
her death, a Director of the Company and who shall have been in Continuous
Status as a Director since the date of grant of the Option, the Option may be
exercised, at any time within six (6) months following the date of death, by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
would have accrued had the Optionee continued living and remained in Continuous
Status as Director for six (6) months (or such lesser period of time as is
determined by the Board) after the date of death. Notwithstanding the foregoing,
in no event may the Option be exercised after its term set forth in Section 7
has expired.
(ii) Three (3) months after the termination of Continuous Status
as a Director, the Option may be exercised, at any time within six (6) months
following the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of termination.
Notwithstanding the foregoing, in no event may the option be exercised after its
term set forth in Section 7 has expired.
10. NONTRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
-----------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution or pursuant to a qualified
domestic relations order (as defined by the Code or the rules thereunder). The
designation of a beneficiary by an Optionee does not constitute a transfer. An
Option may be exercised during the lifetime of an Optionee only by the Optionee
or a transferee permitted by this Section.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
------------------------------------------------------------------
(a) ADJUSTMENT. Subject to any required action by the stockholders of
----------
the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of shares of Common Stock set forth in Sections 4(b)(ii),
(iii) and (iv) above, and the number of shares of Common Stock which have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, as well as the price per share of Common Stock covered by each
such outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock (including any such change in the number of shares of Common
Stock effected in connection with a change in domicile of the Company), or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
-------- -------
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no
-7-
<PAGE>
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option.
(b) CORPORATE TRANSACTIONS. In the event of (i) a dissolution or
----------------------
liquidation of the Company, (ii) a sale of all or substantially all of the
Company's assets, or (iii) a merger, consolidation or other capital
reorganization of the Company (other than one in which the holders of more than
fifty percent (50%) of the shares of capital stock of the Company outstanding
immediately prior to such transaction continue to hold (either by the voting
securities remaining outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company, or such surviving entity,
outstanding immediately after such merger or consolidation) (any such
transaction described in (i), (ii) or (iii) referred to herein as a "Corporate
---------
Transaction"), (A) an Optionee shall have the right to exercise his or her
- -----------
Option as to all of the Optioned Stock, including Shares as to which the Option
would not otherwise be exercisable, immediately prior to the consummation of
such of such Corporate Transaction, and (B) the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the successor corporation
does not agree to such assumption or substitution, in which case the Option
shall terminate upon the consummation of such Corporate Transaction. For
purposes of this Section 11(b), an Option shall be considered assumed, without
limitation, if, at the time of issuance of the stock or other consideration upon
such Corporate Transaction, each Optionee would be entitled to receive upon
exercise of an Option the same number and kind of shares of stock or the same
amount of property, cash or securities as the Optionee would have been entitled
to receive upon the occurrence of such transaction if the Optionee had been,
immediately prior to such transaction, the holder of the number of Shares of
Common Stock covered by the Option at such time (after giving effect to any
adjustments in the number of Shares covered by the Option as provided for in
this Section 11).
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
-------------------------------------
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule 16b-3
- -------- ----
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the stockholders of the Company to Plan amendments to
the extent and in the manner required by such law or regulation. Notwithstanding
the foregoing, the provisions set forth in Section 4 of this Plan (and any other
Sections of this Plan that affect the formula award terms required to be
specified in this Plan by Rule 16b-3) shall not be amended more than once every
six months, other than to comport with changes in the Code, the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder.
-8-
<PAGE>
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
----------------------------------
termination of the Plan that would impair the rights of any Optionee shall not
affect Options already granted to such Optionee and such Options shall remain in
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance. As a
condition to the exercise of an Option, the Company may require the person
exercising such Option to represent and warrant at the time of any such exercise
that the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares, if, in the opinion of counsel for
the Company, such a representation is required by any of the aforementioned
relevant provisions of law.
15. RESERVATION OF SHARES. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
16. OPTION AGREEMENT. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
17. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to
--------------------
approval by the stockholders of the Company at or prior to the first annual
meeting of stockholders held subsequent to the granting of an Option hereunder.
If such stockholder approval is obtained at a duly held stockholders' meeting,
it may be obtained by the affirmative vote of the holders of a majority of the
outstanding shares of the Company present or represented and entitled to vote
thereon. If such stockholder approval is obtained by written consent, it may be
obtained by the written consent of the holders of a majority of the outstanding
shares of the Company. Options may be granted, but not exercised, before such
stockholder approval.
-9-
<PAGE>
EXHIBIT 10.5
PILOT NETWORK SERVICES, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
The following constitute the provisions of the 1998 Employee Stock Purchase
Plan of Pilot Network Services, Inc.
1. PURPOSE. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. DEFINITIONS.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean Pilot Network Services, Inc., a California
-------
corporation.
(e) "Compensation" shall mean all regular straight time gross earnings
------------
and commissions, and shall not include payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Continuous Status as an Employee" shall mean the absence of any
--------------------------------
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
agreed to in writing by the Company, provided that such leave is for a period of
--------
not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
(g) "Contributions" shall mean all amounts credited to the account of
-------------
a participant pursuant to the Plan.
(h) "Designated Subsidiaries" shall mean the Subsidiaries which have
-----------------------
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(i) "Employee" shall mean any person, including an Officer, who is
--------
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
<PAGE>
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(k) "Purchase Date" shall mean the last day of each Purchase Period of
-------------
the Plan.
(l) "Offering Date" shall mean the first business day of each Offering
-------------
Period of the Plan.
(m) "Offering Period" shall mean a period of twelve (12) months
---------------
commencing on January 1 and July 1 of each year, except for the first Offering
Period as set forth in Section 4(a).
(n) "Officer" shall mean a person who is an officer of the Company
-------
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(o) "Plan" shall mean this Employee Stock Purchase Plan.
----
(p) "Purchase Period" shall mean a period of six (6) months within an
---------------
Offering Period, except for the first Purchase Period as set forth in Section
4(b).
(q) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value (as defined in Section 7(b) below) of a Share of Common Stock on
the Offering Date or on the Purchase Date, whichever is lower; provided,
however, that in the event (i) the Company's stockholders approve an increase in
the number of Shares available for issuance under the Plan, and (ii) all or a
portion of such additional Shares are to be issued with respect to one or more
Offering Periods that are underway at the time of such stockholder approval
("Additional Shares"), and (iii) the Fair Market Value of a Share of Common
- -------------------
Stock on the date of such approval (the "Approval Date Fair Market Value") is
-------------------------------
higher than the Fair Market Value on the Offering Date for any such Offering
Period, then in such instance the Purchase Price with respect to Additional
Shares shall be 85% of the Approval Date Fair Market Value or the Fair Market
Value of a Share of Common Stock on the Purchase Date, whichever is lower.
(r) "Share" shall mean a share of Common Stock, as adjusted in
-----
accordance with Section 19 of the Plan.
(s) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
3. ELIGIBILITY.
-----------
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code;
-2-
<PAGE>
provided, however, that eligible Employees may not participate in more than one
Offering Period at a time.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own stock and/or
hold outstanding options to purchase stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Company or of any subsidiary of the Company, or (ii) if such option would permit
his or her rights to purchase stock under all employee stock purchase plans
(described in Section 423 of the Code) of the Company and its Subsidiaries to
accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of the
Fair Market Value (as defined in Section 7(b) below) of such stock (determined
at the time such option is granted) for each calendar year in which such option
is outstanding at any time.
4. OFFERING PERIODS AND PURCHASE PERIODS.
-------------------------------------
(a) OFFERING PERIODS. The Plan shall be implemented by a series of
----------------
Offering Periods of twenty-four (24) months duration, with new Offering Periods
commencing on or about May 1 and November 1 of each year (or at such other time
or times as may be determined by the Board of Directors). The first Offering
Period shall commence on the beginning of the effective date of the Registration
Statement on Form S-1 for the initial public offering of the Company's Common
Stock (the "IPO Date") and continue until October 31, 2000. The Plan shall
--------
continue until terminated in accordance with Section 19 hereof. The Board of
Directors of the Company shall have the power to change the duration and/or the
frequency of Offering Periods with respect to future offerings without
stockholder approval if such change is announced at least fifteen (15) days
prior to the scheduled beginning of the first Offering Period to be affected.
(b) PURCHASE PERIODS. Each Offering Period shall consist of four (4)
----------------
consecutive purchase periods of six (6) months duration. The last day of each
Purchase Period shall be the "Purchase Date" for such Purchase Period. A
-------------
Purchase Period commencing on May 1 shall end on April 30 two years later. A
Purchase Period commencing on November 1 shall end on October 31 two years
later. The first Purchase Period shall commence on the IPO Date and shall end
on April 30, 1999. The Board of Directors of the Company shall have the power
to change the duration and/or frequency of Purchase Periods with respect to
future purchases without stockholder approval if such change is announced at
least fifteen (15) days prior to the scheduled beginning of the first Purchase
Period to be affected.
5. PARTICIPATION.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's payroll office prior to the applicable Offering
Date, unless a later time for filing the subscription agreement is set by the
Board for all eligible Employees with respect to a given offering. The
subscription agreement shall set forth the percentage of the participant's
Compensation (which
-3-
<PAGE>
shall be not less than 1% and not more than 20%) to be paid as Contributions
pursuant to the Plan.
(b) Payroll deductions shall commence on the first payroll following
the Offering Date and shall end on the last payroll paid on or prior to the last
Purchase Period of the Offering Period to which the subscription agreement is
applicable, unless sooner terminated by the participant as provided in Section
10.
6. METHOD OF PAYMENT OF CONTRIBUTIONS.
----------------------------------
(a) The participant shall elect to have payroll deductions made on
each payday during the Offering Period in an amount not less than one percent
(1%) and not more than ten percent (10%) (or such greater percentage as the
Board may establish from time to time before an Offering Date, which percentage
shall not exceed twenty percent (20%)) of such participant's Compensation on
each such payday; provided however that the Board shall have the authority to
increase the maximum percentage which participants may have deducted from their
Compensation to an amount not in excess of twenty percent (20%) of a
participant's Compensation on each such payday. All payroll deductions made by a
participant shall be credited to his or her account under the Plan. A
participant may not make any additional payments into such account.
(b) A participant may discontinue his or her participation in the Plan
as provided in Section 10, or, on one occasion only during the Offering Period,
may decrease the rate of his or her Contributions during the Offering Period by
completing and filing with the Company a new subscription agreement. The change
in rate shall be effective as of the beginning of the next calendar month
following the date of filing of the new subscription agreement, if the agreement
is filed at least ten (10) business days prior to such date and, if not, as of
the beginning of the next succeeding calendar month.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased to 0% at such time during any Offering
Period which is scheduled to end during the current calendar year that the
aggregate of all payroll deductions accumulated with respect to such Offering
Period and any other Offering Period ending within the same calendar year equal
$21,250. Payroll deductions shall re-commence at the rate provided in such
participant's subscription Agreement at the beginning of the first Offering
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10.
7. GRANT OF OPTION.
---------------
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase Date a number of Shares of the Company's Common Stock
determined by dividing such Employee's Contributions accumulated prior to such
Purchase Date and retained in the participant's account as of the Purchase Date
by the applicable Purchase Price; provided, however, that the maximum number of
Shares an Employee may purchase during each Offering
-4-
<PAGE>
Period shall be 1,000 Shares (without giving effect to the two-for-one stock
split to be effected upon reincorporation of the Company under the laws of the
state of Delaware), and provided further that such purchase shall be subject to
the limitations set forth in Sections 3(b) and 13.
(b) The fair market value of the Company's Common Stock on a given
date (the "Fair Market Value") shall be determined by the Board in its
-----------------
discretion based on the closing price of the Common Stock for such date (or, in
the event that the Common Stock is not traded on such date, on the immediately
preceding trading date), as reported by the National Association of Securities
Dealers Automated Quotation (Nasdaq) National Market or, if such price is not
reported, the mean of the bid and asked prices per share of the Common Stock as
reported by Nasdaq or, in the event the Common Stock is listed on a stock
exchange, the Fair Market Value per share shall be the closing price on such
exchange on such date (or, in the event that the Common Stock is not traded on
such date, on the immediately preceding trading date), as reported in The Wall
--------
Street Journal. For purposes of the Offering Date under the first Offering
- --------------
Period under the Plan, the Fair Market Value of a share of the Common Stock of
the Company shall be the Price to Public as set forth in the final prospectus
filed with the Securities and Exchange Commission pursuant to Rule 424 under the
Securities Act of 1933, as amended.
8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan as
------------------
provided in paragraph 10, his or her option for the purchase of Shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of full Shares subject to the option will be purchased at the
applicable Purchase Price with the accumulated Contributions in his or her
account. The Shares purchased upon exercise of an option hereunder shall be
deemed to be transferred to the participant on the Purchase Date. During his or
her lifetime, a participant's option to purchase Shares hereunder is exercisable
only by him or her.
9. DELIVERY. As promptly as practicable after each Purchase Date of each
--------
Offering Period, the Company shall arrange the delivery to each participant, as
appropriate, of a certificate representing the Shares purchased upon exercise of
his or her option. Any cash remaining to the credit of a participant's account
under the Plan after a purchase by him or her of Shares at the termination of
each Purchase Period, or which is insufficient to purchase a full Share, shall
be carried over to the next Purchase Period if the Employee continues to
participate in the Plan, or if the Employee does not continue to participate,
shall be returned to said participant.
10. VOLUNTARY WITHDRAWAL; TERMINATION OF EMPLOYMENT.
-----------------------------------------------
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
each Purchase Date by giving written notice to the Company. All of the
participant's Contributions credited to his or her account will be paid to him
or her promptly after receipt of his or her notice of withdrawal and his or her
option for the current period will be automatically terminated, and no further
Contributions for the purchase of Shares will be made during the Offering
Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of
-5-
<PAGE>
his or her death, to the person or persons entitled thereto under Section 14,
and his or her option will be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
11. AUTOMATIC WITHDRAWAL. If the Fair Market Value of the Shares on the
--------------------
first Purchase Date of an Offering Period is less than the Fair Market Value of
the Shares on the Offering Date for such Offering Period, then every participant
shall automatically (i) be withdrawn from such Offering Period at the close of
such Purchase Date and after the acquisition of Shares for such Purchase Period,
and (ii) be enrolled in the Offering Period commencing on the first business day
subsequent to such Purchase Period.
12. INTEREST. No interest shall accrue on the Contributions of a
--------
participant in the Plan.
13. STOCK.
-----
(a) The maximum number of Shares which shall be made available for
sale under the Plan shall be 100,000 Shares (without giving effect to the two-
for-one stock split to be effected upon reincorporation of the Company under the
laws of the state of Delaware), plus an annual increase on the first day of each
of the Company's fiscal years in 1999, 2000, 2001, 2002 and 2003 equal to the
lesser of (i) 50,000 Shares (without giving effect to the two-for-one stock
split to be effected upon reincorporation of the Company under the laws of the
state of Delaware), (ii) one-half of one percent (1/2%) of the Shares
outstanding on the last day of the immediately preceding fiscal year, or (iii)
such lesser number of Shares as is determined by the Board, subject to
adjustment upon changes in capitalization of the Company as provided in Section
19. If the total number of Shares which would otherwise be subject to options
granted pursuant to Section 7(a) on the Offering Date of an Offering Period
exceeds the number of Shares then available under the Plan (after deduction of
all Shares for which options have been exercised or are then outstanding), the
Company shall make a pro rata allocation of the Shares remaining available for
option grant in as uniform a manner as shall be practicable and as it shall
determine to be equitable. In such event, the Company shall give written notice
of such reduction of the number of Shares subject to the option to each Employee
affected thereby and shall similarly reduce the rate of Contributions, if
necessary.
(b) The participant shall have no interest or voting right in Shares
covered by his or her option until such option has been exercised.
-6-
<PAGE>
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. ADMINISTRATION. The Board, or a committee named by the Board, shall
--------------
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan. The composition of the committee shall be in accordance with the
requirements to obtain or retain any available exemption from the operation of
Section 16(b) of the Exchange Act pursuant to Rule 16b-3 promulgated thereunder.
15. DESIGNATION OF BENEFICIARY.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any Shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of a
Purchase Period but prior to delivery to him or her of such Shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Purchase Date of an Offering Period.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
(and his or her spouse, if any) at any time by written notice. In the event of
the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such Shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its discretion, may deliver such Shares and/or cash to the spouse or to any
one or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as the
Company may designate.
16. TRANSFERABILITY. Neither Contributions credited to a participant's
---------------
account nor any rights with regard to the exercise of an option or to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 15) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 10.
17. USE OF FUNDS. All Contributions received or held by the Company under
------------
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
18. REPORTS. Individual accounts will be maintained for each participant
-------
in the Plan. Statements of account will be given to participating Employees
promptly following the Purchase
-7-
<PAGE>
Date, which statements will set forth the amounts of Contributions, the per
share purchase price, the number of Shares purchased and the remaining cash
balance, if any.
19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
------------------------------------------------------------------
(a) ADJUSTMENT. Subject to any required action by the stockholders of
----------
the Company, the number of Shares covered by each option under the Plan which
has not yet been exercised and the number of Shares which have been authorized
for issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), as well as the maximum number of shares of
--------
Common Stock which may be purchased by a participant in an Offering Period, the
number of shares of Common Stock set forth in Section 13(a)(i) above, and the
price per Share of Common Stock covered by each option under the Plan which has
not yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common Stock
(including any such change in the number of shares of Common Stock effected in
connection with a change in domicile of the Company), or any other increase or
decrease in the number of Shares effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an option.
(b) CORPORATE TRANSACTIONS. In the event of the proposed dissolution
----------------------
or liquidation of the Company, the Offering Period will terminate immediately
prior to the consummation of such proposed action, unless otherwise provided by
the Board. In the event of (i) a proposed sale of all or substantially all of
the assets of the Company, or (ii) a merger, consolidation or other capital
reorganization of the Company (other than one in which the holders of more than
fifty percent (50%) of the shares of capital stock of the Company outstanding
immediately prior to such transaction continue to hold (either by the voting
securities remaining outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company, or such surviving entity,
outstanding immediately after such merger or consolidation), each option under
the Plan shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the Board determines, in the exercise of its sole discretion and in lieu
of such assumption or substitution, to shorten the Offering Period then in
progress by setting a new Purchase Date (the "New Purchase Date"). If the Board
-----------------
shortens the Offering Period then in progress in lieu of assumption or
substitution in the event of a merger or sale of assets, the Board shall notify
each participant in writing, at least ten (10) days prior to the New Purchase
Date, that the Purchase Date for his or her option has been changed to the New
Purchase Date and that his or her option will be exercised automatically on the
New Purchase Date, unless prior to such date he or she has withdrawn from the
Offering Period as provided in Section 10. For purposes of this paragraph, an
option granted under the Plan shall be deemed to be assumed if, following the
sale of assets or
-8-
<PAGE>
merger, the option confers the right to purchase, for each share of option stock
subject to the option immediately prior to the sale of assets or merger, the
consideration (whether stock, cash or other securities or property) received in
the sale of assets or merger by holders of Common Stock for each Share of Common
Stock held on the effective date of the transaction (and if such holders were
offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares of Common Stock); provided,
--------
however, that if such consideration received in the sale of assets or merger was
- -------
not solely common stock of the successor corporation or its parent (as defined
in Section 424(e) of the Code), the Board may, with the consent of the successor
corporation and the participant, provide for the consideration to be received
upon exercise of the option to be solely common stock of the successor
corporation or its parent equal in Fair Market Value to the per Share
consideration received by holders of Common Stock in the sale of assets, merger,
consolidation or other reorganization.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per Share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of Shares of its outstanding Common Stock, and
in the event of the Company being consolidated with or merged into any other
corporation.
20. AMENDMENT OR TERMINATION.
------------------------
(a) The Board may at any time terminate or amend the Plan. Except as
provided in Section 19, no such termination may affect options previously
granted, provided that an Offering Period may be terminated by the Board on a
Purchase Date if the Board determines that the termination of the Plan is in the
best interests of the Company and the stockholders or if continuation of an
Offering Period would cause the Company to incur adverse accounting charges
resulting from a change in the generally accepted accounting rules applicable to
such plan. Except as provided in Section 19, no amendment shall make any change
in any option theretofore granted which adversely affects the rights of any
participant. In addition, to the extent necessary to comply with Rule 16b-3
under the Exchange Act, or under Section 423 of the Code (or any successor rule
or provision or any applicable law or regulation), the Company shall obtain
stockholder approval in such a manner and to such a degree as so required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods and Purchase
Periods, limit the frequency and/or number of changes in the amount withheld
during an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
-9-
<PAGE>
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
21. NOTICES. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective upon
----------------------------
the IPO Date. It shall continue in effect for a term of twenty (20) years
unless sooner terminated under Section 20.
24. ADDITIONAL RESTRICTIONS OF RULE 16B-3. The terms and conditions of
-------------------------------------
options granted hereunder to, and the purchase of Shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the Shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
-10-
<PAGE>
PILOT NETWORK SERVICES, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
----------------------
NEW ELECTION ______
CHANGE OF ELECTION ______
1. I, ________________________, hereby elect to participate in the Pilot
Network Services, Inc. 1998 Employee Stock Purchase Plan (the "Plan") for the
----
Offering Period ______________, ____ to _______________, ____, and subscribe to
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 20% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can decrease the rate of my Contributions on one occasion only
during any Offering Period by completing and filing a new Subscription Agreement
with such decrease taking effect as of the beginning of the calendar month
following the date of filing of the new Subscription Agreement, if filed at
least ten (10) business days prior to the beginning of such month. Further, I
may change the rate of deductions for future Offering Periods by filing a new
Subscription Agreement, and any such change will be effective as of the
beginning of the next Offering Period. In addition, I acknowledge that, unless
I discontinue my participation in the Plan as provided in Section 10 of the
Plan, my election will continue to be effective for each successive Offering
Period.
<PAGE>
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "Pilot Network Services, Inc. 1998 Employee
Stock Purchase Plan." I understand that my participation in the Plan is in all
respects subject to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only):
____________________________________
____________________________________
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) ____________________________________
(First) (Middle) (Last)
_____________________ ____________________________________
(Relationship) (Address)
____________________________________
8. I understand that if I dispose of any shares received by me pursuant
to the Plan within 2 years after the Offering Date (the first day of the
Offering Period during which I purchased such shares) or within 1 year after the
Purchase Date, I will be treated for federal income tax purposes as having
received ordinary compensation income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares on the
Purchase Date over the price which I paid for the shares, regardless of whether
I disposed of the shares at a price less than their fair market value at the
Purchase Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days after the
------------------------------------------------------------------------
date of any such disposition, and I will make adequate provision for federal,
- -----------------------------------------------------------------------------
state or other tax withholding obligations, if any, which arise upon the
- ------------------------------------------------------------------------
disposition of the Common Stock. The Company may, but will not be obligated to,
- -------------------------------
withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares under the option, or (2) 15% of the fair market value of the
-2-
<PAGE>
shares on the Offering Date. The remainder of the gain or loss, if any,
recognized on such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
----------------------------------------------------------------------
change. I further understand that I should consult a tax advisor concerning the
- ------
tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The effectiveness
of this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
SIGNATURE: ___________________________
SOCIAL SECURITY #: ___________________
DATE: ________________________________
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
______________________________________
(Signature)
______________________________________
(Print name)
-3-
<PAGE>
PILOT NETWORK SERVICES, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
--------------------
I, __________________________, hereby elect to withdraw my participation in
the Pilot Network Services, Inc. 1998 Employee Stock Purchase Plan (the "Plan")
----
for the Offering Period _________. This withdrawal covers all Contributions
credited to my account and is effective on the date designated below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated:___________________ __________________________________________
Signature of Employee
__________________________________________
Social Security Number
<PAGE>
EXHIBIT 10.6
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
This Amended and Restated Investors' Rights Agreement (this "AGREEMENT") is
made and entered into as of March 31, 1997 by and among Pilot Network Services,
Inc., a California corporation (the "COMPANY"), M. Marketta Silvera ("SILVERA")
and the investors listed on Schedule 1 attached hereto (referred to herein
----------
individually as an "INVESTOR" and collectively as the "INVESTORS").
RECITALS
A. The Company and certain of its shareholders entered into an Investors'
Rights Agreement ("EXISTING RIGHTS AGREEMENT") dated July 18, 1996 pursuant to
which the Company granted certain registration rights to such shareholders.
B. The Company and a certain Investor (the "SERIES F INVESTOR") propose to
enter into a Series F Stock and Warrant Purchase Agreement dated as of the date
hereof (the "SERIES F PURCHASE AGREEMENT") pursuant to which such Investor has
agreed to purchase shares of Series F Preferred Stock (the "SERIES F SHARES")
and a warrant for the purchase of Series F Preferred Stock (the "SERIES F
WARRANT") from the Company.
C. The execution and delivery of this Agreement by the Company and such
Investor are conditions to the purchase of the Series F Shares by the Series F
Investor. Accordingly, the Company and the Investors deem it necessary and
advisable and in their best interests, and the Company also deems it in the best
interests of the shareholders of the Company, to amend and restate the Existing
Rights Agreement and grant the Series F Investor the registration rights
provided herein, subject to execution of this Agreement by the Investors.
D. As a material inducement and consideration to each Series F Investor to
enter into the Series F Purchase Agreement and to perform its obligations
thereunder, the Company and the other Investors have agreed to enter into,
execute and deliver this Agreement on the terms and subject to the conditions
set forth below.
AGREEMENT
NOW, THEREFORE, on the basis of the preceding facts, and as a material
inducement and consideration to the Series F Investor to enter into the Series F
Purchase Agreement and to perform its obligations thereunder, and in
consideration of mutual covenants set forth below, the parties to this Agreement
agree as follows:
1. Registration Rights.
-------------------
1.1 Definitions. For the purposes of this Agreement, the following words
-----------
shall have the meanings set forth below:
<PAGE>
(a) "Commission" means the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
(b) "Common Stock" means the Company's Stock.
(c) "Company's Notice" shall have the meaning set forth in Section 1.2
hereof.
(d) "Initiating Holders" means the holders of Registrable Stock
initially requesting registration of Registrable Stock pursuant to Section 1.2
of this Agreement.
(e) "Investor Notice" shall have the meaning forth in Section 1.4
hereof.
(f) "Long-Form Registration Statement" means a registration statement
on Form S-1 or Form S-2 or any similar form of registration statement adopted by
the Commission from and after the date hereof.
(g) "Prospective Sellers" shall have the meaning set forth in Section
1.7(a)(ii) hereof.
(h) "Series F Purchase Agreement" shall have the meaning set forth in
Recital B to this Agreement.
(i) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and the subsequent declaration or ordering of
the effectiveness of such registration statement or document.
(j) "Registrable Stock" means (i) any Common Stock issued or issuable
upon conversion of the Series A, Series B, Series C, Series D, Series E or
Series F Preferred Stock held by the Investors, and the Series B Preferred Stock
and the Series F Preferred Stock, if any, issued upon exercise of any warrants
held by the Investors (the "CONVERSION SHARES"); (ii) any Common Stock held by
Silvera (the "FOUNDERS SHARES"); (iii) any Common Stock issued or issuable with
respect to the Conversion Shares or Founders Shares by reason of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization; (iv) any other
shares of Common Stock now held or hereafter acquired by persons holding the
securities described in clauses (i) and (ii) above; (v) any Common Stock issued
or issuable upon the conversion of the Series D Preferred Stock held by the
Warrant Holders, and the Series D Preferred Stock, if any, issued upon exercise
of any Warrants held by the Warrant Holders (provided that the securities
described in this subsection (v) shall be considered "Registrable Stock" only
with respect to Sections 1.4, 1.5, 1.7, 1.8, 1.9, 1.12, 1.13, 1.14, 1.15 and
1.16 hereof); and (vi) any Common Stock issued or issuable upon the conversion
of the Series D Preferred Stock held by Glen McLaughlin, and the Series D
Preferred Stock, if any, issued upon exercise of any warrants held by Glen
McLaughlin; provided, however, that Common Stock or other securities shall only
be treated as Registrable Securities if and so long as they have not been (A)
sold to or through a broker or dealer or underwriter in a
-2-
<PAGE>
public distribution or a public securities transaction or (B) sold in
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act under Section 4(1) thereof so that all transfer restrictions,
and restrictive legends with respect thereto, if any, are removed upon
consummation of such sale. For purposes of Section 1.2(a) and Section 3.8,
Registrable Securities shall not include the Founder's Shares. A person shall be
deemed to be a holder of Registrable Stock when such person has a right to
acquire such Registrable Stock (by conversion or otherwise) regardless of
whether such acquisition has actually been effected.
Subject to the assignment provisions contained in Section 1.15, each
share of Registrable Stock shall continue to be Registrable Stock in the hands
of each subsequent holder thereof; provided that each share of Registrable Stock
shall cease to be Registrable Stock when transferred to any person who is not
affiliated with a holder in accordance with a registered public offering or in
accordance with Rule 144 promulgated by the Commission under the Securities Act.
For the purposes of this Agreement, the officers, directors and shareholders, in
the case of a corporation, and the partners, in the case of a partnership, of a
holder, without limitation, shall be deemed to be affiliated with such holder.
(k) "Requesting Holders" shall have the meaning set forth in Section
1.2 hereof.
(l) "Securities Act" means the Securities Act of 1933, as amended.
(m) "Series F Shares" shall have the meaning set forth in Recital B to
this Agreement.
(n) "Series F Warrant" shall have the meaning set forth in Recital B
to this Agreement.
(o) "Short-Form Registration Statement" means a registration statement
on Form S-3 or any similar form of registration statement adopted by the
Commission from and after the date hereof.
(p) "Warrant Holders" shall mean MMC/GATX Partnership No. 1 and
Phoenix Leasing Incorporated. Each Warrant Holder shall be admitted to this
Agreement as an "Investor," but only to the extent necessary for the exercise of
their rights as holder of Registrable Stock.
1.2 Required Registrations.
----------------------
(a) Demand Registration. If, at any time after the earlier to occur
-------------------
of March 15, 1999 or the date that is six (6) months after the effective date of
the first registration statement filed by the Company covering an offering of
the Company's securities (other than a registration relating either to the sale
of securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or a Rule 145 transaction, or a registration on any
form which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of
Registrable Stock), holders of at least
-3-
<PAGE>
twenty five percent (25%) of the Registrable Stock then outstanding propose to
dispose of, pursuant to a Long-Form Registration Statement, at least twenty five
percent (25%) of the Registrable Stock then outstanding, then such holders may
request the Company in writing to effect such registration, stating the form of
registration statement under the Securities Act to be used, the number of shares
of Registrable Stock to be disposed of and the intended method of disposition of
such shares.
(b) Short-Form Registration. If at any time at which the Company is
-----------------------
entitled to file a registration statement on a Short-Form Registration
Statement, holders of at least twenty percent (20%) of the Registrable Stock,
excluding Founders Shares, then outstanding propose to dispose of Stock pursuant
to a Short-Form Registration Statement, then such holders may request the
Company in writing to effect such registration, stating the form of registration
statement under the Securities Act to be used, the number of shares of
Registrable Stock to be disposed of and the intended method of disposition of
such shares; provided that, if the Company has, within the twelve (12) month
period preceding the date of such request, already effected one registration via
a Short-Form Registration Statement pursuant to this Section 1.2(b), then the
Company shall not be obligated to effect any such registration until at least
twelve (12) months have expired from the effective date of the last Short-Form
Registration Statement, and; provided, further, however, that the Company shall
not be obligated to effect any such registration pursuant to this Section 1.2(b)
if the holders propose to sell Registrable Stock at an aggregate price to the
public (net of any underwriters' discounts or commissions) of less than $500,000
or in any particular jurisdiction in which the Company would be required to
qualify to do business or to execute a general consent to service or process in
effecting such registration, qualification or compliance.
(c) Upon receipt of the request of the Initiating Holders pursuant to
Section 1.2(a) or 1.2(b) above, the Company shall give prompt written notice
thereof to all other holders of Registrable Stock. Subject to the provisions of
Section 1.3 below, the Company shall use its best efforts promptly to effect the
registration under the Securities Act of all shares of Registrable Stock
specified in the requests of the Initiating Holders and the requests (stating
the number of shares of Registrable Stock to be disposed of and the intended
method of disposition of such shares) of other holders of shares of Registrable
Stock ("REQUESTING HOLDERS") given within 15 days after receipt of such notice
from the Company.
1.3 Limitations on Required Registrations.
-------------------------------------
(a) The Company shall not be required to prepare and file more than
two (2) Long-Form Registration Statements, which actually become or are declared
effective, at the request of holders of Registrable Stock pursuant to Section
1.2(a) hereof. The foregoing, however, shall not limit the Company's obligation
from time to time to prepare and file up to one (1) Short-Form Registration
Statement each twelve (12) months if requested by holders of Registrable Stock
pursuant to Section 1.2(b) hereof.
(b) Only Common Stock may be included in a registration, and, whenever
a registration requested by the holders of Registrable Stock is for a firmly
under written offering, if the underwriters determine, in their sole discretion,
that the number of shares of Common Stock
-4-
<PAGE>
so included which are to be sold by the holders of Registrable Stock is limited
due to market conditions, the holders (including both the Initiating Holders and
the Requesting Holders) of Registrable Stock proposing to sell their shares in
such underwriting and registration shall share pro rata in the available portion
of the registration in question, such sharing to be based upon the number of
shares of Registrable Stock then held by such holders, respectively. The
underwriters may reduce the number of shares of Registrable Securities to be
included in the initial public offering of the Company's Common Stock at their
sole discretion; provided that, the number of shares of Registrable Securities
requesting inclusion in any post-initial public offering registration actually
registered in such offering shall not be reduced below thirty percent (30%) of
the requesting shares without the consent of a majority of the Initiating
Holders and the Requesting Holders. If any holder of Registrable Stock
disapproves of the terms of the underwriting, such holder may elect to withdraw
therefrom by written notice to the Company, the underwriter and the Initiating
Holders. The Registrable Stock so withdrawn shall also be withdrawn from
registration; provided, however, that, except with respect to Company-initiated
registration statements, if by the withdrawal of such Registrable Stock a
greater number of shares of Registrable Stock held by other holders of
Registrable Stock may be included in such registration (up to the maximum of any
limitation imposed by the underwriters), then the Company shall offer to all
holders of Registrable Stock who have included Registrable Stock in the
registration the right to include additional Registrable Stock in the same
proportion used in determining the limitation imposed by the provisions of this
Section 1.3(b). The right of a holder of Registrable Stock to participate in an
underwritten offering shall be conditioned upon such holder accepting the terms
of the underwriting and entering into an underwriting agreement in customary
form with the underwriter(s) selected for such underwriting by the Company
(c) The Company shall not be required to prepare and file a
registration statement pursuant to Section 1.2 hereof which would become
effective within 180 days following the effective date of a registration
statement filed by the Company with the Commission pertaining to an underwritten
public offering of securities for cash for the account of the Company or if the
Initiating Holders' request for registration is received by the Company
subsequent to such time as the Company in good faith gives written notice to the
holders of Registrable Stock that the Company is commencing to prepare a
Company-initiated registration statement and the Company is actively employing
in good faith all reasonable efforts to cause such registration statement to
become effective.
(d) Notwithstanding the foregoing, if the Company shall furnish to the
Initiating and Requesting Holders a certificate signed by the President of the
Company stating that in the good faith judgment of the Board of Directors of the
Company, it would be detrimental to the Company and its shareholders for such
registration statement to be filed and it is therefore essential to defer the
filing of such registration statement, the Company shall have the right to defer
such filing for a period of not more than 120 days after receipt of the request
of the Initiating Holders; provided, however, that the Company may not utilize
this right more than once in any 12-month period.
1.4 Incidental Registration. If the Company at any time proposes to
-----------------------
register any of its securities for sale for its own account or for the account
of any other person (other than a
-5-
<PAGE>
registration relating either to the sale of securities to employees of the
Company pursuant to a stock option, stock purchase or similar plan or a Rule 145
transaction, or a registration on any form which does not include substantially
the same information as would be required to be included in a registration
statement covering the sale of Registrable Stock), it shall each such time give
written notice (the "COMPANY'S NOTICE"), at its expense, to all holders of
Registrable Stock of its intention to do so at least 30 days prior to the filing
of a registration statement with respect to such registration with the
Commission. If any holder of Registrable Stock desires to dispose of all or part
of such stock, it may request registration thereof in connection with the
Company's registration by delivering to the Company, within thirty (30) days
after receipt of the Company's Notice, written notice of such request (the
"PIGGYBACK NOTICE") stating the number of shares of Registrable Stock to be
disposed of and the intended method of disposition of such shares by such holder
or holders. The Company shall use its best efforts to cause all shares of
Registrable Stock specified in the Piggyback Notice to be registered under the
Securities Act so as to permit the sale or other disposition (in accordance with
the intended methods thereof as aforesaid) by such holder or holders of the
shares so registered, subject, however, to the limitations set forth in Section
1.5 hereof.
1.5 Limitations on Incidental Registration.
--------------------------------------
(a) If the registration of which the Company gives notice pursuant to
Section 1.4 above is for the purpose of permitting a disposition of securities
by the Company pursuant to a firm commitment underwritten offering, the notice
shall so state, and the Company shall have the right to limit the aggregate size
of the offering or the number of shares to be included therein by shareholders
of the Company if requested to do so in good faith by the managing underwriter
of the offering and only securities which are to be included in the underwriting
may be included in the registration.
(b) Whenever the number of shares which may be registered pursuant to
Section 1.4 is limited by the provisions of Section 1.5(a) above, the Company
shall have priority as to sales over the holders of Registrable Stock and each
holder hereby agrees that it shall withdraw its securities from such
registration to the extent necessary to allow the Company to include all the
shares which the Company desires to sell for its own account to be included
within such registration; provided that, except with respect to the first Long-
Form Registration Statement effected by the Company on its own initiative, in no
event shall the Registrable Stock requested to be included pursuant to Section
1.4 above be reduced below thirty percent (30%) of the total amount of
securities included in such offering. The holders of Registrable Stock given
rights by Section 1.4 above shall share pro rata (as a single class) in the
available portion of the registration in question, such sharing to be based upon
the number of shares of such stock then held by each of such holders,
respectively.
1.6 Designation of Underwriter. In the case of any registration initiated
--------------------------
by the holders of Registrable Stock pursuant to the provisions of Section 1.2
hereof which is proposed to be effected pursuant to a firm commitment
underwriting, the Company shall have the right to designate the managing
underwriter, and all holders of Registrable Stock participating in the
registration shall sell their shares only pursuant to such underwriting;
provided, however, that so
- -------- -------
-6-
<PAGE>
long as the Trustees of the General Electric Pension Fund (the "GE FUND") shall
hold any Registrable Stock and GE Fund sells Registrable Stock pursuant to a
registration under Section 1.2 or 1.4 hereof, if the General Electric Company
has a 5% or more interest, direct or indirect, in an underwriter participating
in such registration, GE Fund shall have the right to approve or disapprove the
participation of such underwriter in such registration.
1.7 Registration Procedures.
-----------------------
(a) If and when the Company is required by the provisions of this
Agreement to use its best efforts to effect the registration of shares of
Registrable Stock the Company shall:
(i) prepare and file with the Commission a registration statement
with respect to such shares and use its best efforts to cause such registration
statement to become and remain effective for up to 120 days as provided herein;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectuses used in
connection therewith as may be necessary to keep such registration statement
effective and current for up to 120 days and to comply with the provisions of
the Securities Act with respect to the sale or other disposition of all shares
covered by such registration statement, including such amendments and
supplements as may be necessary to reflect the intended method of disposition
from time to time of the holder or holders of such shares who have requested
that any of their shares be sold or otherwise disposed of in connection with the
registration (the "PROSPECTIVE SELLERS");
(iii) furnish to each Prospective Seller such number of copies of
each prospectus, including preliminary prospectuses, in conformity with the
requirements of the Securities Act, and such other documents, as the Prospective
Seller may reasonably request in order to facilitate the public sale or other
disposition of the shares owned by it;
(iv) use its best efforts to register or qualify the shares
covered by such registration statement under such other securities or blue sky
or other applicable laws of such jurisdictions as each Prospective Seller shall
reasonably request to enable such seller to consummate the public sale or other
disposition of the shares owned by such seller; provided that, the Company shall
not be required in connection therewith or as a election thereto to qualify to
do business or to file a general consent to service of process in any such
jurisdiction.
(v) upon written request, furnish to each Prospective Seller a
signed counterpart, addressed to the Prospective Sellers and their underwriters,
if any, of: (A) an opinion of counsel for the Company, dated the effective date
of the registration statement; and (B) a "comfort" letter signed by the
independent public accountants who have certified the Company's financial
statements included in the registration statement; covering substantially the
same matters with respect to the registration statement (and the prospectus
included therein) and (in the case of the accountants' letter) with respect to
the events subsequent to the date of the financial statements, as are
customarily covered (at the time of such registration) in the opinions of
issuers' counsel and in accountants' letters delivered to the underwriters in
connection with underwritten public offerings of securities;
-7-
<PAGE>
(vi) cause all such shares to be listed on each securities
exchange on which similar securities issued by the Company are then listed;
(vii) provide a transfer agent and registrar for all such shares
not later than the effective date of such registration statement;
(viii) perform its obligation under an underwriting agreement and
take all such other customary actions as the holders of a majority of the shares
being sold reasonably request in order to expedite or facilitate the disposition
of such shares; and
(ix) make available for inspection by any Prospective Seller or
managing underwriter participating in any disposition pursuant to such
registration statement, and any attorney, accountant or other agent retained by
any such Prospective Seller or underwriter, all financial and other records,
pertinent corporate documents and properties of the Company as reasonably
requested by such Prospective Seller or underwriter, and cause the Company's
officers, directors and employees to supply all information reasonably requested
by any such Prospective Seller, underwriter, attorney, accountant or agent in
connection with the preparation of such registration statement.
(b) Each Prospective Seller of such shares shall furnish to the
Company such information as the Company may reasonably require from the
Prospective Seller for inclusion in the registration statement (and the
prospectus included therein) and shall also enter into and perform any
obligations under an underwriting agreement.
(c) The Prospective Sellers shall not (until further notice) effect
sales of the shares covered by the registration statement after receipt of
telegraphic or written notice from the Company to suspend sales to permit the
Company to correct or update a registration statement or prospectus.
1.8 Expenses of Registration.
------------------------
(a) All expenses incurred in effecting any registration requested
pursuant to Section 1.2 or 1.4 hereof, including, without limitation, all
registration and filing fees, printing expenses, expenses of compliance with
blue sky laws, fees and disbursements of counsel for the Company, reasonable
fees and disbursements for one counsel for the holders of Registrable Stock and
expenses of any audits incidental to or required by any such registration,
("REGISTRATION EXPENSES") shall be borne by the Company; provided, however, that
(i) each Prospective Seller shall bear underwriting discounts or brokerage fees
or commissions relating to the sale of its shares; and (ii) the Company shall be
required to bear the Registration Expenses for a maximum of two (2) Long Form
Registration Statements and not more than one (1) Short Form Registration
Statement within any twelve (12) month period.
(b) All Registration Expenses incurred in effecting any Long-Form
Registration Statement after the second Long-Form Registration Statement (if
permitted by the Company) or more than one (1) Short-Form Registration Statement
in any twelve (12) month period (if permitted by the Company) shall be borne pro
rata by the holders of the Registrable
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<PAGE>
Stock included in such registration, in accordance with the number of shares
being sold in such registration.
(c) Notwithstanding the foregoing, the Company shall not be required
to pay for any expenses of any registration proceeding begun pursuant to either
Section 1.2(a) or 1.2(b) if the registration request is subsequently withdrawn
at the request of the holders of a majority of the Registrable Stock to be
registered (in which case all participating holders shall bear such expenses),
unless the holders of a majority of the Registrable Stock agree to forfeit their
right to one (1) paid demand registration pursuant to the subsection of Section
1.2(a) under which the request was made; provided, however, that if at the time
of such withdrawal, the holders have learned of a material adverse change in the
condition, business or prospects of the Company from that known to the
Initiating Holders at the time of their request, then the holders shall not be
required to pay any of such expenses and shall retain their rights pursuant to
Section 1.2.
1.9 Indemnification.
---------------
(a) The Company shall indemnify and hold harmless each holder
requesting or joining in a registration of such securities and each of its
officers, directors, partners and agents, each underwriter (as defined in the
Securities Act) and each controlling person of any holder or underwriter, if
any, (within the meaning of the Securities Act) (collectively the "HOLDER") with
respect to which registration or qualification of Registrable Stock has been
effected pursuant to this Agreement, against any losses, claims, damages or
liabilities, joint or several (or actions in respect thereof), to which such
Holder may be subject under the Securities Act, under any other federal or state
regulation or statute or at common law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
(i) any untrue statement (or alleged untrue statement) of any material fact
contained in any registration statement under which such securities were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any summary prospectus issued in connection
with any securities being registered, or any amendment or supplement thereto, or
any other document, or (ii) any omission (or alleged omission) to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading or (iii) any violation by the Company of the
Securities Act or any Blue Sky law, or any rule or regulation promulgated under
the Securities Act or any Blue Sky law, or any other law, applicable to the
Company in connection with any such registration, qualification or compliance
((i), (ii) and (iii) are each referred to hereafter as a "VIOLATION"), and shall
reimburse each such Holder for any legal or other expenses reasonably incurred
by such Holder in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company shall
not be liable to any Holder in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or omission made in such registration statement, preliminary
prospectus, summary prospectus, prospectus, or amendment or supplement thereto,
or any other document, in reliance upon and in conformity with written
information furnished to the Company by such Holder specifically for use
therein.
-9-
<PAGE>
(b) Each holder requesting or joining in a registration of such
securities whose Registrable Stock are included in the securities as to which
registration or qualification is being effected pursuant to this Agreement,
shall indemnify and hold harmless the Company, each underwriter (as defined in
the Securities Act) and each controlling person of the Company or underwriter,
if any, (within the meaning of the Securities Act) and any other Holder selling
securities with respect to which registration or qualification has been effected
pursuant to this Agreement, against any losses, claims, damages or liabilities,
joint or several (or actions in respect thereof), to which the Company,
underwriter, controlling person or Holder may be subject under the Securities
Act, under any other statute or at common law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent) that
such Violation occurs in reliance upon written information furnished by the
holder expressly for use in connection with such registration, and shall
reimburse the Company, underwriter, controlling person or Holder for any legal
or other expenses reasonably incurred by the Company, underwriter, controlling
person or Holder in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the holder shall not
be liable to the Company, underwriter, controlling person or Holder in any such
case to the extent that any such loss, claim, damage or liability exceeds the
net proceeds from the offering received by such holder from the underwriters.
The indemnity provided for herein shall remain in full force and effect
regardless of any investigation made by or on behalf of the Company,
underwriter, controlling person or Holder.
(c) If the indemnification provided for in Section 1.9(a) or 1.9(b)
above is unavailable to an indemnified party in respect of any losses, claims,
damages or liabilities referred to therein, then the indemnifying party in lieu
of indemnifying such indemnified party thereunder shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages, expenses or liabilities, in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or omissions
which resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to information
supplied by the indemnifying party, or by the indemnified party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The parties agree that it would not be just and equitable if
contribution pursuant to this Section 1.9(c) were determined by pro rata
allocation or by any other method of allocation which does not take into account
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 and liabilities or actions in respect thereof 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(c), no holder
shall be required to contribute any amount in excess of the amount by
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<PAGE>
which the total price at which the Registrable Stock sold by it exceeds the
amount of any damages which such holder 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 misrepresentations (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
(d) Promptly after receipt by an indemnified party under Section
1.9(a) or 1.9(b) above of notice of the commencement of any action, such
indemnified party shall notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such Sections or to any liability under this Section 1.9
the extent that it has not been prejudiced as a proximate result of such
failure. In case any such action shall be brought against any indemnified
party, and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, to assume the defense thereof, with counsel
satisfactory to such indemnified party, provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assert such legal defenses (in which case the
indemnifying party shall not have the right to direct the defense of such action
on behalf of the indemnified party or parties). Upon the permitted assumption
by the indemnifying party of the defense of such action, and approval by the
indemnified party of counsel, the indemnifying party shall not be liable to such
indemnified party under this Section 1.9 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
connection with the assertion of legal defenses in accordance with the proviso
to the next preceding sentence, (ii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time, (iii) the indemnifying party and its
counsel do not actively and vigorously pursue the defense of such action or (iv)
the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party.
1.10 Inclusion of Additional Shares in Required Registrations; Other
---------------------------------------------------------------
Company Initiated Registrations. The Company shall not register securities for
- -------------------------------
sale for the account of any other person in any registration requested by the
holders of Registrable Stock pursuant to Section 1.2 hereof unless permitted to
do so by the written consent of holders who hold at least fifty percent (50%) of
the Registrable Stock as to which registration has been requested. The Company
may not cause any other registration of securities for sale for its own account
or for the account of any other person to become effective within 180 days after
the effective date of any registration requested by the holders of Registrable
Stock pursuant to Section 1.2 hereof.
1.11 Rights which May Be Granted to Other Persons. The Company shall not
--------------------------------------------
grant any person registration rights which shall in any way whatsoever impair
the priority of the registration rights granted to the Investors in this
Agreement.
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<PAGE>
1.12 Rule 144 Requirements. Immediately after the date on which a
---------------------
registration statement filed by the Company under the Securities Act becomes
effective, the Company shall undertake to make publicly available, and available
to the holders of Registrable Stock, such information as is necessary to enable
the holders of Registrable Stock to make sales of such stock pursuant to Rule
144 of the Commission under the Securities Act. The Company shall furnish to
any such holder, upon request, a written statement executed by the Company as to
the steps it has taken to comply with the current public information
requirements of Rule 144.
1.13 Delay of Registration. No holder of Registrable Stock shall have any
---------------------
right to obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.14 Holdback. If the Company files a registration statement in
--------
connection with an underwritten public offering, a holder of Registrable Stock
shall not effect any sale or distribution of any shares (except pursuant to such
registration statement) of the capital stock of the Company, whether now owned
or hereafter acquired, during the period requested by the underwriters
commencing with the effective date of such registration statement and ending on
the close of business on a date which is not more than one hundred and eighty
(180) days thereafter or such time as the registration statement is withdrawn,
whichever is earlier; provided however that all officers and directors of the
Company enter into similar agreements.
1.15 Assignment of Registration Rights. The rights to cause the Company
---------------------------------
to register Registrable Stock pursuant to this Agreement may be assigned (but
only with all related obligations) by the Investors to a transferee or assignee
(other than a competitor of the Company) of such securities who, after such
assignment or transfer, holds at least 40,000 shares of the Registrable Stock
(subject to appropriate adjustment for stock splits, stock dividends,
combinations and other recapitalizations) originally purchased by such Investor
(assuming exercise of all Warrants), provided (a) the Company is, within a
reasonable time after such transfer, furnished with written notice of the name
and address of such transferee or assignee and the securities with respect to
which such registration rights are being assigned; (b) such transferee or
assignee agrees in writing to be bound by and subject to the terms and
conditions of this Agreement, including without limitation the provisions of
Section 1.14; and (c) such assignment shall be effective only if immediately
following such transfer the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act. A transfer of
any Registrable Stock by the Investors to a partner or affiliate of such
Investors shall be exempt from the minimum shareholding requirements of this
Section 1.15.
1.16 Termination of Registration Rights. Neither the Investors nor
----------------------------------
Silvera shall be entitled to exercise any right provided for in this Agreement
(a) after seven (7) years following the consummation of the sale of securities
pursuant to a registration statement filed by the Company under the Securities
Act in connection with the initial firm commitment underwritten offering of its
securities to the general public or (b) at such time as a holder holds
Registrable Stock constituting less than one percent (1%) of the outstanding
voting stock of the Company.
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<PAGE>
2. Right of First Refusal.
----------------------
2.1 Rights of Investors. If at any time prior to the expiration date of
-------------------
the period set forth in Section 2.5 below, the Company determines to issue any
additional shares of its capital stock, or warrants, options, rights or other
securities convertible into its capital stock, (collectively the "EQUITY
SECURITIES"), the Company shall first give each of the current holders of Series
A, Series B, Series C, Series D, Series E and Series F Preferred Stock (the
"RIGHTHOLDERS"), the right to purchase such Rightholders' pro rata share (as
defined below) of such Equity Securities in order to allow each Rightholder to
maintain its percentage interest in the Company by delivering to them a written
offer which shall state the price and other terms and conditions of the proposed
issuance. If the Company proposes to issue the Equity Securities for
consideration other than solely cash and/or promissory notes, the offer to the
Rightholders shall, to the extent of such consideration, permit the Rightholders
to pay in lieu thereof, cash equal to the fair market value (as determined in
good faith by the Board of Directors of the Company) of such consideration, and
the offer shall state the Company's estimate of such fair market value. The
Board of Directors shall fix the period of the offer which shall be a minimum of
30 days or such longer period as is necessary to determine the fair market value
of the consideration referred to in the preceding sentence.
2.2 Acceptance of Company Offer. A Rightholder may accept an offer only
---------------------------
by giving written notice to the Company before the offer expires that such
Rightholder has accepted the offer to purchase some or all of the securities
offered (the "ACCEPTED SECURITIES"); provided, however, that the maximum number
or amount of Equity Securities a Rightholder shall be entitled to purchase shall
be equal to that number or amount of securities to be issued multiplied by a
fraction, the numerator of which shall be the aggregate number of shares of
outstanding Common Stock and/or Preferred Stock (calculated on an as converted
basis) held by such Rightholder and the denominator of which shall be the
aggregate number of outstanding shares of Common Stock and/or Preferred Stock
(calculated on an as converted basis) as of the time the written offer by the
Company under Section 2.1 is given and prior to the issuance of the Equity
Securities subject to the offer.
Promptly following the expiration of the offer, the Company shall allocate
the securities subscribed for among the Rightholders accepting or partially
accepting the offer (the "SUBSCRIBING HOLDERS"), pro rata, based upon their
respective holdings as aforesaid, and shall by written notice (the "ACCEPTANCE
NOTICE") advise all Subscribing Holders of the number or amount of securities
allocated to each of the Subscribing Holders. Within ten (10) days following
receipt of the Acceptance Notice, each of the Subscribing Holders shall deliver
to the Company payment in full for the Accepted Securities purchased by it
against delivery by the Company to each Subscribing Holder of a certificate or
certificates evidencing the Accepted Securities purchased by such Subscribing
Holder.
2.3 Issuances to Third Parties. To the extent the offer is not subscribed
--------------------------
by the Rightholders, the Company may, for a period of ninety (90) days
thereafter, issue and sell the unaccepted securities, or any of them, upon terms
and conditions no less favorable to the Company than those specified in such
offer, to any person or persons.
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<PAGE>
2.4 Excluded Transactions. Notwithstanding the provisions of this Section
---------------------
2, the Company shall not be required to first offer the Equity Securities to the
Rightholders if:
(a) The issuance by the Company is pursuant to the conversion of any
shares of the Series A, Series B, Series C, Series D, Series E or Series F
Preferred Stock, or upon the exercise of the Warrants to the purchase Series B,
Series C, Series D or Series F Preferred Stock of the Company;
(b) The issuance by the Company is of stock or options granted under
an employee or non-employee director stock plan approved by the Board of
Directors;
(c) The issuance by the Company is a result of the acquisition of the
assets or stock of another company in exchange for shares of capital stock of
the Company;
(d) The issuance by the Company is pursuant to a registration
statement filed under the Securities Act;
(e) The issuance by the Company is of Common Stock upon conversion or
exercise of any Equity Security which was not subject to the rights set forth in
this Section 2 or for which such rights were not exercised;
(f) The issuance by the Company is of Equity Securities in connection
with corporate partnering arrangements or other strategic relationships in terms
approved by the Company's Board of Directors; provided, however, that such
relationship is not with an entity whose primary business is financial
investments;
(g) The issuance by the Company is of warrants as of the date hereof
which are exercisable for shares of stock of the Company or the issuance is of
warrants exercisable for up to an additional 10,000 (as adjusted to reflect
stock dividends, stock splits or like transactions) shares of stock of the
Company, or the issuance of stock upon exercise of such warrants, in connection
with leasing of equipment or purchase of equipment for the Company;
(h) The issuance by the Company is of convertible debt or warrants
issued as of the date hereof, or the issuance is of warrants or convertible debt
exercisable for up to an additional 50,000 (as adjusted to reflect stock
dividends, stock splits or like transactions) shares of stock of the Company, or
the issuance of stock upon exercise or conversion of such securities, to banks
or other similar financial institutions (as designated by the Company's Board of
Directors) in connection with debt financing transactions; or
(i) The issuance by the Company is of shares of Series A, Series B,
Series C, Series D or Series E Preferred Stock or of Series F Shares pursuant to
the Series F Purchase Agreement.
2.5 Termination. All rights granted in this Section 2 shall terminate
-----------
upon (a) the closing of a firm commitment underwritten public offering pursuant
to an effective registration statement under the Securities Act covering the
offer and sale of the Common Stock of the
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<PAGE>
Company in which all outstanding Preferred Stock of the Company is converted
into Common Stock of the Company, and (b) with respect to each Rightholder, at
such time as a Rightholder holds securities of the Company constituting less
than one percent (1%) of the outstanding voting stock of the Company, whichever
is earlier.
2.6 Waiver. The right of first refusal provided under this section may be
------
waived only by each individual holder with respect to the then outstanding
shares of Common Stock owned by such Rightholder (assuming conversion of all
shares of Preferred Stock and exercise of any options or warrants held by said
Rightholder).
2.7 Assignment of Rights of First Refusal. The right of first refusal
-------------------------------------
granted under this Section 2 may only be assigned by a Rightholder to a
transferee or assignee if the Rightholder transfer at least 40,000 shares
(subject to appropriate adjustment for stock splits, stock dividends,
combinations and other recapitalizations) of the Company's Common Stock
(treating all shares of Preferred Stock for this purpose as though converted
into Common Stock).
2.8 Prior Agreements. The provisions of this Section 2 states the entire
----------------
understanding of the parties regarding rights of first refusal with respect to
issuances of stock by the Company, and shall be deemed to amend and restate in
all respects the rights of first refusal provisions contained in the Existing
Rights Agreement.
3. Miscellaneous.
-------------
3.1 Adjustments Affecting Registrable Securities. The Company shall not
--------------------------------------------
effect a stock split or combination of shares or take any other action, or
permit any change to occur, with respect to its equity securities, which would
adversely affect at such time the ability of the holders of Registrable Stock to
include such stock in a registration undertaken pursuant to this Agreement or
which would adversely affect the marketability of such stock in any such
registration.
3.2 Notices. All notices, demands or other communications hereunder shall
-------
be in writing and shall be deemed given when delivered personally, mailed by
certified mail, return receipt requested, sent by overnight courier service or
telecopied, telegraphed or telexed (transmission confirmed), or otherwise
actually delivered: (i) if to the Company to
Pilot Network Services, Inc.
1080 Marina Village Parkway
Alameda, CA 94501
Attn: M. Marketta Silvera;
if to the Investors to the addresses indicated on Schedule 1; and if to Silvera
to
99 Tappan Lane
Orinda, California 94563,
-15-
<PAGE>
or at such other address and numbers as may have been furnished by such person
in writing to the other parties.
3.3 Severability and Governing Law. Should any Section or any part of a
------------------------------
Section within this Agreement be rendered void, invalid or unenforceable by any
court of law for any reason, such invalidity or unenforceability shall not void
or render invalid or unenforceable any other Section or part of a Section in
this Agreement. This Agreement is made and entered into in the State of
California and the laws of said state shall govern the validity and
interpretation hereof and the performance by the parties hereto of their
respective duties and obligation hereunder.
3.4 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
3.5 Captions and Section Headings. Section titles or captions contained
-----------------------------
in this Agreement are inserted as a matter of convenience and for reference
purposes only, and in no way define, limit, extend or describe the scope of this
Agreement or the intent of any provision hereof.
3.6 Singular and Plural, Etc. Whenever the singular number is used herein
-------------------------
and where required by the context, the same shall include the plural, and the
neuter gender shall include the masculine and feminine genders.
3.7 Costs and Attorneys' Fees. In the event that any action, suit, or
-------------------------
other proceeding is instituted concerning or arising out of this Agreement, the
prevailing party shall recover all of such party's costs, and attorneys' fees
incurred in each and every such action, suit, or other proceeding, including any
and all appeals or petitions therefrom. As used herein, "attorneys' fees" shall
mean the full and actual costs of any legal services actually rendered in
connection with the matters involved, calculated on the basis of the usual fee
charged by the attorneys performing such services.
3.8 Amendments and Waivers. Neither this Agreement nor any term hereof
----------------------
may be changed, waived, discharged or terminated orally or in writing, except
that any term of this Agreement may be amended and the observance of any such
term may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the written consent of the Company,
the holders of at least a majority of the Registrable Stock then in existence
and the holders of a majority of the Registrable Stock issued or issuable upon
conversion of the Series F Preferred Stock; or, to the extent provided in
Section 2.6, by the individual holder; or, to the extent provided in the proviso
to Section 1.6, by GE Fund; provided, however, that no such amendment or waiver
shall affect the provisions of this Section 3.8, no such waiver shall extend to
or affect any other obligation not expressly waived, and no such waiver shall
effect any rights granted hereunder to Founder Shares unless all holders of such
stock join in any such written consent.
-16-
<PAGE>
3.9 Successors and Assigns. All rights, covenants and agreements of the
----------------------
parties contained in this Agreement shall, except as otherwise provided herein,
be binding upon and inure to the benefit of their respective successors and
assigns.
3.10 Specific Performance. The parties hereto agree that the capital
--------------------
stock of the Company cannot be purchased or sold in the open market and that,
for these reasons, among others, the parties will be irreparably damaged in the
event that this Agreement is not specifically enforceable. Accordingly, in the
event of any controversy concerning the capital stock which is the subject of
this Agreement, or any right or obligation to register such securities, such
right or obligation shall be enforceable in a court of equity by specific
performance. The rights granted in this Section 3.10 shall be cumulative and
not exclusive, and shall be in addition to any and all other rights which the
parties hereto may have hereunder, at law or in equity.
3.11 Termination of Existing Rights Agreement. This Agreement contains
----------------------------------------
the entire understanding of the parties, and there are no further or other
agreements or understandings, written or oral, in effect between the parties
relating to the subject matter hereof. The signatories to this Agreement (other
than the Company), as the holders of more than fifty percent (50%) in interest
of the Registrable Securities (as defined in the Existing Rights Agreement),
hereby agree that the Existing Rights Agreement is hereby amended and restated
in its entirety by this Agreement, and the Existing Rights Agreement shall be of
no further force or effect.
3.12 Trustees Not Liable. Any obligation of The Trustees of General
-------------------
Electric Pension Trust shall be enforceable solely against the assets of such
Pension Trust and not against any Trustee (individually or in the aggregate) or
GEPT Investment Management Incorporated.
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
THE "COMPANY"
PILOT NETWORK SERVICES, INC.,
a California corporation
By:/s/ M. Marketta Silvera
------------------------------
M. Marketta Silvera, President
THE "INVESTORS"
EL DORADO VENTURES III, L.P.,
a California limited partnership
By: El Dorado Venture Partners III,
a California general partnership
By: /s/ Shanda Bahles
------------------------------
EL DORADO TECHNOLOGY IV, L.P.,
a California limited partnership
By: El Dorado Venture Partners III,
a California general partnership
By: /s/ Shanda Bahles
------------------------------
EL DORADO C&L FUND, L.P.,
a California limited partnership
By: El Dorado Venture Partners III,
a California general partnership
By: /s/ Shanda Bahles
------------------------------
-18-
<PAGE>
JEFFREY T. WEBBER
By: /s/ Jeffrey T. Webber
--------------------------------------
Jeffrey T. Webber
WILLIAM B. ELMORE
By: /s/ William B. Elmore
--------------------------------------
William B. Elmore
MARKETTA SILVERA
By: /s/ Marketta Silvera
--------------------------------------
Marketta Silvera
TECHNOLOGY FUNDING VENTURES PARTNERS V, AN
AGGRESSIVE GROWTH FUND, L.P., a Delaware
limited partnership
By: Technology Funding, Inc., Managing
General Partner
By: /s/ Gregory T. George
--------------------------------------
Its: Vice President
-------------------------------------
-19-
<PAGE>
O'ROURKE INVESTMENTS CORPORATION, a
California corporation
By: /s/ Thomas O'Rourke
-----------------------------
Title: President
---------------------------
LAMBDA IV, LLC, a Delaware limited liability
company
By: /s/ Anthony Lamport
-----------------------------
Title: Manager
---------------------------
GLEN MCLAUGHLIN
By: /s/ Glen McLaughlin
-----------------------------
Glen McLaughlin
WILLIAM E. KIRSCH
By: /s/ William E. Kirsch
-----------------------------
William E. Kirsch
STEVEN M. COSTELLA, TRUSTEE, OR
SUCCESSOR TRUSTEE, OF THE
STEVEN M. COSTELLA TRUST,
DATED MAY 8, 1989
By: /s/ Steven M. Costella
-----------------------------
Its:
----------------------------
-20-
<PAGE>
PHOENIX LEASING INCORPORATED
By: /s/ illegible
--------------------------------------
Title:
-----------------------------------
MMC/GATX PARTNERSHIP NO. 1
By: GATX Capital Corporation,
as agent
By: /s/ Patricia W. Leicher
--------------------------------------
Title: Vice President
-----------------------------------
GLEN WALLACE MCLAUGHLIN
By: /s/ Glen Wallace McLaughlin
--------------------------------------
HELEN ELIZABETH MCLAUGHLIN O'ROURKE
By: /s/ Helen Elizabeth McLaughlin O'Rourke
--------------------------------------
THE TRUSTEES OF THE GENERAL ELECTRIC PENSION
TRUST
By: /s/ David H. Wrederecht
--------------------------------------
Title: Trustee
----------------------------------
-21-
<PAGE>
SCHEDULE 1
LIST OF INVESTORS
El Dorado Ventures III, L.P.
20300 Stevens Creek Blvd.
Cupertino, California 95014
Attn: Shanda Bahles
El Dorado Technology IV, L.P.
20300 Stevens Creek Blvd.
Cupertino, California 95014
Attn: Shanda Bahles
El Dorado C&L Fund, L.P.
20300 Stevens Creek Blvd.
Cupertino, California 95014
Attn: Shanda Bahles
Technology Funding Ventures Partners V,
an Aggressive Growth Fund, L.P.
2000 Alameda de las Pulgas
San Mateo, California 94403
Attn: Gregory George
Jeffrey Webber
R.B. Webber & Company
1717 Embarcadero Road, Suite 2000
Palo Alto, California 94303
William Elmore
6 Tevis Place
Palo Alto, California 94306
O'Rourke Investment Corporation
12930 Saratoga Avenue, Suite B-7
Saratoga, California 95070
Attn: Thomas O'Rourke
Lambda IV, L.L.C.
Lambda Fund Management, Inc.
380 Lexington Avenue, 54th Floor
New York, New York 10168
Attn: Anthony Lamport
<PAGE>
Glen McLaughlin
Venture Leasing Associates
14016 Camino Barco
Saratoga, California 95070
William E. Kirsch
c/o Costella Kirsch, Inc.
873 Santa Cruz Avenue
Suite 207
Menlo Park, California 94025
Steven M. Costella, Trustee, or Successor Trustee,
of the Steven M. Costella Trust dated 5/8/89
c/o Costella Kirsch, Inc.
873 Santa Cruz Avenue
Suite 207
Menlo Park, California 94025
Phoenix Leasing Incorporated
2401 Kerner Boulevard
San Rafael, CA 94901-5529
Attn: Margaret Peterson
MMC/GATX Partnership No. 1
c/o GATX Capital Corporation
4 Embarcadero Center
Suite 2200
San Francisco, California 94111
Attn: Contract Administrator
The Trustees of the General Electric Pension Trust
c/o G. E. Investments
3003 Summer Street
Stamford, CT 06904-7900
Attn: David H. Wiederecht
-2-
<PAGE>
EXHIBIT 10.7(b)
LEASE
BY AND BETWEEN
ALAMEDA REAL ESTATE INVESTMENTS,
a California limited partnership
AND
ASK COMPUTER SYSTEMS, INC.,
a California corporation
1080 Marina Village Parkway
Alameda, California
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Parties.............................................................. 1
2. Demise of Premises................................................... 1
3. Lease Term, Definitions, Early Entry and Construction................ 1
A. Lease Term..................................................... 1
B. Definitions.................................................... 1
C. Early Entry Following Renovation Improvements.................. 3
D. Construction of Renovation Improvements........................ 3
4. Rent................................................................. 3
A. Payment of Rent................................................ 3
B. Schedule of Base Monthly Rent.................................. 3
C. Rental Abatement............................................... 4
D. Late Charge.................................................... 4
E. Renovation Improvements........................................ 4
F. Additional Rent................................................ 4
G. Operating Expenses............................................. 4
H. Place of Payment............................................... 6
5. Security Deposit..................................................... 7
6. Use of Premises...................................................... 7
7. Taxes and Assessments................................................ 7
A. Tenant's Property.............................................. 7
B. Payment of Property Taxes...................................... 7
C. Property Taxes Defined......................................... 7
D. Assessments.................................................... 8
E. Other Taxes.................................................... 8
F. Tenant's Right to Contest...................................... 8
G. Reduction in Property Taxes.................................... 8
8. Insurance............................................................ 8
A. Waiver and Indemnity........................................... 8
B. Tenant's Liability Insurance................................... 9
C. Landlord's Liability Insurance................................. 9
D. Fire and All Risk Insurance.................................... 9
E. Release of Landlord............................................ 10
F. Mutual Waiver of Subrogation................................... 10
9. Utilities............................................................ 10
10. Repairs and Maintenance.............................................. 10
A. Tenant's Responsibilities...................................... 10
B. Landlord's Responsibilities.................................... 11
C. Warranties..................................................... 12
D. Condition on Delivery.......................................... 12
E. Limitation on Repair Obligation of Landlord.................... 12
11. Outside Areas........................................................ 12
12. Amortization of Certain Improvements as Additional Rent.............. 12
13. Alterations.......................................................... 13
A. Trade Fixtures................................................. 13
B. Alterations.................................................... 13
C. Lien Waiver.................................................... 14
D. Legally Required Alterations................................... 14
14. Delivery of Possession After Renovation Improvements................. 14
15. Default.............................................................. 15
A. Events of Tenant's Default..................................... 15
B. Remedies....................................................... 15
16. Destruction.......................................................... 16
A. Landlord's Duty to Restore..................................... 16
B. Landlord's Right to Terminate.................................. 17
C. Tenant's Right to Terminate.................................... 18
D. Abatement of Rent.............................................. 18
17. Condemnation......................................................... 18
A. Definition of Terms............................................ 18
B. Rights......................................................... 18
C. Total Taking................................................... 19
D. Partial Taking................................................. 19
E. Temporary Taking............................................... 19
18. Mechanics' Liens..................................................... 19
19. Inspection of the Premises........................................... 19
20. Compliance with Laws................................................. 19
A. Obligation of Tenant........................................... 19
B. Right to Contest............................................... 20
21. Subordination........................................................ 20
22. Holding Over......................................................... 20
23. Notices.............................................................. 20
24. Attorneys' Fees...................................................... 21
25. Nonassignment........................................................ 21
A. Consent Required............................................... 21
B. Notice Requested............................................... 22
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
C. Landlord's Right to Share in Net Subrent Profit............ 22
D. Exempt Transfers........................................... 23
26. Successors..................................................... 23
27. Lender Protection.............................................. 23
28. Estoppel Certificates and Financial Statements................. 23
29. Surrender of Lease Not Merger.................................. 24
30. Waiver......................................................... 24
31. General........................................................ 24
A. Captions................................................... 24
B. Transfers by Landlord: Limitations on Tenant's Recourse
for Landlord Default.................................. 24
C. Time....................................................... 25
D. Severability: Governing Law................................ 25
E. Joint and Several Liability................................ 25
F. Exhibits................................................... 25
G. Miscellaneous.............................................. 25
H. Survival................................................... 25
32. Signs.......................................................... 25
33. Interest on Past Due Obligations............................... 26
34. Surrender of the Premises...................................... 26
35. Authority...................................................... 26
36. Options to Extend.............................................. 26
37. Hazardous Material............................................. 27
A. Definitions................................................ 27
B. Use Restriction............................................ 27
C. Compliance................................................. 29
D. Assignment and Subletting.................................. 29
E. Notice..................................................... 29
F. Surrender.................................................. 29
G. Landlord's Obligations..................................... 30
38. Approvals...................................................... 30
39. Reasonable Expenditures........................................ 30
40. Right to Perform Other Party's Covenants...................... 30
41. CPI Adjustment................................................. 30
42. Integration and Amendments...................................... 30
43. Memorandum of Lease............................................ 31
44. Non-Discrimination............................................. 31
45. Brokerage Commissions.......................................... 31
46. Existing Tenancy............................................... 31
</TABLE>
EXHIBITS
--------
EXHIBIT A - Diagram(s) of Premises
EXHIBIT B - Improvement Agreement
EXHIBIT C - Diagram of Marina Village Project
EXHIBIT D - Existing Hazardous Material Condition
-ii-
<PAGE>
MARINA VILLAGE
LEASE
-----
ASK COMPUTER SYSTEMS, INC.
1080 MARINA VILLAGE PARKWAY
---------------------------
As of the Commencement Date (as hereinafter defined) this Lease shall replace
and supersede that certain Lease dated August 1, 1984 ("Previous Lease") by and
between ASK COMPUTER SYSTEMS INC., as successor-in-interest to RELATIONAL
TECHNOLOGY, INC., as Tenant, and ALAMEDA REAL ESTATE INVESTMENTS, as Landlord,
with respect to the Premises (as hereinafter defined), except that the Previous
Lease shall continue to govern the rights and obligations of the parties
accruing prior to that date with respect to the Premises.
1. PARTIES. This Lease, dated for reference purposes as of June 25, 1992, is
-------
made by and between ALAMEDA REAL ESTATE INVESTMENTS, a California limited
partnership ("Landlord"), and ASK COMPUTER SYSTEMS, INC., a Delaware
corporation ("Tenant").
2. DEMISE OF PREMISES. Landlord hereby leases to Tenant and Tenant hereby
------------------
leases from Landlord, upon the terms and conditions hereinafter set forth,
those certain premises (the "Premises") situated in the City of Alameda,
County of Alameda, State of California, described as follows:
A. The right to use in common with other tenants of the Building, the
Common Areas within the Building and the Outside Areas adjacent to the
Building and located on the Parcel (as such terms are hereinafter defined);
B. Approximately 83,091 square feet of Rentable Area (as defined in
Paragraph 3.B(xiv)) as shown on Exhibit A hereto, subject to adjustment
---------
under Paragraph 4.C(ii), and located within that building (the "Building")
known as 1080 Marina Village Parkway, constructed on a portion of that
certain real property described as Lot 3 of Parcel Map 4299 recorded July
24, 1985 in Map Book 155, Pages 21-26, Alameda County Records (the
"Parcel"); and
C. All interior improvements previously constructed or to be constructed
(the "Renovation Improvements") in the Premises in accordance with the
provisions of the Improvement Agreement attached hereto as Exhibit B.
---------
3. LEASE TERM, DEFINITIONS, EARLY ENTRY AND CONSTRUCTION.
-----------------------------------------------------
A. Lease Term. The term of this Lease (the "Lease Term") shall commence
----------
on June 30, 1992 (the "Commencement Date") and shall end September 30,
2004, unless sooner terminated or extended pursuant to any provision of
this Lease. Landlord and Tenant acknowledge that Tenant has the Option,
pursuant to that certain Marina Village Lease 1101 Marina Village Parkway,
of even date herewith, to terminate this Lease by notice given to Landlord
on or before December 15, 1992.
B. Definitions. As used herein, the following terms shall have the
-----------
following meanings:
(i) The term "Affiliate" shall mean with respect to either Landlord or
Tenant, a person or entity that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under
common control with Landlord (or either of its constituent partners,
or the shareholders or partners of such constituent partners) or
Tenant and any officer, director, trustee, shareholder or partner of
any such person or entity. For purposes of this definition, the term
"control" means the ownership of fifty percent (50%) or more of the
beneficial interest or voting power of the appropriate entity (e.g.,
----
partnership, corporation, trust, or unincorporated association).
(ii) The term "Agent" shall mean, with respect to either Landlord or
Tenant, its respective agents, employees, contractors (and their
subcontractors), and invitees (and in the case of Tenant, its
subtenants).
(iii) The term "Agreed Interest Rate" shall mean the "prime" or reference
rate announced from time to time by the Bank of America, NT & SA, or
its successor, for short-term commercial loans plus two percent (2%)
per annum, but in no event to exceed the maximum interest rate
permitted by law.
1
<PAGE>
(iv) The term "Alterations" shall mean improvements, additions, alterations
and fixtures installed in the Premises by Tenant at its expense which
are not Trade Fixtures.
(v) The term "Common Area" shall mean those portions of the Building not
leased to Tenant or other tenants or available for lease or exclusive
use to other tenants, whether or not those areas are actually subject
to an existing lease, such as hallways, lobby, common restrooms,
utility rooms, etc.
(vi) The term "Consumer Price Index" shall mean the Consumer Price Index,
for All Urban Consumers Subgroup "All Items", for the San Francisco-
Oakland-San Jose Metropolitan Area (Base Year 1982-84=100), which is
currently being published monthly by the United States Department of
Labor, Bureau of Labor Statistics. If, however, this Consumer Price
Index is changed so that the base year is altered from that used as of
the Commencement Date, then the Consumer Price Index shall be converted
in accordance with the conversion factor published by the United States
Department of Labor, Bureau of Labor Statistics, to obtain the same
results that would have been obtained had the base year not been
changed. If no conversion factor is available or if the Consumer Price
Index is otherwise changed, revised or discontinued for any reason,
there shall be substituted in lieu thereof and the term "Consumer Price
Index" shall thereafter refer to the most nearly comparable official
price index of the United States Government to obtain substantially the
same result as would have been obtained had the original Consumer Price
Index not been changed, revised or discontinued, which alternative
index shall be selected by Landlord and shall be subject to Tenant's
prior written approval.
(vii) The term "Effective Date" shall mean the date first set forth above
also used for reference purposes as the date of this Lease.
(viii) The term "Institutional Lender" shall mean any commercial bank, savings
and loan association, life insurance company, pension fund, or other
entity regularly engaged in the business of lending where the primary
security is real property whose activities are regulated by the state
or federal government, and which institution is then in compliance with
all regulations by which it is governed.
(ix) The term "Law" shall mean any judicial decision, statute, constitution,
ordinance, resolution, regulation, rule, administrative order, or other
requirement of any municipal, county, state, federal or other
governmental agency or authority having jurisdiction over the parties
to this Lease or the Premises.
(x) The term "Lender" shall mean any beneficiary, mortgagee, secured party
or other holder of any deed of trust, mortgage or other written
security device or agreement encumbering the Premises.
(xi) The term "Outside Areas" shall mean all access roads, driveways,
parking areas, loading docks and ramps, side-walks, landscape areas,
exterior lighting and other facilities located on the Parcel outside
the exterior walls of the Building.
(xii) The term "Project" shall mean all real property within the West End
Community Improvement Project Area which is commonly referred to as
Marina Village, Alameda, California, and more specifically outlined on
Exhibit C attached hereto.
---------
(xiii) The term "Renovation Commencement Date" with respect to any portion of
the Premises vacated by Tenant to permit Landlord to perform the
Renovation Improvements under the Improvement Agreement shall mean the
date when all of the following have occurred: (a) Landlord has caused
to be substantially completed on any given floor of the Premises all
work to be performed by Landlord pursuant to the Improvement Agreement
("Landlord's Work"):(b) the City of Alameda has issued a temporary
Certificate of Occupancy which permits Tenant to legally occupy that
portion of the Premises and to commence the operation of its business
therein: (c) possession of any portion of the Premises has been
tendered by Landlord to Tenant: (d) all utility services are available
for use by Tenant: and (e) there are no uncompleted items or defects in
construction relating to the Renovation Improvements which would
materially interfere with Tenant's ability to use the Premises for the
uses permitted by the Lease.
(xiv) The term "Rentable Area" shall mean rentable square footage of the
Premises as determined by the Building Owners and Managers Association
(BOMA) measurement standards for multi-story buildings, measuring to
the
2
<PAGE>
"glass line" outside boundary, excluding major vertical penetrations,
such as stair wells, elevators and mechanical shafts, exterior decks,
atria and courtyards.
(xv) The term "Tenant's Percentage Share" shall mean the Rentable Area of
the Premises divided by the total Rentable Area of the Building,
which shall be deemed to be 93.08%, subject to adjustment under
subparagraph 4.C,(ii) below .
(xvi) The term "Trade Fixtures" shall mean anything installed in or affixed
to the Premises by Tenant at its expense for purposes of trade,
manufacture, ornament or domestic use (except replacement of similar
work or material originally installed by Landlord) which can be
removed without injury to the Premises (e.g., demountable partitions,
---
business and production equipment and systems, furniture and
furnishings) unless such things has, by the manner in which it is
affixed, become an integral part of the Premises.
C. Early Entry Following Renovation Improvements. Tenant may enter the
---------------------------------------------
portion of the Premises after its vacation of such portion (as set forth in
the Improvement Agreement) and prior to the Renovation Commencement Date
for such portion and in accordance with the terms of the Improvement
Agreement to install fixtures and equipment therein provided it first
obtains the prior written approval of Landlord for such entry, which
approval Landlord may withhold if such entry will substantially delay or
increase the cost of completion of construction and Tenant does not agree
to pay such increased cost of Landlord's Work; provided, however, to the
extent such early entry by Tenant causes a delay in the construction of
Landlord's Work, then the Renovation Commencement Date for that portion of
the Premises shall be advanced by the number of days of delay. If Landlord
permits Tenant to so enter upon the Premises, such entry shall be subject
to all of the terms and conditions of this Lease, excepting only the
obligation to pay Base Monthly Rent, Operating Expenses and Property Taxes
with respect to such portion. Tenant shall coordinate its entry onto the
Premises with Landlord and the contractors and other personnel employed by
Landlord and shall at all times while exercising its right of entry refrain
from interfering with the construction activities of such personnel. In any
case, Tenant shall repair any damage to the Renovation Improvements
constructed by Landlord pursuant to Exhibit "B" resulting from the entry
-----------
upon the Premises by Tenant prior to the Renovation Commencement Date or
caused by the installation of Trade Fixtures and equipment by Tenant or
Tenant's Agents. If the entry by Tenant or its Agents prior to the
applicable Renovation Commencement Date causes a delay in completing the
construction of the Renovation Improvements, then the Renovation
Commencement Date shall be deemed to have occurred on the date the
Renovation Improvements would have been completed had there been no such
delay caused by Tenant or its Agents. In the event Tenant does not
immediately comply with any notice from Landlord requesting that Tenant
cease any interference with Landlord's construction activities. Tenant
shall be required to vacate that portion of the Premises but shall
thereafter be entitled to re-enter that portion as soon as reasonably
practicable so long as Tenant's re-entry does not interfere with Landlord's
construction activities in the Premises. Notwithstanding anything to the
contrary contained above, Tenant's obligation for payment of Base Monthly
Rent, Operating Expenses and Property Taxes shall not be advanced unless
within a reasonable period of time after learning of the occurrence of any
delay caused by Tenant or its Agents. Landlord gives notice to Tenant of
the fact that such delay has occurred and the known or anticipated extent
of any such delay.
D. Construction of Renovation Improvements. Following Tenant's vacation of
---------------------------------------
a portion of the Premises and prior to the Renovation Commencement Date,
Landlord shall perform Renovation Improvements in accordance with the terms
of the Improvement Agreement.
4. RENT
----
A. Payment of Rent. Tenant shall pay to Landlord as rent for the Premises
---------------
the sum specified in Paragraph 4.B. as the same may be adjusted pursuant to
such Paragraph 4.B (the "Base Monthly Rent") each month in advance on the
first day of each calendar month, without deduction, offset, prior notice
or demand (except as otherwise expressly permitted by this Lease),
commencing on the Commencement Date and continuing through the initial
Lease Term, together with such Additional Rent as is payable by Tenant to
Landlord under the terms of this Lease, subject to the abatement described
in Paragraph 4(C) below.
3
<PAGE>
B. Schedule of Base Monthly Rent. The Base Monthly Rent for the Premises shall
-----------------------------
be as follows:
7/1/92 - 3/31/95 $1.160 per square foot of Rentable Area
4/1/95 - 3/31/98 $1.305 per square foot of Rentable Area
4/1/98 - 3/31/01 $1.468 per square foot of Rentable Area
4/1/01 - 3/31/04 $1.651 per square foot of Rentable Area
4/1/04 - 9/30/04 $1.857 per square foot of Rentable Area
This Paragraph 4.B shall not apply during the Option Terms, as the subject of
periodic increases in Base Monthly Rent during the Option Terms is governed by
Paragraph 36.B.
C. Rental Abatement.
----------------
(i) Tenant shall receive a credit in the amount of $140.214 towards the first
installment of Base Monthly Rent due hereunder.
(ii) Landlord and Tenant acknowledge and agree that during the Lease Term,
Landlord shall furnish and install on a phased floor by floor basis,
certain Renovation Improvements within the Premises, pursuant to the
terms and progress schedule described in the Improvement Agreement.
Landlord and Tenant agree to amend this Lease to reflect that commencing
on the date on which Tenant has completely vacated any given floor or
portion of floor of the Premises in accordance with the schedule set
forth in the Improvement Agreement and continuing until the Renovation
Commencement Date for such floor, such floor and its related Rentable
Area shall be deleted from the Premises. Concurrent with the Renovation
Commencement Date for any given floor in the Building, Landlord and
Tenant shall further amend this Lease to reflect the addition of such
Rentable Area to the Premises and such amendment shall provide that until
two weeks after such Renovation Commencement Date for such floor, Tenant
shall not be obligated to pay Monthly Base Rent, Operation Expenses and
Property Taxes due under this Lease pertaining to that portion of the
Premises.
D. Late Charge. If any installment of Base Monthly Rent, Additional Rent or any
-----------
other sum payable by Tenant shall not be received by Landlord when due,
Tenantshall pay to Landlord, as Additional Rent, a late charge equal to four
percent (4%) of such overdue amount. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of late payment by Tenant. Acceptance of such late charge by
Landlord shall in no event constitute a waiver of Tenant's default with respect
to such overdue amount, nor prevent Landlord from exercising any of its rights
and remedies hereunder.
E. Renovation Improvements. The rights and obligations of Landlord and Tenant
-----------------------
with respect to the Renovation Improvements shall be as set forth in Exhibit B.
---------
F. Additional Rent. Tenant's obligation to pay its percentage share of Property
---------------
Taxes in accordance with Paragraph 7, Operating Expenses (as defined herein),
and other sums required to be paid by Tenant under this Lease other than Base
Monthly Rent (which other amounts are referred to herein as the "Additional
Rent") shall commence on the Commencement Date. All taxes, Operating Expenses,
late charges, costs and expenses which Tenant is required to pay hereunder,
together with all interest and penalties that may accrue thereon in the event of
Tenant's failure to pay such amounts, and all damages, costs, and attorneys'
fees and expenses which Landlord may incur by reason of any default of Tenant or
failure on Tenant's part to comply with the terms of this Lease, shall be deemed
to be Additional Rent and shall be paid in addition to the Base Monthly Rent,
and, in the event of nonpayment by Tenant. Landlord shall have all of the rights
and remedies with respect thereto as Landlord has for the nonpayment of Base
Monthly Rent.
G. Operating Expenses.
------------------
(1) The term "Operating Expenses" shall mean all expenses and costs of every
kind and nature which Landlord shall reasonably pay or become obligated to pay
because of or in connection with the operation, maintenance and repair of the
Premises, the Building, the Common Area, the Outside Areas, or the Project
including, without limitation, (i) licenses, permit and inspection fees not
related to the Renovation Improvement of the Premises, (ii) premiums for
insurance maintained by Landlord with respect to the Building and the Project
which complies with Paragraph 8.C and 8.D hereof, (iii) wages, salaries and
related expenses and benefits of all employees engaged in operation, maintenance
and security to
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the extent fairly allocable to the Building (but excluding leasing,
accounting and management activities which are covered by the specified
management fee), (iv) supplies and materials and equipment rental; (v) all
maintenance, repair, janitorial, security and service costs, (vi) a
management cost recovery equal to three percent (3%) of Base Monthly Rent
and Additional Rent payable with respect to the Premises (collectively,
"Gross Revenues") so long as Tenant leases less than all of the Building,
and two percent (2%) of Gross Revenues so long as Tenant leases all of the
Building, provided that Operating Expenses shall not include any other
management fee or costs incurred by Landlord in connection with property
management services, or payable to any third party manager for such
services, and provided further that Gross Revenues shall not include any of
the items described as exclusions from Operating Expenses under
subparagraph 4.G(2), (vii) professional services fees; (viii) repair,
replacement and maintenance costs of the Common Area and Outside Areas,
including, without limitation, those for sidewalks, landscaping, service
areas, parking areas, building exterior, pipes, ducts, conduits, wires and
driveways (excluding those described in Paragraph 10.B to be paid for by
Landlord and not reimbursed as Operating Expenses and those paid for by
proceeds of insurance or by other parties and excluding alterations to the
extent attributable to tenants of the Building other than Tenant), (ix)
amortization of capital improvements to the extent such capital
improvements reduce other Operating Expenses or to the extent that they are
required by governmental authorities amortized according to Paragraph 12,
(x) all charges for heat, water, gas, electricity, sewer and other
utilities used or consumed in the Building, Common Area and Outside Areas,
(xi) maintenance and repair of the roof membrane and (xii) all other
operating expenses reasonably incurred in connection with the operation of
the Building and the Project. Landlord shall not collect in excess of 100%
of all Operating Expenses, and Landlord shall not recover, through
Operating Expenses, any item of costs more than once. Tenant's share of
Operating Expenses and costs incurred by Landlord on a Project-wide basis
shall be the product obtained by multiplying such expenses by a fraction,
the numerator of which is the Rentable Area of the Premises and the
denominator of which is the total Rentable Area of all improvements located
within the Project which benefit from the goods and services relating to
such expenses and costs.
(2) Notwithstanding anything contained in this Lease, the term "Operating
Expenses" shall not include any of the following:
(a) Expenses incurred in connection with (i) obtaining financing for the
Project; (ii) constructing improvements for Tenant or any other tenant of
the Project; (iii) procuring tenants for any portion of the Project
(including commissions and legal fees); (iv) the negotiation, amendment, or
termination of any lease (including unlawful detainer action); or (v)
proceedings against any specific tenant:
(b) Any expenditure for which Landlord has been reimbursed by insurance,
by Tenant, or by any third party (other than pursuant to rent escalation or
tax and operating expense reimbursement provisions in leases):
(c) Any depreciation or amortization on the Project or any property used
in connection therewith:
(d) Expenses in connection with services or other benefits of the type
that are not provided to Tenant, but which are provided to other tenants of
the Project:
(e) Costs incurred due to the violation by Landlord or any other tenant of
the terms of any lease with Landlord affecting the Project:
(f) Overhead and profit increments paid to Affiliates of Landlord, or to
any party as a result of a non-competitive selection process, for
management or other services with respect to the Project to the extent the
cost that would have been paid had the services, supplies, and materials
been provided by parties unaffiliated with Landlord on a competitive basis:
(g) Interest, principal or any other payment made with respect to any
loans obtained by LandLord or any ground lease or underiving lease
affecting the Project:
(h) Rental incurred in leasing building service equipment ordinarily
considered to be of a capital nature (excluding equipment used in providing
janitorial services that is not affixed to the building):
(i) Accounting expenses relating to the ownership entity and not related
to the ownership or operation of the Project:
(j) Any costs, fines or penalties incurred due to violations by Landlord
or any third party of any Law:
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(k) Any fine and the cost of correcting any violations of Laws applicable
to the design or construction of the Premises prior to the Commencement
Date or any latent defects in the construction of the Premises;
(l) Costs incurred to comply with any Law to the extent of violations
which existed prior to the Commencement Date, including the cost to bring
the Project into compliance with the Americans with Disabilities Act;
(m) The cost of repairs or replacements incurred by reason of fire or
other peril, or caused by the exercise of the right of eminent domain;
(n) Costs directly resulting from the negligence or intentional misconduct
of Landlord or Landlord's Agents;
(o) Any cost or expense incurred in connection with the presence or
alleged presence or remediation of any Hazardous Material on the Project
(which subject is governed exclusively in Paragraph 37 of the Lease) not
caused by Tenant or its Agents;
(p) The "deductible" under any insurance policy maintained by Landlord
(with Tenant's obligation to contribute to the cost of any "deductible"
covered by Paragraph 8.D hereof);
(q) Any Property Taxes or taxes or similar charges excluded from the
definition of "Property Taxes" pursuant to Paragraph 7.C (with Tenant's
obligation to contribute to the payment Real Property Taxes governed by
Paragraph 7.B hereof);
(r) The cost of maintenance, repairs or replacements to the structural
parts of any Building that is part of the Project (including foundation,
load-bearings walls, roof structural system, and floor slab) and all
enclosed plumbing and electrical lines up to the point they enter any
Building in the Project.
(3) Tenant shall pay to Landlord each month at the same time and in the
same manner as monthly Base Rent 1/12th of Landlord's estimate of Tenant's
Percentage Share of Operating Expenses for the then current calendar year.
Within 90 days after the close of each calendar year, or as soon after such
90-day period as practicable. Landlord shall deliver to Tenant a statement
of actual Operating Expenses for such calendar year. If on the basis of
such statement Tenant owes an amount that is less than the estimated for
such calendar year previously made by Tenant. Landlord shall refund such
excess to Tenant. If on the basis of such statement Tenant owes an amount
that is more than the estimated payments for such calendar year previously
made by Tenant. Tenant shall pay the deficiency to Landlord within 30 days
after delivery of the statement. The obligations of Landlord and Tenant
under this subparagraph with respect to the reconciliation between
estimated payments and actual Operating Expenses for the last year of the
term shall survive the termination of the Lease.
(4) If requested by Tenant, Landlord shall make available to Tenant,
within 45 days of Tenant's notice of requests, which notice shall be given
no later than 90 days following Tenant's receipt of Landlord's statement,
actual bills and invoices, or copies thereof, supporting Landlord's
statement of estimated or actual Operating Expenses for such calendar year,
together with Landlord's calculations of Operating Expenses and Tenant's
Percentage Share. If Tenant disputes such statement, then Tenant shall not
withhold payment but shall, within 10 days after reviewing such bills and
invoices, send notice to Landlord objecting to such statement. If such
notice is sent, the parties recognize the unavailability of Landlord's
books and records because of the confidential nature thereof and hence
agree that either party may refer the decision of the issues raised to a
reputable independent firm of certified public accountants selected by
Landlord and approved by Tenant, which approval shall not be unreasonably
withheld or delayed, which accountants shall have the right to audit
Landlord's records pertaining to Operating Expenses. Any adjustment to any
previous payment of Operating Expenses shall be paid by Landlord or Tenant,
as the case may be, within 30 days after such accountants render their
decision. If the accountants find that the Landlord's statement has
overstated the total Operating Expenses by 5% or more, then Landlord shall
bear the cost of all fees and expenses of the accountants. Otherwise, the
Tenant shall bear the cost of all fees and expenses of the accountants.
H. Place of Payment. Rent shall be payable in lawful money of the United
----------------
States of America to Landlord at 1150 Manna Village Parkway, Suite 100,
Alameda, California or to such other person(s) or at such other place(s) as
Landlord may designate in writing.
6
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5. SECURITY DEPOSIT. No security or similar deposit shall at any time be due
----------------
from Tenant under this Lease.
6. USE OF PREMISES. Tenant may use the Premises for general office use and,
---------------
for so long as Tenant is the tenant for the entire Building, for research
and development purposes which are similar to, and not inconsistent with,
other uses in the Project and which do not require excessive use or misuse
of Building mechanical, electrical, structural or elevator systems, but the
Premises shall not be used for any other purpose. In making such use of the
Premises, Tenant shall comply with all provisions of this Lease, including
without limitation Paragraph 37. Tenant shall indemnify, defend and hold
Landlord harmless against any loss, expense, damage, reasonable attorneys'
fees or liability arising out of failure of Tenant to comply with any
applicable Law. Tenant shall not commit, or suffer to be committed, any
waste upon the Premises, or any nuisance, or allow any sale by auction upon
the Premises, or allow the Premises to be used for any unlawful purpose, or
use any corridor, sidewalks or Outside Areas for storage or any purpose
other than access to the premises, or place or maintain any signs on or
visible from the exterior of the Premises without Landlord's written
consent or do or permit to be done anything in and about the Premises,
either in connection with activities hereunder expressly permitted or
otherwise, which would cause a cancellation of any policy of insurance
(including fire insurance) maintained by Landlord in connection with the
Premises or the Building which would violate the terms of any covenants,
conditions or restrictions affecting the Building or the land on which it
is located or place any loads upon the floor, walls or ceiling which
endanger the structure, or place any harmful liquids in the drainage system
of the Building. No waste materials or refuse shall be dumped upon or
permitted to remain upon any part of the Outside Areas except in trash
containers placed inside exterior enclosures designated for that purpose by
Landlord or otherwise with the written consent of Landlord.
7. TAXES AND ASSESSMENTS.
---------------------
A. Tenant's Property. Tenant shall pay before delinquency any and all
-----------------
taxes and assessments, license fees and public charges levied, assessed or
imposed upon or against Tenant's Trade Fixtures, equipment, furnishings,
furniture, appliances and personal property installed or located on or
within the Premises. Tenant shall use all reasonable efforts to cause said
Trade Fixtures, equipment, furnishings, furniture, appliances and personal
property to be assessed and billed separately from the real property of
Landlord. If any of Tenant's said personal property shall be assessed with
Landlord's real property, Tenant shall pay Landlord the taxes attributable
to Tenant within ten (10) days after receipt of a written statement from
Landlord setting forth the taxes applicable to Tenant's personal property.
B. Payment of Property Taxes. Tenant shall pay, as Additional Rent,
-------------------------
Tenant's Percentage Share of all Property Taxes payable by Landlord and
levied or assessed with respect to the Building and parking area
attributable to the Building, which accrue and become due during the Lease
Term; provided, however, that if the Premises do not constitute a separate
parcel for purposes of assessing Property Taxes, Tenant shall only pay that
portion of the Property Taxes for the tax parcel of which the Building is a
part that is reasonably and equitably allocable to the Building and
attributable parking. Tenant shall pay such Property Taxes to Landlord not
later than (i) twenty (20) days after receipt of billing; or (ii) ten (10)
days prior to the delinquency date of such Property Taxes, whichever is
later. If Tenant fails to do so, Tenant shall reimburse Landlord, on
demand, for all interest, late fees and penalties that the taxing authority
charges the Landlord as a result of such late payment by Tenant. In the
event the Lender holding a first deed of trust encumbering the Premises
requires an impound for Property Taxes, then Tenant shall pay on the first
day of each calendar month one twelfth (1/12) of its annual share of such
Property Taxes, so long as Tenant receives all interest earned thereon
received by Landlord until paid to the taxing authority. Tenant's liability
hereunder shall be prorated to reflect the commencement and termination
dates of the Lease Term, and any overpayment of taxes by Tenant shall be
credited against sums otherwise due hereunder or shall be paid by Landlord
to Tenant in cash if attributable to any period after the termination date
of this Lease; provided, however, that if there exists an uncured Event of
Tenant's Default at any time that Landlord is obligated to reimburse
overpayments to Tenant pursuant to this sentence, Landlord may apply the
amount so held by it to cure such uncured default. Upon written request,
Landlord shall supply to Tenant all tax bills and other correspondence from
any governmental agency relating to any Property Tax that Tenant is
obligated to pay, and Tenant shall have the right to inspect and copy
Landlord's books and records at Tenant's expense upon reasonable notice to
the extent such books and records relate to a determination of the amount
of Property Taxes due or being contested by Landlord or Tenant.
C. Property Taxes Defined. For the purpose of this Lease, "Property Taxes"
----------------------
means and includes all taxes, assessments (including, but not limited to,
assessments for public improvements or benefits), taxes based on vehicles
utilizing parking areas, taxes based or measured by the rent paid, payable
or received under this Lease, taxes on the value, use or occupancy of the
Premises, and all other governmental impositions and charges of every kind
and nature whatsoever, whether or not customary or within the contemplation
of the parties hereto and regardless of whether the same shall be
extraordinary or
7
<PAGE>
ordinary, general or special, unforeseen or foreseen, or similar or
dissimilar to any of the foregoing which, at any time during the Lease
Term, shall be applicable to the Premises, or assessed, levied or imposed
upon the Premises, or become due and payable and a lien or charge upon the
Premises, or any part thereof, under or by virtue of any present or future
Laws whatsoever. There shall be credited against Property Taxes all amounts
received by Landlord from tax increment reimbursements from the West End
Community Improvement District related to improvements to real property on
the tax parcel to which such Property Taxes relate. The term "Property
Taxes" shall not include (i) any federal, state or local net income,
estate, transfer, excise, capital stock or inheritance tax imposed on
Landlord, or (ii) any tax, assessment or other governmental levy or any
increase therein occasioned by or relating to any "change in ownership" (as
defined in Sections 60-65 of the California Revenue and Taxation Code and
the regulations thereunder) during the initial term of the Lease, and in
such event Tenant also shall not receive the benefit of any increase in tax
increment, if any, resulting from such change of ownership or transfer.
D. Assessments. With respect to any Property Tax that may be payable in
-----------
installments or by an alternative means at the election of Landlord, Tenant
shall be obligated to pay no more than that amount which would have been
payable had Landlord elected to pay such Property Tax in installments over
the maximum term allowable.
E. Other Taxes. Tenant shall pay, as Additional Rent, or reimburse
-----------
Landlord for, any tax based upon, allocable to, or measured by the area of
the Premises or the rental payable by Tenant under this Lease, including,
without limitation, any gross receipts tax levied by any state, local or
federal government with respect to the receipt of such rental; any tax upon
or with respect to the possession, leasing, operation, management,
maintenance, alteration, repair, use or occupancy of the Premises or any
portion thereof: any privilege tax, business and occupation tax, sales
and/or use tax, water tax, sewer tax, employee tax, parking tax,
occupational license tax imposed upon Landlord or Tenant with respect to
the Premises; any tax upon this transaction or any document to which Tenant
is a party creating or transferring an interest or an estate in the
Premises; provided, however, that Tenant shall not be obligated to pay any
federal, state or local net income, estate, transfer, excise, capital stock
or inheritance tax imposed on Landlord or imposed as a result of the sale
or conveyance of Landlord's interest in the Premises and/or this Lease.
F. Tenant's Right to Contest. Tenant shall have the right, by
-------------------------
appropriate proceedings, to protest or contest any assessment, reassessment
or allocation of Property Taxes or any change therein or any application of
any Law to the Premises or Tenant's use thereof. Landlord shall notify
Tenant in writing of any change in Property Taxes within sufficient time to
allow Tenant to review and, if it so desires, to contest or protest such
change. In the contest or proceedings, Tenant may act in its own name
and/or the name of Landlord and Landlord will, at Tenant's request and
expense, cooperate with Tenant in any way Tenant may reasonably require in
connection with such contest. If Tenant does not pay Tenant's Percentage
Share of the Property Taxes when due which are the subject of such protest
or contest. Tenant shall post a bond in lieu thereof and, with respect to
any contest of Property Taxes or Laws, shall hold Landlord and the Premises
harmless from any damage arising out of the proceedings or contest and
shall pay any judgment that may be rendered for which Tenant would
otherwise be liable under this Lease without such contest or protest. In
any event, Tenant agrees to pay Tenant's Percentage Share of the Property
Taxes prior to the foreclosure of any tax lien. Any contest conducted by
Tenant under this Paragraph shall be at Tenant's expense and if interest or
late charges become payable as a result of such contest or protest. Tenant
shall pay the same.
G. Reduction in Property Taxes. Within a reasonable period following the
---------------------------
Commencement Date, Landlord shall apply for and use reasonable efforts to
obtain a reduction in Property Taxes from the County Assessors Office,
based on a finding that the current assessed valuation of the Premises
exceeds the current fair market value thereof.
8. INSURANCE.
---------
A. Waiver and Indemnity. As this Lease does not involve the public
--------------------
interest and insurance is available to Tenant which will protect it against
such claims, damage, injury or death. Tenant hereby waives all claims
against Landlord for damage to any property or injury to or death of any
person in, upon or about the Premises or the Building arising at any time
and from any cause: provided, however, that the foregoing waiver shall not
apply to (i) damage to the property of persons other than Tenant; or (ii)
death or injury to any person resulting from the negligence or willful
misconduct of Landlord or its Agents. Tenant shall hold Landlord harmless
from and defend Landlord against all claims (except to the extent such
arises from the negligence or willful misconduct of Landlord or its Agents)
(i) for damage to any property or injury to or death of any person arising
from the use of the Premises by Tenant, or (ii) arising from the negligence
or willful misconduct of Tenant, its employees, agents, or contractors in,
upon or about those portions of the Project or the Building other than
8
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the Premises. Landlord shall hold harmless from and defend Tenant against all
claims (except such as arise from the negligence or willful misconduct of Tenant
or its Agents) for damage to any property or injury to or death of any person
arising from events occurring in the Common Areas and Outside Areas. The
foregoing indemnity obligation of Landlord and Tenant shall include attorney's
fees, investigation costs, and all other costs and expenses incurred by the
other party from the first notice that any claim or demand is to be made or may
be made. The provisions of this Paragraph 8 shall survive the expiration or
termination of this Lease with respect to any damage, injury, or death occurring
prior to such termination, and other than with respect to Tenant's right to
early entry under Paragraph 3, its provisions shall only apply after the later
of the Commencement Date or the date that Tenant or its Agents has actually
entered into occupancy of the Premises.
B. Tenant's Liability Insurance. Tenant shall obtain and maintain during the
----------------------------
term of this Lease comprehensive general liability insurance with combined
single limit for personal injury and property damage in a form and with carriers
acceptable to Landlord in an amount not less than $1,000,000, and employer's
liability and workers' compensation insurance as required by Law. In addition,
Tenant shall maintain excess or umbrella liability insurance with limits not
less than $4,000,000 having the general liability coverage desired above as
underlying. Tenant's comprehensive general liability and excess/umbrella
insurance policy shall be endorsed to provide that (i) it may not be canceled or
altered in such a manner as adversely to affect the coverage afforded thereby
without 30 days' prior written notice to Landlord, (ii) Landlord is named as
additional insured, (iii) the insurer acknowledges acceptance of the mutual
waiver of claims by Landlord and Tenant pursuant to subparagraph (F) below, and
(iv) such insurance is primary with respect to Landlord and that any other
insurance maintained by Landlord is excess and noncontributing with such
insurance. If, in the reasonable opinion of Landlord's insurance adviser, based
on a substantial increase in recovered liability claims generally, the specified
amounts of coverage are no longer adequate, such coverage shall be appropriately
increased but, in no event shall such required coverage exceed the level of
coverage customarily carried by similar businesses in Alameda County. Prior to
the Term Commencement. Tenant shall deliver to Landlord a duplicate of such
policy or a certificate thereof to Landlord for retention by it, with
endorsements, and at least 30 days prior to the expiration of such policy or any
renewal thereof. Tenant shall deliver to Landlord a replacement or renewal
binder, followed by a duplicate policy or certificate within a reasonable time
thereafter. If Tenant fails to obtain such insurance or to furnish Landlord any
such duplicate policy or certificate as herein required. Landlord may, as its
election, without notice to Tenant and without any obligation to do so, procure
and maintain such coverage and Tenant shall reimburse Landlord on demand as
Additional Rent for any premium so paid by Landlord.
C. Landlord's Liability Insurance. Landlord shall maintain a policy or
------------------------------
policies of comprehensive general liability insurance insuring Landlord (and
such others as are designated by Landlord) against liability for personal
injury, bodily injury, death and damage to property occurring or resulting from
an occurrence in, on or about the Premises in an amount not less than that
required of Tenant, endorsed to provide coverage for the obligations of Landlord
under Paragraph 8.A. provided if Landlord elects to carry a higher level of
coverage such amount of excess coverage must be reasonable. The cost of such
liability insurance which Landlord elects to maintain shall be Additional Rent,
and Tenant shall pay to Landlord the cost of such insurance as a part of
Operating Expenses.
D. Fire and All Risk Insurance. Landlord shall obtain and keep in force during
---------------------------
the Lease Term a policy or policies of insurance covering loss or damage to the
Building in the amount of the full replacement cost thereof and the Renovation
Improvements to the extent paid for by Landlord providing protection against
those perils included within the classification of "all risk" insurance, plus a
policy of rental income insurance in the amount of twelve (12) months of Base
Monthly Rent and revenues received from the Building together with such
additional coverages (such as earthquake and flood insurance) which Landlord may
reasonably elect to maintain from time to time or which Landlord's Lender may
require Landlord to maintain from time to time so long as such Lender is an
Institutional Lender whose loan is secured by a deed of trust encumbering the
Premises. Tenant shall have no interest in nor any right to the proceeds of any
insurance procured by Landlord on the Building and Renovation Improvements.
Tenant shall pay to Landlord, as Additional Rent. Tenant's Percentage Share of
the cost of such insurance procured and maintained by Landlord as part of its
Operating Expense payment. Tenant's liability for the cost of such insurance
shall be prorated as of the commencement and termination of the Lease Term.
Tenant acknowledges that such insurance procured by Landlord shall contain a
commercially reasonable deductible approved by Landlord and Tenant which reduces
Tenant's cost for such insurance and, in the event of loss or damage which is
not caused by Landlord or its Agents. Tenant shall be required to pay to
Landlord the amount of such deductible. Notwithstanding anything contained
herein, the following shall apply:
(i) In the event Tenant becomes liable to pay "deductibles" with respect to any
loss or losses the aggregate amount of which exceeds for any twelve (12)
month period during the Lease Term an amount equal to one installment of
the
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<PAGE>
Base Monthly Rent then payable, the amount of such excess shall
not be payable by Tenant currently but instead shall be amortized
over the useful life of the improvements constructed with such
deductible amount, together with interest at the Agreed Interest
Rate, and payable as Additional Rent in accordance with the
procedure set forth in Paragraphs 12.A. and B.
(ii) Tenant shall not be obligated to pay the cost of earthquake
insurance to the extent that it exceeds a commercially reasonable
rate for the earthquake insurance; provided, however, that in the
event an Institutional Lender which holds at least 30 loans
secured by office/industrial buildings in Northern California and
is holding a loan that is secured by a deed of trust encumbering
the Premises requires that earthquake insurance be maintained,
and it is the general policy of such Lender to require that
earthquake insurance be maintained on substantially all
properties owned, managed or encumbered by such Lender in the
same or comparable seismic zone as the Premises in California,
then in that event Tenant shall pay the entire cost of earthquake
insurance even if it exceeds a commercially reasonable rate;
provided, however, if such Institutional Lender does not hold
loans on a minimum of 30 office or industrial buildings in
Northern California then Tenant shall not be obligated to pay the
cost of such earthquake insurance to the extent the annual cost
thereof exceeds Thirty Six Cents ($0.36) per One Hundred Dollars
($100) of replacement cost. If the cost of earthquake insurance
exceeds a commercially reasonable rate, Tenant shall nonetheless
continue to pay an amount equal to a commercially reasonable rate
for such earthquake insurance so long as such insurance is
carried by Landlord, subject to the limit contained in preceding
sentence, and Landlord shall pay the remainder of the cost of
earthquake insurance. For purposes hereof, a "commercially
reasonable rate" for earthquake insurance shall mean any rate
that is within the range of the then-current cost of earthquake
coverage which is then being paid by "Prime Owners" (defined
below) of office buildings in the San Francisco Bay Area
containing more than 50,000 square feet that were built after
1976 and which is customarily being reimbursed or paid by tenants
occupying, under triple net office leases, such buildings. The
term "Prime Owners" shall be defined to mean any entity or
individual whose office or commercial real property holdings in
the San Francisco Bay Area exceed Fifty Million Dollars
($50,000,000) in fair market value who fit into any one of the
following categories: (a) institutional investors such as pension
funds, insurance companies, and syndications where partnership
interests were offered pursuant to a registered public offering;
(b) office developers and their affiliated partnerships who
individually have owned or developed more than 250,000 square
feet of office buildings in the San Francisco Bay Area; and (c)
office corporations who own office facilities they occupy.
E. Release of Landlord. Tenant acknowledges that the insurance to be
-------------------
maintained by Landlord on the Premises pursuant to Paragraph 8.D above will
not insure any of Tenant's property. Accordingly, Tenant at Tenant's own
expense, shall maintain in full force and effect on all of its Trade
Fixtures, equipment, leasehold improvements and personal property in the
Premises, a policy of "all risk" coverage insurance to the extent of at
least ninety percent (90%) of their insurable value.
F. Mutual Waiver of Subrogation. Tenant and Landlord hereby mutually
----------------------------
waive their respective rights for recovery against each other for any loss
of or damage to the property of either party, where such loss or damage is
insured by any insurance policy required to be maintained by this Lease or
otherwise in force at the time of such loss or damage (except such waiver
shall not apply to any loss to the extent it is within the "deductible
amount" of such policy). Each party shall obtain any special endorsements,
if required by the insurer, whereby the insurer waives its right of
subrogation against the other party hereto. The provisions of this
Paragraph 8.F shall not apply in those instances in which waiver of
subrogation would cause either party's insurance coverage to be voided or
otherwise made uncollectible or is not available at reasonable cost.
9. UTILITIES. Tenant shall pay for all water, gas, light, heat, power,
---------
electricity, telephone, trash pick-up, sewer charges, and all other
services supplied to or consumed on the Premises, and all taxes and
surcharges thereon: provided, however, so long as Tenant's Percentage Share
is less than One Hundred Percent (100%). Landlord shall pay all utility
charges, except those specifically allocable to Tenant such as telephone,
and Tenant shall reimburse to Landlord, in the same manner as Base Monthly
Rent, Landlord's estimate of Tenant's Percentage Share of such utility
costs, except that Tenant shall pay One Hundred Percent (100%) of the
utility costs related to Tenant's computer room. During any portion of the
term that Tenant's Percentage Share is less than One Hundred Percent
(100%), Landlord may elect to submeter any such utility costs in order to
determine a more accurate actual usage of such utilities by Tenant and
reimbursement by Tenant. Wherever it is practical to do so such services
shall be separately metered or charged to Tenant by the provider thereof
and paid for directly by Tenant. To the extent any of the foregoing
services are provided by Landlord, Tenant shall reimburse Landlord as
Additional Rent for all actual out-of-pocket costs incurred by Landlord in
connection with the provision of such services as billed by the provider
thereof based on Landlord's reasonable estimate of Tenant's use or
consumption of such services.
10
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10. REPAIRS AND MAINTENANCE.
-----------------------
A. Tenant's Responsibilities. Subject to Landlord's obligation to
-------------------------
maintain, repair and replace pursuant to Paragraph 10.B. Tenant shall,
during the Lease Term, at Tenant's sole cost and expense, keep and maintain
in good order, condition and repair the entire Premises and every part
thereof and Common Areas, including, without limitation, windows, window
frames, plate glass, glazing, skylights, truck doors, doors and all door
hardware, partitions and all plumbing, electrical, gas, water, telephone
and other cabling, lighting, heating, air conditioning and ventilation
facilities, equipment and systems within the Premises or within the
Building serving the Premises; provided, however, so long as Tenant's
Percentage Share is less than One Hundred Percent (100%), Landlord shall
keep and maintain in good order and repair those portions of the Common
Area specifically described as (i) the first floor lobby, (ii) all
stairwells, (iii) fourth floor elevator lobby and corridor, (iv) fourth
floor common restrooms, and (v) elevators, and Tenant shall reimburse
Landlord in the same manner as Base Monthly Rent for Tenant's Percentage
Share of such costs with the exception that the cost of maintaining items
(iii) and (iv) above shall be reimbursed by Tenant at 64.88% until such
time as Tenant vacates the fourth floor in accordance with the schedule set
forth in the Improvement Agreement. The term "repair" shall include
replacements, restorations and/or renewals when necessary, as well as
painting. Tenant's obligation shall extend to all alterations, additions
and improvements to the Premises, and all fixtures and appurtenances
therein and thereto. Tenant shall, at all times during the Lease Term,
either (i) personally maintain any heating, ventilating and air
conditioning ("HVAC") equipment which serves the Premises through a
maintenance program reasonably approved by Landlord; or (ii) have in effect
a service contract for the maintenance of such HVAC equipment with an HVAC
repair maintenance contractor approved by Landlord which provides for
periodic inspection and servicing at least once every sixty (60) days
during the Lease Term and shall provide Landlord with a copy of such
contract. No less frequently than annually, Tenant shall cause to be made
an inspection of any HVAC system which serves the Premises by a licensed
HVAC repair and maintenance contractor or mechanical engineer approved by
Landlord. Tenant shall deliver to Landlord a written report prepared by the
party making such inspections promptly after the conclusion of each such
inspection. Except as otherwise provided herein, Tenant shall perform such
maintenance and repair work as is recommended by such inspectors to the
extent such work is reasonably necessary to keep any HVAC equipment which
serves the Premises in good order, condition and repair. Tenant shall
indemnify and save Landlord harmless against and from all costs, expenses,
liabilities, losses, injuries, damages, suits, fines, penalties, claims and
demands, including reasonable attorneys' fees, resulting from Tenant's
failure to comply with the foregoing, and Tenant hereby expressly releases
and discharges Landlord of and from any liability therefor. The foregoing
notwithstanding, so long as Tenant's Percentage Share is less than One
Hundred Percent (100%). Tenant shall be credited with that portion of the
costs attributable to HVAC maintenance for space in the Building not leased
by Tenant.
B. Landlord's Responsibilities. During the Lease Term, Landlord shall be
---------------------------
responsible for the following:
(i) Landlord shall maintain, repair and replace when necessary in order to
maintain good order, condition and repair: (1) Common Areas as
described above: (2) Outside Areas: (3) all structural parts of the
Building (i.e., foundation, floor slabs, load-bearing walls and roof
---
structural systems): (4) roof membrane: (5) all plumbing and
electrical lines, pipes, conduits, systems and facilities up to the
point they enter the Building: and (6) all other portions of the
Building requiring capital expenditures excluding Renovation
Improvements (but not excluding HVAC, plumbing and electrical systems)
where (a) the useful life of any replacement item will extend beyond
the remaining Lease Term (excluding options to extend that have not
yet been exercised), and (b) the cost of replacement (and all other
replacements commenced within the same calendar year) exceeds $55,000.
Landlord shall be solely responsible for the payment of costs relating
to the maintenance, repair and replacement of all structural parts of
the Building and all plumbing and electrical lines, pipes, conduits,
systems and facilities up to the point they enter the Building (except
to the extent such costs are the result of an event of damage or
destruction covered under Paragraph 16 below). Landlord shall pay for
the other maintenance, repair and replacement obligations set forth in
this subparagraph provided that the cost thereof shall be considered
Operating Expenses reimbursable by Tenant under Paragraph 4.G. except
that capital expenditures items which, together with all other capital
expenditures incurred within the same calendar year, exceeds $55,000,
shall be amortized, together with interest, as described in Paragraph
12.A., and shall be paid by Tenant in accordance with Paragraph 12.B.
Upon the commencement of any Option Term, the $55,000 limit in this
subparagraph (i) shall be increased pursuant to Paragraph 41 in
accordance with the increase in the Consumer Price Index from the
Effective Date through the commencement of the Option Term.
(ii) Landlord shall be responsible for the correction of defects in design
and construction of the Building and Renovation Improvements and for
corrections of violations of Law existing as of the date the building
permits for the Building
11
<PAGE>
and Renovation Improvements were issued. The costs of such correction
shall be borne exclusively by Landlord without right of reimbursement
from Tenant.
(iii) No less frequently than annually, Landlord shall cause to be made an
inspection of the Building roof membrane and roof system by an
inspection service approved by Tenant which inspection shall be done
in accordance with the roofing contractor's specifications and the
roof vendor's recommendation specifications. Landlord shall deliver
to Tenant a written report prepared by the party making such
inspections promptly after the conclusions of each such inspection.
Landlord shall perform such maintenance and repair work as is
recommended by such inspectors to the extent such work is reasonably
necessary to keep the roof membrane and roof system in good order,
condition and repair. The costs of the inspection and any resulting
repairs of the Building roof membrane (to the extent not capital
expenditures subject to subparagraph 10.B(i)) shall be considered
Operating Expenses reimbursable by Tenant under Paragraph 4.G and the
costs related to the structural roof system shall be borne
exclusively by Landlord without right of reimbursement from Tenant.
C. Warranties. Landlord shall assign to Tenant for the term of this Lease
----------
the benefit of all warranties available to Landlord which would reduce the
cost of performing the obligations of Tenant pursuant to the Lease.
Landlord shall cooperate with Tenant in the enforcement of such warranties.
D. Condition on Delivery. As of the Effective Date, Tenant is in
---------------------
possession of the Premises and has accepted the Premises. As of the
Renovation Commencement Date for any given floor of the Premises. Landlord
shall deliver such portion of the Premises in good condition and repair,
broom clean, with all electrical, mechanical, HVAC, plumbing and lighting
equipment, systems and facilities servicing the Premises in good working
order.
E. Limitation on Repair Obligation of Landlord. Landlord shall have no
-------------------------------------------
maintenance or repair obligations whatsoever with respect to the Premises
except as expressly provided in Paragraphs 10, 13D, 16 and 17. Tenant
hereby expressly waives the provisions of Subsection 1 of Section 1932 and
Section 1941 and 1942 of the Civil Code of California and all rights to
make repairs at the expense of Landlord as provided in Section 1942 of said
Civil Code.
11. OUTSIDE AREAS. Tenant and its Agents shall have the non-exclusive right to
-------------
use the Outside Areas in common with other occupants of the Project, which
shall include Tenant's right to not less than three and one-half (3.5)
spaces for automobile parking for each one thousand (1,000) square feet of
Rentable Area in the Premises. This right shall terminate upon the
expiration or earlier termination of this Lease. Landlord may make non-
material changes to the shape, size, location, amount and extent of the
Outside Areas provided that no such change shall reduce the parking rights
granted to Tenant hereunder and shall not in any case unreasonably
interfere with the use of the Premises by Tenant. Unless required by Law or
any governmental agency, Landlord shall obtain Tenant's prior consent to
any material modifications or changes to the Outside Areas. Tenant shall
not abandon any inoperative vehicles or equipment on any portion of the
Outside Areas. Tenant shall make no Alterations to the Outside Areas
without the consent of Landlord. In no event shall Tenant be charged by
Landlord for use of parking spaces in the Outside Areas except to the
extent required by Law or any governmental agency and any revenue received
by Landlord with respect to Tenant's use of such parking spaces, if not
paid to a governmental entity, shall be reimbursed to Tenant, less costs
attributable to Landlord's collection thereof.
12. AMORTIZATION OF CERTAIN IMPROVEMENTS AS ADDITIONAL RENT. Tenant shall pay
-------------------------------------------------------
Additional Rent in the amount described in this paragraph in the event
Landlord is required by this Lease to do any of the following: (i) pay the
deductible amount in excess of the limit paid by Tenant pursuant to
Paragraph 8.D and on account of damage caused by any peril to the Premises:
(ii) make replacements to the Premises or to the Building when required
pursuant to Paragraph 10.B.(i); or (iii) make improvements required to be
constructed in order to comply with any Law not in effect or applicable to
the Premises as of the Effective Date, which improvements are not the
responsibility of Tenant pursuant to Paragraph 13.D. The amount of
Additional Rent Tenant is to pay with respect to the amounts spent by
Landlord pursuant to the foregoing sentence shall be determined as follows:
A. All costs paid by Landlord to construct such improvements or make such
restoration (including financing costs but excluding reimbursements
received from insurers or other third parties and any management fee to
Landlord) shall be amortized over the useful life of such improvements or
restoration (determined in accordance with generally accepted accounting
principles) and payable by Tenant, together with interest at the Agreed
Interest Rate, in equal monthly installments. Landlord shall inform Tenant
of the monthly amortization payment required so to amortize such costs and
shall also provide Tenant with the information upon which such
determination is made.
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<PAGE>
B. As Additional Rent, Tenant shall pay an amount equal to Tenant's
share of such monthly amortization payment for each month after such
improvement or restoration is completed until the first to occur of
(i) the expiration of the Lease Term (which shall not include the
period of any subsequent option to extend where the Base Monthly Rent
is determined based upon the fair market rental value of the
Premises), or (ii) the end of the term of the useful life over which
such costs were amortized. The amount of such Additional Rent that
Tenant is to pay shall be due at the same time the Base Monthly Rent
is due.
13. ALTERATIONS.
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A. Trade Fixtures. Throughout the Lease Term, Tenant shall provide,
--------------
install and maintain in good condition all Trade Fixtures required in
the conduct of its business in the Premises. All Trade Fixtures shall
remain Tenant's property.
B. Alterations. The following provisions govern Alterations
-----------
constructed by Tenant;
(i) Tenant shall not construct any Alterations or otherwise alter
the Premises without Landlord's prior approval if (a) such
action results in the demolition, removal or material alteration
of existing improvements or future Renovation Improvements
(including partitions, wall and floor coverings, ceilings,
lighting fixtures or other utility installations), and (b) the
cost of such construction or alteration exceeds One Hundred
Thousand Dollars ($100,000) per work of improvement (as such
amount is adjusted pursuant to Paragraph 41) or if the cost of
Alterations done, under construction, or for which approval is
sought during any calendar quarter exceeds One Hundred Thousand
Dollars ($100,000) (as such amount is adjusted pursuant to
Paragraph 41). With respect to any Alterations which must be
approved by Landlord pursuant to the immediately preceding
sentence, Tenant shall not commence construction of such
Alterations until Landlord shall have first approved the plans
and specifications therefor, which approval shall be deemed
given if not denied in writing within ten (10) working days
after Landlord shall have received Tenant's request for such
approval. In no event shall Tenant make any Alterations to the
Premises which could affect the structural integrity or the
exterior design of the Building. Notwithstanding anything
contained herein, Tenant shall have the right to reconfigure
demountable walls and partitions without Landlord's prior
consent.
(ii) All Alterations requiring Landlord's approval shall be
installed by Tenant in substantial compliance with the approved
plans and specifications therefor. All construction undertaken
by Tenant shall be done in accordance with all Laws and in a
good and workmanlike manner using materials of good quality.
Tenant shall not commence construction of any Alterations until
(a) all required governmental approvals and permits shall have
been obtained, and (b) all requirements regarding insurance
imposed by this Lease have been satisfied.
(iii) Landlord shall cause to be made available to Tenant all
information maintained by Landlord or Landlord's architect which
relate to the plans for the Building, including any "as-built"
plans for the Building (and mechanical platforms on the Building
roof) and/or Outside Areas so that Tenant can incorporate such
information into Tenant's files relating to plans for the
Renovation Improvements and for Alterations. At all times during
the Lease Term, (a) Tenant shall maintain and keep updated "as-
built" plans for all Alterations constructed by Tenant which may
or may not have required a building permit or other governmental
approval, and (b) Tenant shall provide to Landlord copies of all
such "as-built" plans and any and all other drawings relating to
Tenant's Alterations in the Premises.
(iv) All Alterations shall remain the property of Tenant during the
Lease Term. Tenant shall have the right to remove any
Alterations so long as it repairs all damage caused by the
installation thereof and returns the Premises to the condition
existing prior to the installation of such Alterations. At the
expiration or sooner termination of the Lease Term, all
Alterations that Tenant does not elect to remove shall be
surrendered to Landlord as a part of the realty and shall then
become Landlord's property, and Landlord shall have no
obligation to reimburse Tenant for all or any portion of the
value or cost thereof. Notwithstanding anything contained herein
(but subject to the restrictions set forth in Paragraphs
13.B(iv)(a) and (b)), if Landlord so requires, at the expiration
or earlier termination of the Lease Term, Tenant shall remove
any Alterations designated for removal by Landlord including,
those Alterations for which Landlord's consent was not initially
required, and shall restore the Premises to the condition
existing prior to the installation of such Alterations only to
the extent necessary to return the Premises to a condition that
has substantially the same value to subsequent tenants as
existed on the Commencement Date, ordinary wear and tear
excepted. The following provisions shall qualify the general
rule set forth in the immediately preceding sentence:
13
<PAGE>
(a) Tenant shall remove and restore all damage caused by the removal
of any specialized Alterations specifically related to the
operation of Tenant's business in the Premises. To the extent
Alterations made by the Tenant results in a reduction in the
capacity of HVAC, mechanical, electrical or plumbing systems.
Tenant shall restore HVAC, mechanical, electrical and plumbing
systems so that the capacity thereof is substantially the same as
existed as of the Commencement Date, ordinary wear and tear
excepted. If restroom "cores" and fixtures have been changed,
such "cores" shall be moved to their original location and such
"cores" and fixtures shall be restored to substantially the same
condition as existed as of the Commencement Date, ordinary wear
and tear expected. If Tenant has made any Alterations to the
structural parts of the Building (i.e., foundations, load-bearing
----
walls, and structural roof system, but excluding roof membrane)
or the floor slab, such structural parts of the Building shall be
returned to the condition existing prior to the making of such
Alterations by Tenant (including the filling of any pits, wells
or trenches). If Tenant has made any Alterations to the roof
membrane, the roof membrane shall be returned to the condition
existing prior to the making of such Alterations by Tenant,
except that Tenant shall not be obligated to restore any
penetration of the roof membrane that has been made with the
written approval of Landlord. The percentage of dropped ceiling
for each area of the Building (office, research and development,
etc.) shall be substantially the same as existed as of the
Commencement Date. Any Alterations made by Tenant to the fire
sprinkler system shall be restored to substantially the same
condition as existed as of the Commencement Date, ordinary wear
and tear excepted.
(b) Tenant shall only be required to remove Alterations for which
either of the following is true, and only if such removal is
otherwise required by all of the preceding provisions of this
Paragraph 13.B(iv): (i) such Alterations were approved in writing
by Landlord and, at the time such approval was given by Landlord,
Landlord informed Tenant in writing that Landlord would require
that such Alterations be removed at the termination of the Lease
Term: or (ii) such Alterations were installed without Landlord's
consent.
C. Lien Waiver. Landlord, within thirty (30) days after request from
-----------
Tenant, shall execute and deliver any document reasonably required by any
supplier, lessor or lender in connection with the installation in the
Premises of Tenant's personal property or Tenant's Trade Fixtures pursuant
to which Landlord waives any rights it may have with respect to such
personal property or Trade Fixtures provided that the supplier, lessor or
lender agrees in writing that (i) it will remove the personal property and
Trade Fixtures from the Premises before the expiration of the Lease Term or
within five (5) days after termination of the Lease Term, and if it does
not remove the property within such period of time, it shall have waived
any rights it may have had to the property in question: (ii) it shall
repair any damage to the Premises resulting from the removal of the
personal property or Trade Fixtures from the Premises: (iii) it will
indemnify Landlord for any loss or liability resulting from its entry onto
the Premises: and (iv) it agrees that the lien waiver will not be recorded.
D. Legally Required Alterations. If, during the Lease Term, any alteration,
----------------------------
addition or change of any sort to all or any portion of the Premises is
required by Law because of (i) Tenant's particular use or change of use of
the Premises, (ii) Tenant's application for a new permit or governmental
approval, or (iii) Tenant's construction or installation of any Alterations
or Trade Fixtures, Tenant shall promptly make the same at its sole cost and
expense. If during the Lease Term, any alteration, addition, or change to
the Premises is required by any Law and is not made the responsibility of
Tenant pursuant to the immediately preceding sentence. Landlord shall
promptly make the same and the cost of such alteration, addition or change
shall be amortized and Tenant shall pay its share of said cost to Landlord
to the extent provided in Paragraph 12.
14. DELIVERY OF POSSESSION AFTER RENOVATIONS IMPROVEMENTS. Following
-----------------------------------------------------
completion of the Renovation Improvements pursuant to the terms and
progress schedule of the Improvement Agreement. Landlord shall use
reasonable efforts to deliver possession of the applicable portions of the
Premises to Tenant. By taking possession of such portion of the Premises as
of the Renovation Commencement Date, Tenant will accept such Premises as
being in good and sanitary order, condition and repair and will accept that
portion of the Premises in their condition existing as of the date of such
entry, subject to (i) latent defects, and (ii) punch list items as
identified during the inspection to be undertaken pursuant to the
Improvement Agreement.
15. DEFAULT.
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A. Events of Tenant's Default. A breach of this Lease shall exist if any
--------------------------
of the following events (hereinafter referred to as "Events of Tenant's
Default") shall occur.
14
<PAGE>
(i) Default in payment when due of any installment of rent or other
payment required to be made by Tenant hereunder, and such default
shall not have been cured within three (3) business days after written
notice of such default is given to Tenant (such three (3)-day period
shall be concurrent with, and not in addition to, the notice period
required by Law prior to the commencement of an unlawful detainer
action);
(ii) Tenant's failure to perform any other term, covenant or condition
contained in the Lease, and with respect to those terms, covenants, or
conditions which are susceptible of cure, such failure shall have
continued for thirty (30) days after written notice of such failure is
given to Tenant; provided, however, that if the nature of Tenant's
failure reasonably requires more than thirty (30) days to cure. Tenant
shall not be deemed in default if Tenant commences to cure such
failure within said thirty (30) day period and thereafter diligently
and in good faith prosecutes such cure to completion;
(iii) Tenant's vacation or abandonment of the Premises while there exists an
Event of Tenant's Default with regard to the payment of the Base
Monthly Rent or Additional Rent;
(iv) Tenant's assignment of its assets for the benefit of its creditors:
(v) The sequestration of, attachment of, or execution on any substantial
part of the property of Tenant or on any property essential to the
conduct of Tenant's business shall have occurred, and Tenant shall
have failed to obtain a return or release of such property within
sixty (60) days thereafter or prior to sale pursuant to such
sequestration, attachment or levy, whichever is earlier;
(vi) Tenant shall commence any case, proceeding or other action seeking
reorganization, arrangement, adjustment, liquidation, dissolution or
composition of it or its debts under any Law relating to bankruptcy,
insolvency, reorganization or relief of debtors or seek appointment
of a receiver, trustee, custodian or other similar official for it or
for all or any substantial part of its property;
(vii) Tenant's board of directors shall adopt a resolution authorize any of
the actions set forth in Paragraph 15.A(vi);
(viii) Any case, proceeding or other action against Tenant shall be commenced
seeking to have an order for relief entered against it as debtor or
seeking reorganization, arrangement, adjustment, liquidation,
dissolution or composition of it or its debts under any law relating
to bankruptcy, insolvency, reorganization or relief of debtors, or
seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its property,
and such case, proceeding or other action (a) results in the entry of
an order for relief against it which is not fully stayed within thirty
(30) business days after the entry thereof or (b) remains undismissed
for a period of sixty (60) days; or
(ix) Tenant shall fail to provide financial statements or estopped
certificates to LandLord in accordance with Paragraph 28 within two
(2) business days after giving of notice by Landlord of Tenant's
delinquency in delivery of such statements.
B. Remedies. Upon any Event of Tenant's Default, Landlord shall have the
--------
following remedies, in addition to all other rights and remedies provided by
Law or in equity, to which Landlord may resort cumulatively or in the
alternative;
(i) Recovery of Rent. Landlord shall be entitled to keep this Lease in
---------------
full force and effect (whether or not Tenant shall have abandoned the
Premises) and to enforce all of its rights and remedies under this
Lease, including the right to recover rent and other sums as they
become due, plus interest at the Agreed Interest Rate from the due
date of each installment of rent or other sum until paid.
(ii) Termination. Landlord may terminate this Lease by giving Tenant
-----------
written notice of termination. On the giving of the notice all of
Tenant's rights in the Premises shall terminate. Upon the giving of
the notice of termination, Tenant shall surrender and vacate the
Premises in the condition required by Paragraph 34, and Landlord may
re-enter and take possession of the Premises and all the remaining
improvements or property and eject Tenant or any of Tenant's
subtenants, assignees or other person or persons claiming any right
under or through Tenant or eject some and not others or eject none.
This Lease may also be terminated by a judgment specifically providing
for termination. Any termination under this Paragraph 15.B(ii) shall
not release Tenant from the payment of any sum then due Landlord or
from any claim for damages or rent previously accrued or then accruing
against Tenant or relating to events
15
<PAGE>
accruing prior to such termination. In no event shall any one or more
of the following actions by Landlord constitute a termination of this
Lease:
(a) maintenance and preservation of the Premises:
(b) efforts so relet the Premises:
(c) appointment of a receiver in order to protect Landlord's
interest hereunder:
(d) consent to any subletting of the Premises or assignment of this
Lease by Tenant, whether pursuant to provisions hereof
concerning subletting and assignment or otherwise: or
(e) any other action by Landlord or Landlord's Agents intended to
mitigate the adverse effects from any breach of this Lease by
Tenant.
(iii) Damages. In the event this Lease is terminated pursuant to Paragraph
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15.B or otherwise, Landlord shall be entitled to damages in the
following sums:
(a) the worth at the time of award of the unpaid rent which has been
earned at the time of termination; plus
(b) the worth at the time of award of the amount by which the unpaid
rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that Tenant
proves could have been resonably avoided; plus
(c) the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds
the amount of such rental loss that Tenant proves could be
reasonably avoided; and
(d) any other amount necessary to compensate Landlord for all
detriment proximately caused by Tenant's failure to perform
Tenant's obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom, including,
without limitation, the following: (i) expenses for cleaning,
repairing or restoring damage to the Premises for which Tenant
is responsible: (ii) real estate broker's fees, advertising
costs and other expenses of reletting the Premises fairly
allocable to the remainder of the Lease Term: (iii) costs of
carrying the Premises such as Property Taxes and insurance
premiums thereon, utilities and security precautions until the
Premises are released (but only to the extent not included in
calculating damages pursuant to Paragraphs 15.B(iii)(a); (b) and
(c)); (iv) expenses in retaking possession of the Premises (v)
reasonable attorneys' fees and court costs; and (vi) any
unamortized real estate brokerage commission paid in connection
with this Lease.
The "worth at the time of award" of the amounts referred to in Paragraphs
15.B(iii)(a) and (b) shall be computed by allowing interest at the Agreed
Interest Rate. The "worth at the time of award" of the amounts referred to
in Parapraph 15.B(iii)(c) shall be computed by discounting such amount at
the discount rate of the Federal Reserve Board of San Francisco at the time
of award plus one percent (1%). The term "rent" as used in this Paragraph
shall include all sums required to be paid by Tenant to Landlord pursuant
to the terms of this Lease.
16. DESTRUCTION.
-----------
A. Landlord's Duty to Restore. If the Premises are damaged by any peril
--------------------------
after the Effective Date, Landlord shall restore the Premises except to the
extent that this Lease is terminated by Landlord pursuant to Paragraph 16.B
or by Tenant pursuant to Paragraph 16.C. All insurance proceeds available
from the fire and property damage insurance carried by Landlord pursuant to
Paragraph 8.D shall be paid to and become the property of Landlord. If this
Lease is terminated pursuant to either Paragraph 16.B or 16.C, then all
insurance proceeds available from insurance carried by Tenant which covers
loss to the Building that is Landlord's property or would become Landlord's
property on the termination of this Lease shall be paid to and become the
property of Landlord. To the extent this Lease is not so terminated, then
upon Landlord's receipt of the insurance proceeds (if the loss is covered
by insurance and the issuance at all necessary governmental permits,
Landlord shall commence and diligently prosecute to completion the
restoration of the Premises, to the extent then allowed by Law, to
substantially the same condition in which the Premises were immediately
prior to
16
<PAGE>
such damage. Landlord's obligation to restore shall be limited to the
Premises and Tenant Improvements constructed by Landlord as they existed as
of the Commencement Date, as modified or improved by Alterations
constructed by Tenant thereafter with Landlord's consent, but shall exclude
any Trade Fixtures and/or personal property installed by Tenant in the
Premises. Tenant shall forthwith replace or fully repair all Trade Fixtures
installed by Tenant and existing at the time of such damage or destruction
to the extent still required by Tenant for its business operations in the
Premises.
B. Landlord's Right to Terminate. Landlord shall have the option to
-----------------------------
terminate this Lease in the event any of the following occurs, which option
may be exercised only by delivery to Tenant of a written notice of election
to terminate within sixty (60) days after the date of such damage:
(i) The Building is damaged by any peril either (a) covered by the type
of insurance Landlord is required to carry pursuant to Paragraph 8.D.
or (b) covered by valid and collectible insurance actually carried by
Landlord and in force at the time of such damage or destruction and
in either event the proceeds of such insurance are made available to
Landlord, to such an extent that the estimated restoration cost
exceeds eighty percent (80%) of the then actual replacement cost
thereof and there remains less than three (3) years in the Lease
Term; provided, however, that Landlord may not terminate this Lease
pursuant to this subparagraph if Tenant at the time of such damage
has a then valid written option to extend the Lease Term and Tenant
exercises such option to extend the Lease Term within thirty (30)
days following the date of such damage and such action results in
there being more than three (3) years remaining in the Lease Term (as
it has been extended by the exercise of such option).
(ii) The Building is damaged by any peril both (a) not covered by the type
of insurance Landlord is required to carry pursuant to Paragraph 8.D.
and (b) not covered by valid and collectible insurance actually
carried by Landlord and in force at the time of such damage or
destruction to such an extent that the estimated restoration cost
exceeds five percent (5%) of the then estimated replacement cost of
the Building; provided, however, that Landlord may not terminate this
Lease pursuant to this subparagraph if Tenant agrees in writing to
pay the amount by which the restoration costs exceed five percent
(5%) of the replacement costs of the Building and deposits an amount
equal to the estimated amount of such costs within thirty (30) days
after Landlord has notified Tenant of its election to terminate this
Lease pursuant to this subparagraph.
(iii) The Building is damaged by any peril during the last twelve (12)
months of the Lease Term; provided, however, that Landlord may not
terminate this Lease pursuant to this subparagraph if Tenant, at the
time of such damage, has previously effectively exercised its Option
to Extend the Lease Term, if any.
(iv) The Building is damaged by any peril and, because of the Laws then in
force, may not be restored to substantially the same condition in
which it was prior to such damage because of a substantial increase
in the cost of restoration directly related to changes in Laws that
have occurred since the Building was constructed, which substantial
increase is not covered by insurance proceeds actually made available
by Landlord; provided, however, that Landlord may not terminate this
Lease pursuant to this subparagraph if (a) Tenant agrees in writing
to pay the additional restoration costs directly related to changes
in Laws that have occurred since the Building was constructed to the
extent it is not covered by insurance proceeds actually recovered by
Landlord, and Tenant deposits such amount within thirty (30) days
after Landlord has exercised its option to terminate this Lease, or
(b) the Building may be redesigned in a manner that does not
materially change its size, configuration or value, which redesign
would result in Landlord being able to restore the Building at
reasonable costs and would not result in there being insufficient
insurance proceeds actually recovered by Landlord so long as Landlord
and Tenant reach agreement on such redesign within thirty (30) days
after Landlord has exercised its option to terminate the Lease and
any and all Lenders approve such redesign. For purposes of this
subparagraph, a "substantial increase in the costs of restoration"
shall mean an increase of five percent (5%) or more over what the
restoration costs would have been had no changes in Laws occurred
since the damaged Building was originally constructed.
(v) If Tenant elects to make a deposit to avoid a termination of this
Lease pursuant to Paragraph 16.B(ii) or (iv), the following shall
apply to such deposit: (a) the deposit may be in the form of cash or
an irrevocable letter of credit: (b) any irrevocable letter of credit
provided by Tenant to satisfy this requirement must be payable to
Landlord, be in the amount of the required deposit, be in form
reasonably acceptable to Landlord, and provide for the disbursal of
funds to Landlord upon Landlord's certification that the same are
needed to pay for restoration costs actually incurred: (c) the
deposit shall be disbursed to Landlord as it is needed to pay
restoration costs as they come due on a progress payment basis in
accordance with customary commercial bank construction lending
practices, and Tenant
17
<PAGE>
shall take such action as is necessary to cause the deposit to be so
disbursed: and (d) the deposit, whether in the form of cash or letter
of credit, shall be held in trust for disbursal to pay restoration
costs by any Lender that is an insurance company or financial
institution, or if there is no such Lender or if such Lender does not
agree to act in such capacity, then by a bank, savings and loan
association, or other financial institution selected by Landlord and
approved by Tenant, whose fee shall be paid by Tenant.
C. Tenant's Right to Terminate. If the Building is damaged by any peril
---------------------------
and Landlord does not elect to terminate this Lease or is not entitled so
to terminate this Lease pursuant to Paragraph 16.B, then as soon as
reasonably practicable. Landlord shall furnish Tenant with the written
opinion of Landlord's architect, contractor or construction consultant as
to when the restoration work required of Landlord may be completed. Tenant
shall have the option to terminate this Lease in the event any of the
following occurs, which option may be exercised only by delivery to
Landlord of a written notice of election to terminate within fifteen (15)
days after Tenant receives from Landlord the estimate of the time needed to
complete such restoration:
(i) The Building is damaged by any peril and, in the reasonable opinion
of Landlord's architect, contractor or construction consultant, the
restoration of the Premises cannot be substantially completed within
the earlier of (a) two hundred seventy (270) days after the date of
issuance of necessary building permits for such restoration; or (b)
three hundred sixty-five (365) days after the date of such damage.
(ii) The Building is damaged by any peril within twelve (12) months of the
last day of the Lease Term, and, in the reasonable opinion of
Landlord's architect or construction consultant, the restoration of
the Building cannot be substantially completed within ninety (90)
days after the date of such damage.
D. Abatement of Rent. In the event of damage to the Building which does
-----------------
not result in the termination of this Lease, the Base Monthly Rent and
Tenant's Percentage Share of the Property Taxes and Operating Expenses,
shall be temporarily abated from the date of the damage and during the
period of restoration in proportion to the degree to which Tenant's use of
the Building is impaired by such damage and restoration. In the event of
any dispute between Landlord and Tenant concerning the amount of such
abatement, the matter shall be determined by binding arbitration under the
Commercial Rules of the American Arbitration Association. Tenant shall not
be entitled to any compensation from Landlord for loss of Tenant's property
or loss to Tenant's business caused by such damage or restoration. Tenant
hereby waives the provisions of Section 1932, Subdivision 2, and Section
1933, Subdivision 4, of the California Civil Code, and the provisions of
any similar law, hereafter enacted.
17. CONDEMNATION.
------------
A. Definition of Terms. For the purposes of this Lease, the following
-------------------
terms shall have the indicated meanings: (1) "Taking" means a taking of the
Premises or damage to the Premises related to the exercise of the power of
eminent domain and includes a voluntary conveyance, in lieu of court
proceedings, to any agency, authority, public utility, person or corporate
entity empowered to condemn property: (2) "Total Taking" means the taking
of the entire Building or so much of the Building or the Outside Areas as
to prevent or substantially impair the use thereof by Tenant for the uses
herein specified; provided, however, in no event shall a Taking of less
than ten percent (10%) of the total Rentable Area of the Building or
Outside Areas be deemed a Total Taking: (3) "Partial Taking" means the
taking of only a portion of the Building or of the Outside Areas which does
not constitute a Total Taking: (4) "Date of Taking" means the date upon
which the title to the Premises or a portion thereof passes to and vests in
the condemnor or the effective date of any order for possession if issued
prior to the date title vests in the condemnor, and (5) "Award" means the
amount of any award made, consideration paid, or damages ordered as a
result of a Taking.
B. Rights. The parties agree that in the event of a Taking all rights
------
between them or in and to an Award shall be set forth herein and Tenant
shall have no right to any Award except as set forth herein.
C. Total Taking. In the event of a Total Taking during the Lease Term:
------------
(i) the rights of Tenant under the Lease and the leasehold estate of Tenant
in and to the Premises shall cease and terminate as of the Date of Taking:
(ii) Landlord shall refund to Tenant any prepaid rent: (iii) Tenant shall
pay the Landlord any rent or charges due Landlord under the Lease, each
prorated as of the Date of Taking: (iv) Tenant shall receive from the
Landlord those portions of the Award attributable to Trade Fixtures of
Tenant, the value of any Alterations which Tenant has the right to remove
from the Premises, the unamortized value allocable to the remainder of the
Lease Term of any Alterations installed at Tenant's
18
<PAGE>
expense which are not removable, and moving expenses of Tenant; and
(v) the remainder of the Award shall be paid to and be the property of
Landlord.
D. Partial Taking. In the event of a Partial Taking during the
--------------
Lease Term, the following shall apply: (i) the rights of Tenant under
the Lease and the leasehold estate of Tenant in and to the portion of
the Building and any Outside Areas taken shall cease and terminate as
of the Date of Taking: (ii) from and after the Date of Taking the Base
Monthly Rent shall be reduced to an amount which bears the same
relationship to such Base Monthly Rent before such reduction as the
fair market rental value of the Building which remains after the
Partial Taking bears to the fair market rental value of the Building
prior to the Partial Taking; (iii) Tenant shall receive from the Award
the portions of the Award attributable to Trade Fixtures of Tenant,
the value of any Alterations which Tenant has the right to remove from
that part of the Building taken in the Partial Taking, and the
unamortized value allocable to the remainder of the Lease Term of any
Alterations installed at Tenant's expense which are not removable and
which are located in that part of the Building taken in the Partial
Taking; and (iv) the remainder of the Award shall be paid to and be
the property of the Landlord.
E. Temporary Taking. If any portion of the Building or Outside Areas
----------------
is temporarily taken for two hundred seventy (270) days or less, this
Lease shall remain in effect with no abatement of rent and Tenant
shall be entitled to recover any Award that is made for such Taking.
If any portion of the Building or Outside Areas is temporarily taken
by a Taking for a period which exceeds two hundred seventy (270) days
or which extends beyond the natural expiration of the Lease Term, and
such taking prevents or substantially impairs the use of the remainder
of the Building or Outside Areas by Tenant for the uses herein
specified, then Tenant shall have the right to terminate this Lease
effective as of the Date of Taking.
18. MECHANICS' LIENS. Tenant shall (i) pay for all labor and services
----------------
performed for, materials used by or furnished to Tenant or any
contractor employed by Tenant with respect to the Premises, and (ii)
indemnify, defend and hold Landlord and the Premises harmless and free
from and shall promptly cause to be removed any liens, claims,
demands, encumbrances or judgments created or suffered by reason of
any labor or services performed for, materials, used by or furnished
to Tenant or any contractor employed by Tenant with respect to the
Premises, (iii) give notice to Landlord in writing five (5) business
days prior to employing any laborer or contractor to perform services
related to, or receiving materials for use upon the Premises, and (iv)
permit Landlord to post a notice of nonresponsibility in accordance
with the statutory requirements of California Civil Code Section 3094
or any amendment thereof. In the event Tenant is required to post an
improvement bond with a public agency in connection with the above.
Tenant agrees to include Landlord as an additional obligee. Nothing
herein shall prohibit Tenant from contesting any claim for labor,
services or materials, provided Tenant complies with the provisions of
this Paragraph 18.
19. INSPECTION OF THE PREMISES. Tenant shall permit Landlord and its
---------------------------
Agents to enter the Premises at any reasonable time for the purpose of
inspecting the same, performing Landlord's maintenance and repair
responsibilities, making alterations or improvements to the Premises
or to the Building, posting notices of nonresponsibility for
alterations, additions or repairs, and, if Tenant has not effectively
exercised its option to extend the Lease Term and such extension
option has expired, at any time within eighteen (18) months prior to
expiration of this Lease, to place upon the Premises ordinary "For
Lease" or "For Sale" signs, and, to show the Premises and Building to
prospective tenant and brokers, provided that with respect to any such
entry, other than in the case of an emergency. Landlord shall have
given Tenant at least twenty-four (24) hours prior written notice of
intent to enter the Premises, shall be accompanied by a representative
of Tenant (if Tenant requests and provides such representative), shall
comply with any security procedures of Tenant while therein, and at
all times shall use commercially reasonable efforts to minimize
interference with Tenant's use of the Premises.
20. COMPLIANCE WITH LAWS.
--------------------
A. Obligation of Tenant. Tenant shall, at its own cost, comply with
--------------------
all Laws now in force or which may hereafter be in force pertaining
to the use and occupancy of the Premises by Tenant and its Agents. The
judgment at any court of competent jurisdiction or the admission of
Tenant in any action or proceeding against Tenant, whether Landlord
be a party thereto or not, that Tenant has violated any such Laws in
the use and occupancy of the Premises shall be conclusive of the fact
that such violation by Tenant has occurred.
B. Right to Contest. Tenant shall have the right to contest or
----------------
otherwise review by appropriate legal or administrative proceedings
the application of any Law or insurance underwriters requirement to
the use by Tenant of the Premises. If Tenant desires to so contest any
such Law or requirement. Tenant shall give Landlord written notice of
its intention to do so and may conduct such contest or other reviews
so long as it pays all costs, and compliance therewith maybe held in
<PAGE>
abeyance pending completion of such proceedings. Tenant shall protect
and indemnify Landlord against any and all expenses or damages
resulting from such contest or other proceeding.
21. SUBORDINATION. Tenant shall, upon Landlord's request, promptly execute
-------------
any instrument (including an amendment to this Lease) or instruments
of subordination reasonably necessary to subordinate this Lease to any
mortgage or deed of trust to be placed upon the Premises, or any part
thereof, by Landlord, which instrument or instruments may include such
other matters as the Lender customarily requires in connection with
such agreements in comparable transactions, including provisions that
the Lender not be liable for any defaults on the part of Landlord
occurring prior to the time the Leader takes possession of the
Premises in connection with the enforcement of its rights under the
mortgage or deed of trust. Tenant's failure to execute any such
instrument within ten (10) days after written demand therefor shall
constitute a default by Tenant under this Lease. Tenant agrees to
attorn to and recognize any mortgagee or beneficiary of the deed of
trust subsequently encumbering the Premises and any party acquiring
title to the Premises, by judicial foreclosure or a trustee's sale, as
a successor to Landlord hereunder. Tenant's obligation to subordinate
this Lease to any mortgage or deed of trust is conditioned upon the
following:
(i) The Lender must consent in writing to this Lease and agree in
writing that, so long as there does not then exist any Event of
Tenant's Default, in the event of foreclosure of the mortgage or
deed of trust the Lender shall recognize the tenancy of Tenant
on the terms contained herein and this Lease shall remain in
full force and effect.
(ii) If the instrument effecting subordination provides that upon
foreclosure of the mortgage or deed of trust the Lender (or any
successor in interest) is not liable for the full and complete
performance of all of the obligations of the Landlord under this
Lease (e.g., the completion of improvements to be constructed by
----
the Landlord), then such agreement shall provide that if a
foreclosure of such mortgage or deed of trust does occur and the
Lender (or its successor in interest) at any time thereafter
relies upon such provision to avoid performance of any
obligation of the Landlord contained in this Lease thus causing
a material interference with Tenant's use of the Premises,
then in that limited circumstance Tenant shall have the
following rights: (i) Tenant may terminate this Lease; or (ii)
Tenant may perform the obligation that such Leader (or successor
in interest) has elected not to perform and deduct the cost
thereof (with interest at the Agreed Interest Rate from date of
expenditure until reimbursement) from the payments of the Base
Monthly Rent until Tenant has been fully reimbursed for the cost
of such performance.
(iii) With respect to any Lender having a security interest in the
Premises as of the Commencement Date, such Lender shall
execute a non-disturbance agreement in accordance with the
aforementioned terms within ninety (90) days after the
Commencement Date. If such non-disturbance agreement is not
executed within such ninety (90) day period then Tenant shall
have the option at any time prior to the execution by the
Lender of such non-disturbance agreement, but shall not be
obligated to do so, to terminate this Lease whereupon the
Previous Lease shall be reinstated and Tenant shall pay to
Landlord the amount by which (i) all sums which would otherwise
have been payable by Tenant under the Previous Lease during the
period commencing April 1, 1992 and continuing through the date
of such termination, exceeds (ii) all amounts actually paid
by Tenant during the same period.
22. HOLDING OVER. This Lease shall terminate without further notice at the
------------
expiration of the Lease Term. Any holding over by Tenant after
expiration shall not constitute a renewal or extension or give Tenant
any rights in or to the Premises except as expressly provided in this
Lease. Any holding over after the expiration with the consent of
Landlord shall be construed to be a tenancy from month to month, at
one hundred twenty-five percent (125%) of the Base Monthly Rent for
the last month of the Lease Term, and shall otherwise be on the terms
and conditions herein specified insofar as applicable.
23. NOTICES. Any notice required or desired to be given under this Lease
-------
shall be in writing with copies directed as indicted below and shall
be personally served or given upon the earlier of delivery or by mail.
Any notice given by mail shall be deemed to have been given when
forty-eight (48) hours have elapsed from the time which such notice
was deposited in the United States mail, certified and postage
prepaid, addressed to the party to be served with a copy as indicated
herein at the last address given by that party to the other party
under the provisions of this Paragraph. At the date of execution of
this Lease, the address of Landlord is:
c/o Vintage Properties With a Copy To
--------------
393 Vintage Park Drive c/o Marina Village
Suite 210 1150 Marina Village Parkway
Foster City, California 94404 Suite 100
20
<PAGE>
Attn: Joseph R. Seiger Alameda, California 94501
Attn: Property Manager
and the address of Tenant is:
2440 West El Camino Real
Mountain View, California 94039
Attention: Chief Financial Officer.
24. ATTORNEYS' FEES. In the event either party shall bring any action or legal
---------------
proceeding for damages for any alleged breach of any provision of this
Lease, to recover rent or possession of the Premises, to terminate this
Lease, or to enforce, protect or establish any term or covenant of this
Lease or right or remedy of either party, the prevailing party shall be
entitled to recover as a part of such action or proceeding reasonable
attorneys' fees and court costs, including attorneys' fees and costs for
appeal, as may be fixed by the court or jury. The term "prevailing party"
shall mean the party who received substantially the relief requested,
whether by settlement, dismissal, summary judgment, judgment or otherwise.
25. NONASSIGNMENT.
-------------
A. Consent Required. Tenant's interest in this Lease is not assignable, by
----------------
operation of law or otherwise, nor shall Tenant have the right to sublet
the Premises, transfer any interest of Tenant therein or permit any use of
the Premises by another party, without the prior written consent of
Landlord to such assignment, subletting, transfer or use, which consent
Landlord agrees not to unreasonably withhold, subject to the provisions of
Paragraph 25.B and Paragraph 37. A consent to one assignment, subletting,
occupancy or use by another party shall not be deemed to be a consent to
any subsequent assignment, subletting, occupancy or use by another party.
Any assignment or subletting without such consent shall be void and shall,
at the option of Landlord, terminate this Lease. Landlord's waiver or
consent to any assignment or subletting hereunder shall not relieve Tenant
from any obligation under this Lease unless the consent shall so provide.
Tenant may, with Landlord's prior written consent, assign this Lease as
security for a bona fide loan: provided, however, that if the lender is an
Institutional Lender or syndicate of lenders headed by an Institutional
Lender (a "Syndicate"), Landlord's prior consent shall not be required. If
the lender taking this Lease as security is an Institutional Lender or a
Syndicate, Landlord shall make such amendments to this Lease or agreements
with such lender as (i) are reasonably requested by such lender, (ii) are
limited to protecting the lender's security interest in the Lease, (iii)
are customarily received by Institutional Lenders in connection with
leasehold mortgage financing, (iv) do not materially and adversely affect
Landlord's rights under the Lease and will not delay Landlord's exercise of
its remedies for an Event of Tenant's Default and in no event change the
Base Monthly Rent, Additional Rent, or Lease Term, and (v) would not
constitute a default under any mortgage or deed of trust encumbering the
Premises. Notwithstanding the foregoing, Landlord shall not be obligated to
make amendments to the Lease or agreements with such lender which would
permit the Lease to be assigned without the prior consent of Landlord.
Without limiting the other instances in which it may be reasonable for
Landlord to withhold its consent to an assignment or subletting, Landlord
and Tenant acknowledge that it shall be reasonable for Landlord to withhold
its consent (i) if the proposed assignee or sublesee is a governmental
agency: (ii) if, in Landlord's reasonable judgement, the use of the
Premises by the proposed assignee or sublessee would entail any atlerations
which would materially lessen the value of the leasehold improvements in
the Premises (and Tenant does not provide Landlord with reasonable
assurance that such alterations will be removed and restored upon
termination of the Lease), or would require materially increased services
by Landlord for which reimbursement by Tenant is not sufficient to cover
all costs that Landlord would incur as a result of providing such
additional services: (iii) if, in Landlord's reasonable judgment, the
financial worth of the proposed assignee or sublessee does not meet the
credit standards applied by Landlord for other tenants under leases with
comparable term and the proposed sublease term expiration is within one (1)
year of the expiration of the Lease Term, or the character, reputation or
business of the proposed assignee or sublessee is not consistent with the
quality of the other tenancies in the Project: (iv) in the case of a
subletting of less than the entire Premises, if the subletting would result
in the division of any given floor of the Premises into more than four
subparcels, would create a subparcel of a configuration that is not
suitable for normal leasing purposes, or would require access to be
provided through space leased or held for lease to another tenant or
improvements to be made outside of the Premises and Tenant does not provide
Landlord with reasonable assurance that such alterations to create such
configuration will be removed and restored to the original configuration
upon termination of the Lease: or (v) if, at the time consent is requested
or at any time prior to the granting of consent, there is an uncured Event
of Tenant's Default under the Lease which is capable of being cured and
which has not been cured. As used in this Paragraph 25, the term "assign"
or "assignment" shall include, without limitation, any sale.
21
<PAGE>
transfer, or other disposition of all or any position of Tenant's estate under
this Lease, whether voluntary or involuntary, and whether by operation of law or
otherwise including any of the following:
(i) If Tenant is a corporation (i) any dissolution, merger, consolidation, or
other reorganization of Tenant or (ii) a sale of more than 50% of the
value of the assets of Tenant or (iii) if Tenant is a corporation with
fewer than 50 shareholders, sale or other transfer of a controlling
percentage of the capital stock of Tenant to one entity or to a group of
related entities. The phrase "controlling percentage" means the ownership
of, and the right to vote, stocks possessing at least 50% of the total
combined voting power of all classes of Tenant's stock issues outstanding
and permitted to vote for the election of directors:
(ii) If Tenant is a trust the transfer of more than 50% of the beneficial
interest of Tenant, or the dissolution of the trust:
(iii) If Tenant is a partnership or joint venture, the withdrawal, or the
transfer of the interest of any general partner or joint venturer or the
dissolution of the partnership or joint venture:
(iv) If Tenant is composed of tenant-in-common, the transfer of interest of
any cotenants or the partition of dissolution of the cotenancy.
B. Notice Required. It Tenant desires to assign its interest in this Lease or
---------------
sublet the Premises, or transfer any interest of Tenant therein, or permit the
use of the Premises by another party (hereinafter collectively referred to as a
"Transfer"), Tenant shall give Landlord at least fifteen (15) days prior written
notice of the proposed Transfer and of the terms of such proposed Transfer,
including, but not limited to, the name and legal composition of the proposed
transferee, a financial statement of the proposed transferee, the nature of the
proposed transferee's business to be carried on in the Premises, the payment to
be made or other consideration to be given on account of the Transfer, and such
other pertinent information as may be requested by Landlord, all in sufficient
detail to enable Landlord to evaluate the proposed Transfer and the prospective
transferee.
C. Landlord's Rights to Share in Net Subrent Profit. If Landlord consents to
------------------------------------------------
a Transfer proposed by Tenant, Tenant may enter into such Transfer, and if
Tenant does so, the following shall apply so such Transfer (but not to any
Transfer described by Paragraph 25.D):
(i) If Tenant assigns its interest in this Lease, then Tenant shall pay to
Landlord fifty percent (50%) of all consideration received by Tenant over
and above (a) the assignee's agreement to assume the obligations of Tenant
under this Lease, and (b) all "Permitted Transfer Costs" (as defined in
Paragraph 25.C(v)). In the case of assignment, the amount of consideration
owed to Landlord shall be paid to Landlord on the same basis, whether
periodic or in lump sum, that such consideration is paid to Tenant by the
assignee.
(ii) If Tenant sublets any part of the Premises, then with respect to the space
so subleased. Tenant shall pay to Landlord fifty percent (50%) of the
positive difference, if any, between (a) all rent and other consideration
paid by the subtenant to Tenant less (b) all Permitted Transfer Costs and
all payments of the Base Monthly Rent and Additional Rent fairly allocable
so that part of the Premises affected by such sublease. Such amount shall
be paid to Landlord on the same basis whether periodic or in lump sum,
that such rent and other consideration is paid to Tenant by its subtenant.
In calculating Landlord's share of any periodic payments, all such costs
permitted to be deducted from the gross consideration received by Tenant
that have been paid by Tenant shall he first recovered by Tenant.
(iii) Tenant's obligations under this Paragraph 25.C shall survive any Transfer.
At the time Tenant makes any payment to Landlord required by this
Paragraph 25.C. Tenant shall deliver an itemized statement of the method
by which the amount to which Landlord is entitled was calculated,
certified by Tenant as true and correct. Landlord shall have the right at
reasonable intervals to inspect Tenant's books and records relating to the
payments due hereunder. Upon request therefor, Tenant shall deliver to
Landlord copies of all bills, invoices or other documents upon which its
calculations are based.
(iv) As used in this Paragraph 25.C. the term "consideration" shall mean any
consideration of any kind received by Tenant as a result of the Transfer
if such consideration is paid or given in exchange for Tenant's interest
in this Lease or in the Premises.
22
<PAGE>
(v) As used herein, the term "Permitted Transfer Costs" shall mean the
following (a) all reasonable leasing commissions paid to third
parties not affiliated with Tenant in order to obtain the Transfer in
question: (b) all reasonable attorneys' fees incurred by Tenant with
respect to the Transfer in question: (c) the cost of Alterations that
must be made by Tenant in order to obtain the Transfer in question:
(d) the amount of the Base Monthly Rent and all Additional Rent paid
by Tenant with respect to that part of the Premises affected by the
Transfer in question for that period of time during which such part
of the Premises was vacant and actively being marketed for sublease
or assignment so long as at the commencement of such vacancy previous
notice of such vacancy was delivered to Landlord and Landlord was
able to inspect and verify same: and (e) any of the foregoing types
of costs paid or incurred by Tenant with respect to prior Transfers
which Tenant did not recoup (after first paying the Base Monthly Rent
and Additional Rent fairly allocable to the space affected by such
prior Transfers) from rent and other consideration paid by the
subtenants or assignees that were parties to such prior Transfers.
(vi) In the event Tenant shall assign the Lease or sublet the Premises or
request the consent of Landlord to any assignment or subletting or if
Tenant shall request the consent of Landlord for any act that Tenant
proposes to do then Tenant shall pay Landlord's reasonable attorney's
fees incurred in connection therewith up to One Thousand Dollars
($1,000) per event, as such amount as adjusted pursuant to Paragraph
41.
D. Exempt Transfers. Tenants may, without Landlord's prior written
----------------
consent and without any participation by Landlord in assignment or
subletting proceeds, assign its interest in the Lease or sublet the
Premises or a portion thereof to (i) an Affiliate of Tenant: (ii) a
successor corporation related to Tenant by merger, consolidation, non-
bankruptcy reorganization or government action, or engage in a merger,
consolidation or other reorganization of Tenant which is defined as an
"Assignment" under Paragraph 25.A(i); or (iii) a purchaser of substantially
all of the Tenant's assets related to the business being operated at the
Premises, so long Affiliate and Tenant, combined, under (i), such successor
or the entity which continues as Tenant under (ii), or such purchaser under
(iii), has a net worth equal to or greater than the net worth of Tenant as
of the Effective Date: provided that in all such instances the transferee
assumes the obligations of the Tenant under this Lease in a written
instrument delivered to Landlord and provided further that the transferor
tenant remains liable as a primary obligor for the obligations of Tenant
under this Lease (excluding a transferor corporation which does not survive
a merger or other reorganization).
26. SUCCESSORS. This Lease shall be binding on the parties hereto and on their
----------
respective heirs, successors and assigns (to the extent the Lease is
assignable).
27. LENDER PROTECTION. In the event of any default on the part of Landlord.
-----------------
Tenant shall give notice by registered or certified mail to any Lender
whose address shall have been furnished it, and shall offer such Lender a
reasonable opportunity to cure the default, including time to obtain
possession of the Premises by power of sale or judicial foreclosure, if
such should prove necessary to effect a cure.
28. ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS. At all times during the
----------------------------------------------
Lease Term, each party agrees, following any request by the other party,
promptly to execute and deliver to the requesting party an estoppel
certificate (i) certifying that Lease is unmodified and in full force
and effect or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect,
(ii) stating the date to which the rent and other charges are paid in
advance, if any, (iii) acknowledging that there are not, to the certifying
party's knowledge, any uncured defaults on the part of any party hereunder
or, if there are uncured defaults, specifying the nature of such defaults,
and (iv) certifying such other information about the Lease as may be
reasonably required by the requesting party. A failure to deliver an
estoppel certificate within ten (10) days after delivery of a request
therefor shall be a conclusive admission that, as of the date of the
request for such statement, (a) this Lease is unmodified except as may be
represented by the requesting party in said request and is in full force
and effect, (b) there are no uncured defaults in the requesting party's
performance, and (c) no rent has been paid in advance for more than thirty
(30) days. At any time during the Lease Term Tenant shall, upon ten (10)
days prior written notice from Landlord, provide Tenant's most recent
financial statement and financial statements covering the twenty-four (24)
month period prior to the date of such most recent financial statement to
Landlord, any existing Lender or to any potential Lender or buyer of the
Premises. Such statements shall be prepared in accordance with generally
accepted accounting principles and, if such is the normal practice of
Tenant, shall be audited by an independent certified public accountant.
Failure to deliver such statements within ten (10) days after receipt of
written notice from Landlord of delinquency in delivery of such statement
shall be an Event of Tenants Default under Paragraph 15. Landlord shall use
reasonable efforts to keep confidential all financial statements delivered
to it by Tenant pursuant to this paragraph
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and shall cause any potential Lender or buyer of the Premises to whom
such statements are delivered also to agree to use reasonable efforts
to keep such statements confidential.
29. SURRENDER OF LEASE NOT MERGER. The voluntary or other surrender of
-----------------------------
this Lease by Tenant, or a mutual cancellation thereof, shall not
work a merger and shall at the option of Landlord, terminate all or
any existing subleases or subtenants or operate as an assignment to
Landlord of any or all such subleases or subtenants.
30. WAIVER. The waiver by Landlord or Tenant of any breach at any term,
------
covenant or condition or any subsequent breach of the same or any
other term, covenant or condition herein contained shall not be
deemed to be a waiver of such term, covenant or condition or any
subsequent breach of the same or any other term, covenant or
condition herein contained.
31. GENERAL.
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A. Captions. The captions and paragraph headings used in this Lease
--------
are for the purposes of convenience only. They shall not be construed
to limit or extend the meaning of any part of this Lease.
B. Transfers by Landlord; Limitation on Tenant's Recourse for Landlord
-------------------------------------------------------------------
Default: Landlord and its successors in interest shall have the
-------
right to transfer their interest in this Lease and the Premises at
any time and to any person or entity. In the event of any such
transfer, the Landlord originally named herein (and, in the case of
any subsequent transfer, the transferor) from the date of such
transfer shall be relieved of all liability for the performance of
the obligations of the Landlord hereunder which may accrue after
the date of such transfer except for those relating to any funds in
which Tenant has an interest that are in the hands of Landlord or
the then transferor at the time of such transfer which are not
turned over the transferee; provided, however, that the foregoing
release shall not be effective unless the transferee shall have
executed an assumption agreement by which it agrees to perform all
of the obligations of the Landlord under this Lease which accrue
after the date of such transfer or which are then in default. The
release of a transferring Landlord of its obligations under
Paragraph 37.G concerning Hazardous Materials shall further be
conditioned upon the transferee having, at the time of transfer of
title to the Premises, either (i) a net worth determined in
accordance with generally accepted accounting principles of at
least $5,000,000 (as such amount is adjusted pursuant to Paragraph
41) which net worth is also not less than twenty-five percent (25%)
of the value of all assets of such transferee, or (ii) a net worth
determined in accordance with generally accepted accounting
principles of at least $15,000,000 (as adjusted pursuant to
Paragraph 41). In addition, if Landlord voluntarily transfers fee
title to the Premises prior to completion of the Renovation
Improvements, then Landlord or the transferor shall not be relieved
of its obligations to complete the Renovation Improvements in
accordance with the Lease unless Landlord shall upon such transfer
deposit into an escrow under the control of Landlord's transferee
and Tenant, as security for the performance of all obligations
under the Improvement Agreement an amount equal to Landlord's
reasonable estimate of the Renovation Improvement Costs which will
then be required to complete such Renovation Improvements or shall
deliver to Tenant a survey bond in such amount as security for the
obligation of Landlord's transferee with respect to the completion
of the Renovation Improvements which bond shall be in form, and be
issued by such surety company, as is reasonably acceptable to
Tenant. The obligations of Landlord under this Lease do not
constitute personal obligations of the partners, directors,
officers, shareholders, or trustees of Landlord, or of the
partners, directors, officers, shareholders or trustees of
Landlord's partners ("Beneficial Owners") except with respect to
Landlord and its general partners (but not the partners of its
general partners) as provided below. For the realization of any
claims against Landlord arising under this Lease. Tenant shall have
recourse only to the assets of Landlord which are real property
subject to this Lease or proceeds therefrom (e.g; condemnation
---
proceeds, insurance proceeds, or rent) (the "Building Assets") for
the satisfaction of such obligations and not against the other
assets of Landlord or its Beneficial Owners. Notwithstanding the
foregoing, the following shall apply only with respect to claims by
Tenant directly resulting from any and all defaults by Landlord of
its obligations under the Improvement Agreement and/or Paragraph
37.G concerning Hazardous Materials ("Special Defaults"): (i) for
Special Defaults, Tenant shall first seek recourse against Building
Assets but not to exceed $5,000,000 (as adjusted pursuant to
Paragraph 41.) for each claim and in the aggregate: (ii) to the
extent Tenant is unable to recover all amounts to which it is
entitled for Special Defaults from recourse against Building
Assets. Landlord and its general partners (but not any partners or
Beneficial Owners of such general partners) shall be liable to pay
the short fall in Tenant's recovery to the extent necessary to
provide Tenant with an aggregate total recovery from Building
Assets and such additional payments by Landlord and its general
partners of the lesser of $5,000,000 as that amount is adjusted
pursuant to Paragraph 41 hereof) or the aggregate amount Tenant is
entitled to recover from Landlord for Special Defaults under the
following three sentences: and (iii) the obligation of Landlord and
its general partners to make the additional contribution described
in clause (ii) immediately preceding (the "Special Contribution
Obligation") shall be limited as provided in the following three
sentences. The parties acknowledge that concurrently with
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the execution of this Lease, Landlord and Tenant are executing other leases
and option agreements (which, if options are exercised, will lead to the
execution of additional leases) covering facilities in the Project (the
"Other Leases"), and that each of the Other Leases contains a provision
substantially the same as that contained in the immediately preceeding
sentence. Notwithstanding anything contained herein, in no event shall
Landlord and its general partners be required to pay more than $10,000,000
(as such amount is adjusted pursuant to Paragraph 41 hereof) in discharge
of the Special Contribution Obligations described herein or in the Other
Leases. In no event shall Landlord be liable for consequential damages,
such as lost revenues or lost profits, which may result from Landlord's
breach of its obligations to complete the Renovation Improvements set forth
in the Improvement Agreement.
C. Time. Time is of the essence for the performance of each term,
----
covenant and condition of this Lease.
D. Severability; Governing Law. In case any one or more of the provisions
---------------------------
contained herein, except for the payment of rent, shall for any reason be
held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provision of this Lease, but this Lease shall be construed as if such
invalid, illegal or unenforceable provision had not been contained herein.
This Lease shall be construed and enforced in accordance with the laws of
the State of California.
E. Joint and Several Liability. If Tenant is more than one person or
---------------------------
entity, each such person or entity shall be jointly and severally liable
for the obligations of Tenant hereunder.
F. Exhibits. All exhibits attached hereto and referred to herein are
--------
incorporated herein by this reference.
G. Miscellaneous. Any executed copy of this Lease shall be deemed an
-------------
original for all purposes. As used herein, "party" shall mean Landlord or
Tenant, as the context implies. The language in all parts of this Lease
shall in all cases be construed as a whole according to its fair meaning,
and not strictly for or against Landlord or Tenant. When the context of
this Lease requires, the neuter gender includes the masculine, the
feminine, a partnership or corporation or joint venture,and the singular
includes the plural. The terms "shall", "will", and "agree" are mandatory.
The term "may" is permissive. When a party is required to do something by
this Lease, it shall do so at its sole cost and expense without right of
reimbursement from the other party unless specific provision is made
therefor. When a party is obligated not to perform any act, that party is
also obligated to restrain any others within its control from performing
said act, including agents, contractors and employees. The use herein of
the word "including", when following any general statement, term or matter
shall not be construed to limit such statement, term or matter to the
specific items or matters set forth immediately following such word or to
similar items or matters, whether or not non-limiting language (such as
"without limitation" or "but not limited to," or word of similar import) is
used with reference thereto, but rather shall be deemed to refer to all
other items or matters that could reasonably fall within the broadcast
possible scope of such general statement, term or matter.
H. Survival. The following provisions of this Lease shall survive the
--------
expiration or earlier termination of this Lease (but not if such early
termination results from the exercise by Tenant of any right of rescission
of this Lease as set forth in Paragraph 3.A. above); 4.F.(3) (payment of
Percentage Share of Operating Expenses); 7.B. (payment of Percentage Share
of Property Taxes): 8.A. (Waiver and Indemnity): 9. (Utilities): 13.B. (iv)
(removal of alterations): 22 (Holding Over): 31.B. (Transfers by Landlord:
Limitation on Tenant's Recourse): 34 (Surrender): 37.F. (surrender): and
37.G. (Landlord's Obligations).
32. SIGNS. Tenant shall be entitled to install signs identifying its business
-----
within the Project and exterior signs on the Building as described and in
accordance with an overall signage program to be approved by Landlord and
Tenant and subject to any Laws: provided, however. Landlord has previously
agreed to (i) allow Tenant its own separate identity signage from that of
the Project, and (ii) include in Tenant's signage program major entry
signage at the entry to Tenant's campus within the Project, secondary
identity signage at secondary entrances and directional signage to all of
Tenant's buildings within the Project. The cost of all exterior signage
shall be paid by Landlord. At the termination of this Lease. Tenant shall
remove any signs which it has placed on the Premises and shall repair any
damage caused by the installation or removal of such signs.
33. INTEREST ON PAST DUE OBLIGATIONS. Any amount due to Landlord or Tenant not
--------------------------------
paid when due shall bear interest from the due date until paid at the
Agreed Interest Rate. Payment of such interest shall not excuse or cure any
default by Tenant under this Lease.
25
<PAGE>
34. SURRENDER OF THE PREMISES. On the last day of the Lease Term, or on sooner
-------------------------
termination of this Lease, Tenant shall surrender the Premises to Landlord
in their condition existing as of the Commencement Date, ordinary wear and
tear expected, with all originally painted interior walls washed and other
interior walls cleaned, all damaged ceiling tiles and lighting lenses
replaced, all carpets shampooed and cleaned, the air conditioning and
heating equipment serviced and repaired by a reputable and licensed service
firm, all floors cleaned and waxed, all to the reasonable satisfaction of
Landlord, subject to the limitations on Tenant's obligation to remove
Alterations and restore the Premises to its prior condition set forth in
Paragraph 13. Nothing contained in this Paragraph 34 shall require Tenant
to repair the effects of any condemnation, damage or destruction or any
other condition which Tenant is not required to remedy under this Lease.
Tenant shall remove all of Tenant's personal property and Trade Fixtures
from the Premises, and all property not so removed shall be deemed
abandoned by Tenant. Tenant, at its sole cost, shall repair any damage to
the Premises caused by the removal of Tenant's Trade Fixtures, personal
property, machinery and equipment, which repair shall include the patching
and filling of holes and repair of structural damage. If the Premises are
not so surrendered at the termination of this Lease, Tenant shall indemnify
Landlord against loss or liability resulting from delay by Tenant in so
surrendering the Premises, including, without limitation, any claims made
by any succeeding tenant or losses to Landlord due to lost opportunities to
lease to succeeding tenants.
35. AUTHORITY. The undersigned parties hereby warrant that they have proper
---------
authority and are empowered to execute this Lease on behalf of Landlord and
Tenant, respectively.
36. OPTIONS TO EXTEND.
-----------------
A. Tenant shall have three (3) options to extend the Lease Term, each for
a period of five (5) years (each of which is referred to herein as an
"Option Term"). Each option may be exercised only by written notice given
to Landlord not earlier than twenty-four (24) months and not later than
eighteen (18) months prior to the expiration of the then existing Lease
Term. Tenant may not exercise any of such options at any time that there
exists an Event of Tenant's Default involving those events described in
Paragraph 15.A(iv), (vi) or (vii) or there exists an Event of Tenant's
Default that is capable of being cured but has not been cured by Tenant. In
all respects, the terms, covenants and conditions of this Lease shall
remain unchanged during each Option Term, except that the Base Monthly Rent
payable during each Option Term shall be increased in accordance with
Paragraph 36.B. Landlord shall have no obligation to fund additional tenant
improvements in the Premises or pay Tenant's brokerage commission, if any,
and there shall be no further option to extend the Lease Term at the end of
the third Option Term.
B. The Base Monthly Rent payable during each Option Term shall be ninety
percent (90%) of the "Fair Market Rent for the Premises" (as defined in
Paragraph 36.D) as of the first day of the Option Term in question. Base
Monthly Rent during an Option Term may be subject to an adjustment or
adjustments at such times, in such amount or using such formula, as may be
established in connection with determining the Fair Market Rent for the
Premises.
C. Promptly following exercise of each option to extend, the parties
shall meet and endeavor to agree upon the Fair Market Rent of the Premises.
If within fifteen (15) days after exercise of any of the options, the
parties cannot agree upon the Fair Market Rent for the Premises as of the
first day of the Option Term in question, the parties shall submit the
matter to binding appraisal in accordance with the following procedure:
Within thirty (30) days after exercise of the option, the parties shall
either (i) jointly appoint an appraiser for this purpose or (ii) failing
this joint action, separately designate a disinterested appraiser. No
person shall be appointed or designated an appraiser unless he has at least
five (5) years experience in appraising major commercial property in
Alameda County and is a member of a recognized society of real estate
appraisers. If within thirty (30) days after the appointment the two
appraisers reach agreement on the Fair Market Rent for the Premises as of
the first day of the Option Term in question, that value shall be binding
and conclusive upon the parties. If the two appraisers thus appointed
cannot reach agreement on the question presented within thirty (30) days
after their appointment, then the appraisers thus appointed shall appoint a
third disinterested appraiser having like qualifications. If within thirty
(30) days after the appointment of the third appraiser a majority of the
appraisers agree on the Fair Market Rent of the Premises as of the first
day of the Option Term in question, that value shall be binding and
conclusive upon the parties. If within thirty (30) days after the
appointment of the third appraiser a majority of the appraisers cannot
reach agreement on the question presented, then the three appraisers shall
each submit their independent appraisal to the parties, the appraisal
farthest from the median of the three appraisals shall be disregarded, and
the average of the remaining two appraisals shall be deemed to be the Fair
Market Rent of the Premises as of the first day of the Option Term in
question and shall be binding and conclusive upon the parties. Each party
shall pay the fees and expenses of the appraiser appointed by it and shall
share equally the fees and expenses of the third appraiser. If the two
appraisers
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<PAGE>
appointed by the parties cannot agree on the appointment of the third
appraiser, they or either of them shall give notice of such failure to
agree to the parties and if the parties fail to agree upon the selection of
such third appraiser within ten (10) days after the appraisers appointed by
the parties give such notice, then either of the parties, upon notice to
the other party, may request such appointment by the American Arbitration
Association or, on its failure, refusal or inability to act, may apply for
such appointment to the presiding judge of the Superior Court of Alameda
County, California.
D. For purposes of this Paragraph, the term "Fair Market Rent for the
Premises" shall mean the going market rental and any adjustment or
adjustments to such rental at such time(s) and in such amount or using such
formula as is prevailing at the time of the commencement of the Option Term
in question, for comparably equipped space in buildings containing between
50,000 and 250,000 square feet, located within a five (5) mile radius of
the Premises, and in a condition comparable to the then condition of the
Premises, taking into account all legal uses for which the Premises could
be used without material alteration thereto and the value of all the
improvements in the Premises made by Landlord (but adjusting for the age
and then condition of such improvements) for a tenant proposing to sign a
lease for a similar term and having financial qualifications similar to
Tenant and using as a guide equivalent space in the size range specified
above of similar age, construction, quality, use and location. There shall
be excluded from any determination of "Fair Market Rent of the Premises"
the rental value attributable to any improvements constructed by Tenant
with its own funds, and all Trade Fixtures and personal property of Tenant
located in the Premises. Any determination of "Fair Market Rent of the
Premises" shall take into account rental concessions then prevailing in the
market (e.g., "free rent," lease assumptions, payment of moving expenses,
etc.).
E. If the Base Monthly Rent for any Option Term is established by appraisal
conducted pursuant to Paragraph 36.C hereof and if Tenant does not, in its
sole discretion, approve the Fair Market Rent for the Premises established
for the Option Term in question as so established by appraisal, then Tenant
may rescind its exercise of the option in question by giving Landlord
written notice of such election to rescind within fifteen (15) days after
the Fair Market Rent for the Premises for the Option Term in question is so
established by appraisal. If Tenant so timely rescinds its exercise of the
option in question, then (i) the Lease shall expire on the later to occur
of either five hundred forty (540) days after Tenant's notice of rescission
is delivered to Landlord or on the date the Lease would otherwise have
expired absent such exercise of the option in question by Tenant; (ii) if
the Lease Term is extended as a result of Tenant's rescission, then the
Base Monthly Rent for the extended period shall be equal to the Base
Monthly Rent in effect prior to Tenant's rescission; and (iii) Tenant shall
pay all costs incurred by Landlord in participating in any appraisal to
establish the Fair Market Rent for the Premises for the Option Term in
question.
37. HAZARDOUS MATERIAL.
------------------
A. Definitions. As used herein, the term "Hazardous Material" shall mean
-----------
any substance or material which has been determined by any state, federal
or local governmental authority to be capable of posing a risk of injury to
health, safety or property including all of those materials and substances
designated as hazardous or toxic by the Environmental Protection Agency,
the California Water Quality Control Board, the Department of Labor, the
California Department of Industrial Relations, the Department of
Transportation, the Department of Agriculture, the Consumer Product Safety
Commission, the Department of Health and Human Services, the Food and Drug
Administration or any other governmental agency now or hereafter authorized
to regulate materials and substances in the environment. Without limiting
the generality of the foregoing, the term "Hazardous Material" shall
include asbestos, PCB's, petroleum products and all materials and
substances listed under Article 11, or defined as hazardous or extremely
hazardous pursuant to Article 1 of Title 22 of the California Code of
Regulations, Division 4, Chapter 30, as the same shall be amended from time
to time.
B. Use Restriction. Tenant shall not cause or allow anyone else to cause,
---------------
any Hazardous Materials (other than commercially reasonable quantities of
cleaning and office supplies for Tenant's use to be used, generated,
stored, released or disposed of (collectively "Use") on or about the
Premises, the Building or the Outside Areas without the prior written
consent of Landlord, which consent may be withheld in the sole discretion
of Landlord unless all of the conditions set forth in subparagraphs (i)
through (iii) below are met, in which event such consent shall not
unreasonably be withheld. In the Event of any breach by Tenant, which
constitutes an Event of Tenant's Default, of the covenants or conditions
set forth in this Paragraph B, in addition to all of its other remedies
under this Lease, Landlord may revoke any consent previously given with
respect to the Use of Hazardous Materials.
(i) The proposed Hazardous Material does not include freon, TCE,
hydrocarbons or any hydrocarbon-based compounds or any Hazardous
Material that has been detected at any time at levels exceeding
"action levels" of any governmental
27
<PAGE>
agency in the soil or groundwater of the Premises, and the Use does not
involve: (1) outside or underground storage: (2) storage of any quantities
in excess of those requiring the establishment of a Business Plan under
the provisions of Health & Safety Code Section 25503.5: (3) the proposed
Use does not involve manufacturing of commercial quantities of any
Hazardous Materials: or (4) above-ground or inside storage, unless Tenant
has made appropriate provisions for leak protection, leak detection and
leak containment and such provisions are compatible with Building systems.
(ii) The tangible net worth of Tenant at the time it requests consent to such
Use is at least equal to $5,000,000 (as increased in accordance with the
percentage increase in the Consumer Price Index from the Effective Date
through the month prior to Tenant's request). "Tangible net worth" shall
mean, at any date, the sum of the capital stock and additional paid-in
capital stock and additional paid-in capital plus retained earnings (or
minus accumulated deficit) of Tenant and its subsidiaries on a
consolidated basis, minus all intangible assets of Tenant and its
subsidiaries including, without limitation: (a) goodwill, trademarks,
patents, patent application, brand names, copyrights, franchises and
deferred charges (including unamortized debt discount and software
development and other research and development costs), determined in
accordance with generally acceptable accounting principles; (b) treasury
stock; (c) cash held in a sinking or other similar fund established for
the purpose of redemption or other retirement of capital stock: (d) to the
extent not already deducted from total assets, reserves for depreciation,
depletion, obsolescence or amortization of properties and other reserves
or appropriations of retained earnings which have been or should be
established in connection with the business conducted by the relevant
corporation: (e) purchased intangibles; and (f) any revaluation or other
write-up in book value of assets subsequent to the fiscal year of Tenant
last ended at the date of this Lease. Such tangible net worth shall be as
reported by an independent certified public accountant according to
generally accepted accounting principles.
(iii) Tenant, and/or any subtenant on whose behalf Tenant requests such consent
has not previously been cited or charged by any governmental authority for
improper use, storage or discharge of any Hazardous Material and is not,
and has not previously been involved, either as a potentially responsible
party, or otherwise, in any remediation or clean-up of a release of
Hazardous Material: provided, however, if Tenant's proposed subtenant is
an entity whose shares are publicly traded, the subtenant explicitly
assumes in writing the obligations of Tenant under this Paragraph 37 with
respect to those Hazardous Materials Used by such subtenant on a joint and
several basis, and the net worth of such proposed subtenant, as determined
in accordance with generally acceptable accounting principles, is at least
$50,000,000, then this subparagraph (iii) shall not be applicable.
Upon seeking Landlord's consent, Tenant shall provide a complete list of all
Hazardous Materials proposed to be permitted on the Premises, the maximum
quantities to be used during any one-month period and a description of the means
which will be used to handle, store and remove such materials from the Premises.
Tenant shall obtain Landlord's consent before using any additional Hazardous
Materials on the Premises not included in Tenant's most recent list, and shall
provide written certification to Landlord at least once during any twelve month
period of the term, and at any time within five business days of Landlord's
request, but not more often than four times during each twelve month period of
the continued accuracy of Tenant's prior disclosures with respect to the
Hazardous Materials then being used on the Premises. Tenant at its sole cost
shall strictly comply with all Laws relating to the Use by Tenant or its Agents
of Hazardous Materials. Landlord and its Agents may, from time to time, and
without prior notice to Tenant, inspect the Premises for the purposes of
confirming the presence of Hazardous Materials thereon and the means and methods
then being used to handle and dispose of such materials, but Landlord shall not
have an obligation so to do. The costs of inspections by Landlord's consultants
shall be paid by Tenant as an Operating Expense, and if, as a result of any such
inspection, or otherwise, Landlord determines that any certification by Tenant
is inaccurate, then, promptly following Landlord's request, Tenant shall cause
the proper legal removal from the Premises of Hazardous Materials not previously
disclosed and opposed by Landlord, and shall cease all use or processes for
which Landlord has not previously given its consent. If the Use of Hazardous
Materials on the Premises caused by Tenant or its Agents results in
contamination of the Premises or any soul or groundwater in, under or about the
Premises. Tenant, at its expense, shall promptly take all actions necessary to
remediate such contamination and otherwise to comply with the requirements of
any governmental agency or other authority having jurisdiction over the
Premises. Tenant shall defend, hold harmless and indemnify Landlord and its
Agents and employees with respect to (i) all claims, damages (including
consequential damages such as those which may result from Landlord's inability
to obtain financing for the Building), costs (including attorneys' fees) and
liabilities arising out of or in connection with the Use of any Hazardous
Material in or about the Premises by Tenant or its Agents, and (ii) any disposal
or release of any Hazardous Material on or under the Building emanating from
those portions of the Premises over which Tenant has exclusive control occurring
after the date possession of the Premises or the portion where such
28
<PAGE>
Material is disposed or released, is delivered to Tenant and prior to the
termination of this Lease, and that is not the result of the negligence or
willful misconduct of Landlord or its Agents. In the event of any dispute
between Landlord and Tenant concerning Tenant's indemnification and defense
obligations under this Paragraph B, for so long as Tenant uses the Premises
solely for general office purposes. Landlord shall have the burden of showing
by the preponderance of the evidence that the Use of any Hazardous Material was
caused by Tenant or its Agents. If the Premises has been used for other than
general office purposes by Tenant or its Agents, then Tenant shall bear the
burden of showing by the same burden of proof that neither it nor any of its
Agents caused the contamination of the Premises or any such soil or groundwater
or such claims, damages or liabilities.
C. Compliance. Tenant, at its sole cost, shall strictly comply with all Laws
----------
relating to the Use by Tenant of Hazardous Materials. If the presence of
Hazardous Materials on the Premises caused by Tenant or its Agents results in
contamination of the Premises or any soil or groundwater in, under or about the
Premises, Tenant, at its expense, shall promptly take all actions necessary to
remediate such contamination and otherwise to comply with the requirements of
any governmental agency or other authority having jurisdiction over the
Premises. Tenant shall not suffer any lien to be recorded against the Premises
as a consequence of the disposal of a Hazardous Material on the Premises by
Tenant or its Agents, including any so-called state, federal or local "super
fund" lien related to the "clean-up" of a Hazardous Material in or about the
Premises. Tenant shall promptly, following Tenant's becoming aware of the same,
notify Landlord of any inquiry, test, investigation or enforcement proceeding by
or against Tenant or the Premises concerning a Hazardous Material. If Landlord
reasonably believes that Tenant has violated the provisions of this Paragraph 37
and, if following notice by Landlord to Tenant. Tenant has failed to correct
such violation in a timely manner. Landlord shall have the right to appoint a
consultant to conduct an investigation to determine whether Hazardous Materials
are being Used in an appropriate manner. If Tenant has violated any law or
covenant in this Lease regarding the Use of Hazardous Materials on or about the
Premises. Tenant Shall reimburse Landlord for the cost of such investigation.
Tenant, at its expense, shall comply with all reasonable recommendations of the
consultant required to conform Tenant's Use of Hazardous Materials to the
requirements of applicable Law or to fulfill the obligations of Tenant
hereunder.
D. Assignment and Subletting. In evaluating a proposed Transfer and the
-------------------------
prospective transferee in accordance with Paragraph 25. Landlord may take into
account the proposed transferee's history of compliance with Laws regulating
Hazardous Materials.
E. Notice. Landlord and Tenant shall each give written notice to the other as
------
soon as reasonably practicable of (i) any communication received from any
governmental authority concerning Hazardous Materials which relates to the
Premises, and (ii) any contamination of the Premises by Hazardous Materials
which constitutes a violation of any Law regulating Hazardous Materials. At any
time during the Lease Term, Tenant shall, within five (5) days after written
request therefor received from Landlord, disclose in writing all Hazardous
Materials that are being used by Tenant on the Premises, the Use of which
requires Tenant to make written reports to any governmental agency under any Law
regulating Hazardous Materials which disclosure by Tenant shall state the nature
of such Use.
F. Surrender. Upon the expiration or earlier termination of the Lease. Tenant,
---------
at its sole cost, shall remove all Hazardous Materials from the Premises and
from the groundwater under the Premises which Tenant introduced to the Premises
to the extent required by Law or to that level that a prudent owner would do on
its own account (taking into account cost, legal requirements, anticipated
changes in legal requirements and potential threat to groundwater), with
disputes settled by binding arbitration under the Commercial Rules of the
American Arbitration Association. Tenant shall indemnify and hold Landlord
harmless from all claims, liabilities, expenses (including attorney's fees and
investigation costs) penalties, fines, response costs and damages resulting from
Tenant's failure to surrender the Premises as required by this Paragraph,
including, without limitation, any claims or damages in connection with the
condition of the Premises, including damages occasioned by the inability to
relet the Premises or a reduction in the fair market and/or rental value of the
Premises by reason of the existence of any Hazardous Materials disposed of by
Tenant in or around the Premises. Upon the expiration or earlier termination of
the Lease. Landlord, at its option, may through outside consultants, perform an
exit environmental site assessment of the Premises, the cost of which would be
paid by Tenant if (i) Tenant has not increased the intensity of use of Hazardous
Materials over the Lease Term but there is contamination at the Premises caused
by Tenant, or (ii) Tenant (or a subtentant) has increased the intensity of use
of Hazardous Materials over the Lease Term at the Premises. The foregoing
notwithstanding, Tenant's payment of such assessment shall be limited to
$10,000, as adjusted pursuant to Paragraph 41, unless such assessment indicates
that Tenant has caused such contamination.
29
<PAGE>
G. Landlord's Obligations. Landlord represents and warrants that, without
-----------------------
independent investigation, it has no knowledge of any Hazardous Materials
present in, on or under the Premises other than as described in those
reports described in Exhibit "D" (the "Existing Hazardous Material
-----------
Condition"). Landlord, at its sole cost, shall comply with all Laws
(including the federal law known as "CERCLA" and its California
counterpart) which impose liability or responsibility upon either Landlord
or Tenant to investigate, remediate or otherwise take any action with
respect to the following: (i) the Existing Hazardous Material Condition;
and (ii) compliance with all Laws regulating Hazardous Materials affecting
the Premises to the extent that Landlord is legally obligated to do so by
such Laws and such compliance is not made the responsibility of Tenant
pursuant to Paragraph 37.B, 37.C, 37.F. Landlord shall indemnify, defend
and hold Tenant and its Agents harmless from and against all liabilities,
claims, penalties, fines, response costs, and other expenses (including
reasonable attorneys' fees) which result from Landlord's failure to perform
the obligation stated in the immediately preceding sentence.
38. APPROVALS. Whenever this Lease requires an approval, consent, designation,
---------
determination or judgment by either Landlord or Tenant, such approval,
consent, designation, determination or judgement shall not be unreasonably
withheld or delayed.
39. REASONABLE EXPENDITURES. Any expenditure by a party provided or required
-----------------------
under the Lease, for which such party is entitled to demand and does
reimbursement from the other party, shall be limited to the fair market
value of the goods and services involved, shall be reasonably incurred, and
shall be substantiated by documentary evidence available for inspection and
review by the other party or its representative during normal business
hours.
40. RIGHT TO PERFORM OTHER PARTY'S COVENANTS. If either party shall at any time
----------------------------------------
fail to make any payment or perform any other act on its part to be made or
performed under this Lease, and such failure shall continue for thirty (30)
days following notice to the other party and, in the case of Landlord, to
Landlord's Lender(s), of such failure (unless the nature of the obligation
is such that it cannot be completed within thirty (30) days, in which event
the defaulting party need only commence performance within the thirty (30)
day period and thereafter diligently complete the same), the other party
may, but shall not be obligated to and without waiving or releasing such
party from any obligation of such party under this Lease, make such payment
or perform such other act to the extent the other party may deem desirable,
and in connection therewith pay expenses and employ counsel.
Notwithstanding the above, in the event such failure to perform shall
create any unsafe or other emergency condition, the other party may take
such actions as it deems reasonably necessary for protection of person and
property in and about the Premises and shall promptly thereafter notify the
other party of such actions. All sums so paid by the other party and all
penalties, interest and costs in connection therewith shall be due and
payable by the defaulting party on the next day after any such payment by
the other party, together with interest at the Agreed Interest Rate from
such date to the date of payment thereof by the defaulting party to the
other party. All such sums owned by Tenant to Landlord under this Paragraph
40 shall be deemed Additional Rent.
41. CPI ADJUSTMENT. Where provisions of this Lease specify dollar amounts and
--------------
state that they are to be adjusted pursuant to this Paragraph (e.g.,
----
Paragraph 13.B(i) and 31.B), at the time such provisions are applied during
the Lease Term the amount in question shall be adjusted to that amount
which is equal to the product obtained by multiplying (i) the amount
originally specified in the provision in question as of the Effective
Date, by (ii) a fraction the numerator of which is the Consumer Price Index
published immediately preceding the date upon which such provision is to be
applied and the denominator of which is the Consumer Price Index published
immediately preceding the Effective Date.
42. INTEGRATION AND AMENDMENTS. Except as expressly provided herein, Tenant
--------------------------
acknowledges that neither the Landlord nor Landlord's Agents has made any
representation or warranty as to the suitability of the Premises to the
conduct of Tenant's business. Any agreements, warranties or
representations not expressly contained herein shall in no way bind either
Landlord or Tenant, and Landlord and Tenant expressly waive all claims for
damages by reason of any statement, representation, warranty, promise or
agreement, if any, not contained in this Lease. This Lease, together with
all Exhibits hereto, constitutes the entire understanding between the
parties regarding Tenant's lease of the Premises and no addition to, or
modification of, any term or provision of this Lease shall be effective
until set forth in writing signed by both Landlord and Tenant.
30
<PAGE>
43. MEMORANDUM OF LEASE. Concurrently with the execution hereof, the parties
-------------------
shall execute, acknowledge and record a Memorandum of Lease referencing
Tenant's options to extend the term in a form approved by Landlord and
Tenant.
44. NON-DISCRIMINATION. Tenant convenants for itself, its heirs, executors,
------------------
administrators, and assigns, and all persons claiming under or through it,
and this Lease is made and accepted upon it subject to the condition that
there shall be no discrimination against or segregation of any person or
group of persons, on account of race, color, creed, religion, sex, marital
status, national origins, or ancestry in the leasing, subleasing,
transferring, use, occupancy, tenure, or enjoyment of the Premises herein
leased nor shall the Tenant itself, or any person claiming under or through
it, establish or permit any such practice or practices of discrimination or
segregation with reference to the selection, location, number, use, or
occupancy of tenant, subtenants, vendees in the Premises.
45. BROKERAGE COMMISSIONS. Each party hereto represents and warrants to the
---------------------
other that it has any dealings with any real estate brokers, leasing agents
or salesmen, other than Cooper/Brady Commercial Real Estate and Steven R.
Meckfessel (collectively "Brokers"), or incurred any obligations for the
payment of real estate brokerage commissions or finder's fees which would
be earned or due and payable by reason of the execution of this Lease other
than to Brokers. Landlord shall pay any applicable commission to Brokers in
accordance with separate agreements between Landlord and Brokers.
46. EXISTING TENANCY. As of the Effective Date, 6,169 square feet of Rentable
----------------
Area (the "Prudential Space") located on the fourth floor of the Building
is leased by Landlord to The Prudential Insurance Company of America. The
Lease for such space expires on December 31, 1994, and there are no options
to renew the lease term. As of January 1, 1996, the Prudential Space shall
be added to and become a part of the Premises, the Base Monthly Rent shall
be increased to reflect the addition of such space to the Premises, and
Tenant's Percentage Share shall become one hundred percent(100%). Prior to
January 1, 1996, Landlord shall have completed Renovation Improvements
within the Prudential Space under the terms of the Improvement Agreement.
IN WITNESS WHEREOF, the parties have executed this Lease on the dates set forth
below.
TENANT: LANDLORD:
ASK COMPUTER SYSTEMS, INC. ALAMEDA REAL ESTATE INVESTMENTS
a Delaware corporation a California limited partnership
By:/s/ Scott C. Neely By: Vintage Properties - Alameda
--------------------------- Commercial,
a California corporation
Its: VP & General Counsel Managing General Partner
-----------------------
By:___________________________ By: Joseph R. Saiger
----------------------------
Its:_______________________ Its: President
-------------------------
Date of Execution Date of Execution
by Tenant: June 26, 1992 By Landlord: 6/26/92
-------------------- ------------------
31
<PAGE>
EXHIBIT A
---------
1080 MARINA VILLAGE PARKWAY
[FLOOR PLANS APPEAR HERE]
<PAGE>
EXHIBIT A
---------
1080 MARINA VILLAGE PARKWAY
(CONTINUED)
[FLOOR PLANS APPEAR HERE]
<PAGE>
EXHIBIT A
---------
1080 MARINA VILLAGE PARKWAY
[FLOOR PLANS APPEAR HERE]
<PAGE>
EXHIBIT A
---------
1080 MARINA VILLAGE PARKWAY
(CONTINUED)
[FLOOR PLANS APPEAR HERE]
<PAGE>
EXHIBIT A
---------
1080 MARINA VILLAGE PARKWAY
(CONTINUED)
[FLOOR PLANS APPEAR HERE]
<PAGE>
EXHIBIT B
IMPROVEMENT AGREEMENT
FOR 1080 MARINA VILLAGE PARKWAY
INITIAL IMPROVEMENT OF THE BUILDING AND
RENOVATION IMPROVEMENTS
_________________________
This Exhibit B is incorporated into that certain Lease dated June 25, 1992,
between ASK COMPUTER SYSTEMS, INC., as "Tenant", and ALAMEDA REAL ESTATE
INVESTMENTS, as "Landlord", (the "Lease"). All of the defined terms as used in
the Lease shall have the same meanings herein.
1. RENOVATION IMPROVEMENTS. Landlord shall cause the renovation of the
-----------------------
Premises in phases as described in this Exhibit. In accordance with the
progress schedule outlined below, Landlord, through its general contractor,
shall furnish and install within the Premises substantially in accordance
with the drawings and specifications finally approved by Landlord and
Tenant and generally consistent with the quantities and quality of
improvement in the plans previously prepared by Burns & Nettle Architect,
entitled Scheme #2, Preliminary Space Plan for Second Floor, certain
interior improvements on a "turn-key" basis, including, but not limited to,
installation of Tenant's voice and data cabling within the Premises (the
"Renovation Improvements"). The quantities, character and manner of
installation of all of the Renovation Improvements shall be subject to the
limitations imposed by any applicable governmental regulations and shall
include Landlord's standard Building Finishes as set forth in Exhibit B-1
attached hereto.
2. ALLOCATION OF COST. Landlord shall bear the cost of all Renovation
------------------
Improvements, permits, architectural and engineering services related to
the Renovation Improvements. Tenant acknowledges that Landlord's target
expenditure, including permits and professional services, for the
Renovation Improvements is $20.00 per Rentable Area of the Premises, based
upon May, 1992, costs with such target amount to be increased by a factor
of 4% compounded annually until such funds are expended.
3. DRAWINGS AND SPECIFICATIONS.
---------------------------
a. Landlord, through its architects and engineers, shall furnish drawings
and specifications required for the pricing and construction of the
Renovation Improvements. At its own expense and in accordance with the
schedule outlined below, Tenant shall provide Landlord's architects
and engineers with sufficient instructions, as described below, to
enable Landlord's architects and engineers to prepare complete plans
and specifications for the Renovation Improvements.
b. Tenant's instructions to Landlord's architects and engineers shall
include all relevant information, including, without limitation.
Tenant's budget, special floor loadings, floor openings, air
conditioning, plumbing and electrical loads, location and size of
telephone equipment, location and size of all of the functional
requirements and the nature of desired finishes, casework, millwork,
lighting and any special acoustic treatments. Tenant and Landlord
shall diligently pursue preparation of all such drawings and
specifications which shall be subject to the reasonable approval of
both Landlord and Tenant. If information submitted by Tenant is not
sufficient for Landlord's purposes, Landlord shall so notify Tenant
within fifteen days after receipt of such information specifying the
required additional information. Within five days thereafter, Tenant
shall provide the additional information to Landlord in a form
sufficient to permit Landlord, its architects and engineers, and
general contractor to proceed with the design and construction of the
Renovation Improvements. Tenant shall approve or disapprove the final
drawings and specifications within the time period provided in
paragraph 6 below. If Tenant disapproves the drawings and
specifications submitted by Landlord, the parties shall meet within
five (5) days of such disapproval and confer to develop drawings and
specifications acceptable to both Landlord and Tenant. In the event
Tenant and Landlord do not resolve all of Tenant's objections within
five (5) days after initially conferring to resolve such objections,
Landlord and Tenant shall immediately cause Landlord's architect, or a
representative of Landlord's architect, to meet and confer with
Tenant's architect or construction consultant, who shall apply the
standards set forth in this Agreement to resolve Tenant's objections
and incorporate such resolution into the drawings and specifications
for the Renovation Improvements, which process Landlord and Tenant
shall cause to be completed within five (5) business days after the
conclusion of the five (5) day period referred to in the immediately
preceding sentence. The "standards set forth in this Agreement" to be
applied
<PAGE>
by Landlord's architect and Tenant's architect or construction
consultant to resolve objections pursuant to this paragraph shall be
(i) any drawings and specifications that have been previously approved
by Landlord and Tenant, (ii) the requirement that at each stage of
development, the drawings and specifications in question are to be
the logical and reasonable evolution and development of drawings and
specifications previously approved by Landlord and Tenant, (iii)
Landlord and Tenant are obligated to act reasonably and in good faith,
and (iv) unless there is an agreement to the contrary, Landlord and
Tenant have agreed that the improvement requirements of each shall be
evaluated in accordance with custom prevailing in Alameda County for
the development of comparable facilities.
c. Upon completion and approval of the drawings and specifications by
Landlord and Tenant, Landlord shall obtain a quotation of the cost of
the Renovation Improvements from Landlord's contractor. Landlord may
disapprove such quotation if the total cost of the Renovation
Improvements, permits and professional services would exceed $20.00
per Rentable Area of the Premises, increased as described above, as a
result of Tenant's request for quantities or quality of construction
or finishes not contemplated in Paragraph 1 above. If disapproved,
within five days following disapproval Tenant shall provide Landlord
with additional information adequate to permit the revision of the
drawings and specifications and re-pricing of the Renovation
Improvements which are consistent with those contemplated in paragraph
1.
4. CHANGES TO RENOVATION IMPROVEMENTS. Neither Landlord nor Tenant shall have
----------------------------------
the right to order extra work or change orders with respect to the
construction of the Renovation Improvements without the prior written
consent of the other. All extra work or change orders requested by either
Landlord or Tenant shall be made in writing, shall specify any added or
reduced cost and/or construction time resulting therefrom, and shall become
effective and a part of the Renovation Improvement Drawings once approved
in writing by both parties. If a change order requested by Tenant results
in a net increase in the cost to Landlord of constructing the Renovation
Improvements. Tenant shall pay the amount of such increase caused by the
change order requested by Tenant, together with a fee payable to Landlord
equal to 15% of such net increase (but only if and when Tenant's changes
have resulted in a net increase in the cost of the Renovation Improvements
in excess of 5% of initial construction hard costs as set forth in
Landlord's contract with its construction contractor) upon completion of
the Renovation Improvements, or, at Landlord's option, within fifteen (15)
days of Landlord's request.
5. TENANT'S WORK.
-------------
a. Any items or work beyond the scope of the Renovation Improvements for
which Tenant contracts separately (hereinafter "Tenant's Work"), shall
be subject to Landlord's and its contractors' policies and schedules
and shall be conducted in such a way as not to unreasonably hinder,
cause any disharmony with or delay work of improvements in the
Building and Tenant shall be allowed early entry access to the
Premises in accordance with the terms and conditions of Paragraph 3.C.
of the Lease and this Paragraph 5. To this end, Tenant's Work shall
conform with a schedule determined by Landlord's contractor and no
work shall be done by Tenant which would cause Landlord's contractor
to be dependent upon such work for completion of Landlord's
contractor's work. All of Tenant's Work shall be done with union labor
in accordance with the Northern California Master Labor Agreement. In
no event shall work involving the sprinkler, plumbing, mechanical,
electrical power, lighting or life safety systems of the Building be
performed by other than Landlord's approved subcontractors and all
telecommunications and other special electrical equipment shall be
installed under the supervision of Landlord's electrical
subcontractor.
b. Not less than five business days prior to the date Tenant desires to
commence Tenant's Work, it shall give a written request to Landlord
setting forth or accompanied by all of the following:
1. A description and schedule for the work to be performed;
2. The names and addresses of all contractors, subcontractors and
material suppliers who will perform Tenant's Work;
3. The approximate number of individuals, itemized by trade, who
will be present in the Premises;
4. Copies of all drawings and specifications pertaining to that
portion of Tenant's Work;
5. Copies of all licenses and permits which may be required in
connection with the performance of Tenant's Work;
2
<PAGE>
6. Certificates of insurance indicating compliance with the insurance
requirements set forth in the Lease; and
7. At Landlord's request, evidence of the availability of funds
sufficient to pay for all such Tenant's Work.
All of the foregoing shall be subject to Landlord's approval, which approval
shall not unreasonably be withheld.
c. Tenant shall be responsible for any hoisting charges incurred in connection
with Tenant's Work and for any expenses incurred by Landlord due to
hinderance or delay to Landlord's contractors caused by those performing
Tenant's Work or inadequate cleanup by those performing Tenant's Work.
d. If any supplier, contractor or worker performing Tenant's Work unreasonably
hinders or delays any other work of improvement in the Building or performs
any work which may or does unreasonably impair the quality, integrity or
performance of any portion of the Building, Landlord may give notice to
Tenant. If within one business day after Tenant's receipt of such notice,
such supplier, contractor or worker does not cure the failure set forth in
Landlord's notice to Tenant, Tenant shall cause such supplier, contractor
or worker immediately to remove all of its tools, equipment and materials
and to cease working in the Building. As Additional Rent under the Lease,
Tenant shall reimburse Landlord for any repairs or corrections of the
improvements or of any portion of the Building or the cost of any delays
caused by or resulting from the actions or omissions of anyone performing
Tenant's Work.
6. PROGRESS SCHEDULE FOR RENOVATION IMPROVEMENTS. Concurrent with the
---------------------------------------------
execution of this Lease and of even date herewith, Landlord and Tenant have
entered into that certain Lease (the "1101 Lease") for premises located in
a two-story, build-to-suit building (the "1101 Premises") referred to as
1101 Marina Village Parkway, Alameda, California, and that certain Lease
(the "1151 Lease") for premises located in a one-story, build-to-suit
building (the "1151 Premises") referred to as 1151 Marina Village Parkway,
Alameda, California. Pursuant to the terms of the 1101 Lease and 1151
Lease, no later than two weeks after completion of construction, providing
certain other conditions have been met as described therein, Tenant is to
occupy the respective premises. No later than the expiration of such two
week period for the 1101 Premises, Tenant shall vacate three floors of the
Premises, one of which shall be the fourth floor. No later than the
expiration of such two week period for the 1151 Premises, Tenant shall
vacate the remaining two floors of the Premises. Once such portions of the
Premises are vacated, Landlord shall commence construction of the
Renovation Improvements therein as described herein. Additionally, Landlord
and Tenant shall maintain the following progress schedule, with dates and
times for performance for actions as follows, subject to delays for events
beyond the control of either party:
ACTION DATE OR TIME
------ ------------
a. Tenant to vacate three floors Two weeks after Term Commencement
of the Premises (including the under the 1101 Lease
4th floor)
b. Landlord to complete Renovation Three months following Term
Improvements in two of vacated Commencement under the 1101 Lease
floors (not including 4th floor)
c. Tenant to vacate two floors of Two weeks after Term Commencement
the Premises under the 1151 Lease
d. Landlord to complete Renovation Three months following Term
Improvements of two floors (not Commencement under 1151 Lease
including 4th floor)
e. Landlord to complete Renovation Fifteen months following Term
Improvements on fourth floor Commencement under the 1151 Lease
f. Delivery of Instructions by Three months prior to Landlord's
Tenant to Landlord's architects estimated date for commencement of
under Paragraph 3 above Renovation Improvements for any
particular floor
g. Approval or disapproval by Tenant Ten days after submission or
of drawings and specifications resubmission
after submission or resubmission
to Tenant by Landlord's architect
3
<PAGE>
ACTION DATE OR TIME
------ ------------
h. Approval or disapproval of cost Ten days after submission or
quotation by resubmission
Tenant after submission or
resubmission to Tenant
7. COMPLETION AND RENTAL COMMENCEMENT DATE. Notwithstanding anything to the
---------------------------------------
contrary contained in the Lease, Tenant's obligation for the payment of
Base Monthly Rent and Additional Rent under the Lease shall commence two
(2) weeks after Tenant receives notice from Landlord that it has
substantially completed the Renovation Improvements, subject only to the
completion of punch list items as determined by Landlord and Tenant, and
the City of Alameda has issued a temporary Certificate of Occupancy which
permits Tenant to legally occupy that portion of the Premises and to
commence the operation of its business thereon. If Landlord shall be
delayed in substantially completing any portion of the Renovation
Improvements as a result of:
a. Tenant's failure to comply with the schedule set forth in Paragraph 6
above;
b. Tenant's changes to drawings and specifications after approval thereof
pursuant to Paragraph 3(c) above;
c. Changes in the Renovation Improvements at Tenant's request after
commencement of construction in the amount of time of delay specified
in the change order approved by Tenant;
d. Hindrance or disruption of the work of Landlord's contractor resulting
from Tenant's Work or any other reason under-Tenant's control; or
e. Cessation or termination of work in the Premises due to Tenant's
failure to pay when due all amounts payable by Tenant pursuant to this
Exhibit B;
then the commencement date of Tenant's obligation for payment of rental
shall be advanced by the number of days of such delay. Unless otherwise
noted, all time periods referred to in this Exhibit B shall be computed on
a calendar basis with no allowable for holidays or weekends.
Notwithstanding anything to the contrary contained above, Tenant's
obligation for payment of rental shall not be advanced unless within a
reasonable period of time after learning of the occurrence of any delay
caused by Tenant or its contractors, Landlord notifies Tenant in writing of
the fact that such delay has occurred and the known or anticipated extent
of any such delay.
8. DELIVERY OF POSSESSION, PUNCH LIST, AND ACCEPTANCE AGREEMENT. As soon as
------------------------------------------------------------
the improvements to be constructed by Landlord are substantially completed,
Landlord and Tenant shall together inspect the Renovation Improvements.
After such inspection has been completed, each party shall sign an
acceptance agreement which shall (i) include a list of all "punch list"
items which the parties agree are to be corrected by Landlord, and (ii)
shall state the Rent Commencement Date for the portion of the Premises in
which the Renovation Improvements have been constructed. As soon as such
inspection has been completed and such acceptance agreement executed,
Landlord shall deliver possession of the portion of the Premises to Tenant.
Landlord shall use reasonable efforts to complete and/or repair such "punch
list" items within thirty (30) days after executing the acceptance
agreement. Landlord shall have no obligation to deliver possession of the
portion of the Premises to Tenant until such procedures regarding the
preparation of a punch list and the execution of the acceptance agreement
have been completed. Notwithstanding anything contained herein, Tenant's
obligation to pay the Base Monthly Rent and the Additional Rent shall
commence as provided in the Lease, regardless of whether Tenant completes
such inspection or executes such acceptance agreement.
4
<PAGE>
IN WITNESS WHEROF, the parties have executed this Exhibit B on the respective
dates they executed the Lease.
TENANT: LANDLORD:
ASK COMPUTER SYSTEMS, INC., ALAMEDA REAL ESTATE INVESTMENTS,
a Delaware corporation a California limited partnership
By: /s/ SCOTT C. NEELY By: Vintage Properties - Alameda
----------------------------------
Commercial, a California corporation.
Its: VP & GENERAL COUNSEL Managing General Partner
-------------------------------
By:__________________________________ By: /s/ Joseph R. Saiger
------------------------------------
Its:_______________________________ Its: PRESIDENT
--------------------------------
5
<PAGE>
EXHIBIT B-1
-----------
STANDARD OFFICE FINISHES
APPLIANCES/UTILITIES SPECIFICATIONS
- ----------------------------- -------------------------------------
1. Doors 9'0" Plain Sliced Red Oak
2. Hardware Schlage "D" Series Latchset,
"Olympiad"
3. Ceiling Tile 2x4 Armstrong "Second Look II"
4. Light Fixtures 2x4 Parabolic Lens, 3 Lamp Florescent
5. Carpet Design Weave "Premiere"
6. Door Frames Western Integrated Series 300, In
Standard Colors
7. Exterior Window Covering 1" Miniblinds
8. Paint 2 Coat Latex System
9. Electrical, Telephone and Data Two Duplex Outlets And One
Combination Telephone/Data Location
Per Office
10. Partitioning Metal Studs 5/8 Gypboard
11. Sidelight One 2'0" Sidelight Per Office
12. Cabinets Workroom Upper and Lower Cabinets
PAGE 1 OF 1
<PAGE>
EXHIBIT C
---------
OUTLINE OF PROJECT
[FLOOR PLAN APPEARS HERE]
PAGE 1 OF 1
<PAGE>
EXHIBIT D
---------
EXISTING HAZARDOUS MATERIAL CONDITION
ENVIRONMENTAL REPORTS:
- ---------------------
A. "Preliminary Site Environmental Review, Portions of Marina Village,
Alameda, California" prepared by Woodward Clyde Consultants, March 1987.
B. "Toxic Hazardous Assessment Marina Village Development, Alameda,
California" prepared by Applied Geosciences, Inc., December 1987.
C. Toxic Hazard Assessment, Phase II Field Investigation, Marina Village
Development, Alameda California" prepared by Applied Geosciences, Inc.,
February 1, 1988.
Incorporated into the above Toxic Hazardous Assessment for Select Portions
of the Marina Village Development, Alameda, California - Draft Report"
prepared by Applied Geosciences Inc., February 26, 1988.
D. "Investigation of Field Area South of Powerhouse, Marina Village, April 25,
1988" prepared by Levine-Fricke.
E. "Removal of Petroleum Affected Soils from the Field Area South of the
Powerhouse, Alameda Marina Village, Alameda, California" prepared by
Levine-Fricke, October 5, 1988.
F. "Investigation of Northwest Area, Marina Village, Alameda, California"
prepared by Levine-Fricke, October 6, 1988.
G. "Phase I Environmental Assessment Report, Vintage Properties/Alameda
Commercial, Alameda, California", prepared by Levine-Fricke, February 16,
1989.
H. "Continued Monitoring and Proposed Remedial Measure in Northwest Study Area
dated June 26, 1989", prepared by Levine-Fricke (Primary Report).
Supplemental to Primary Report: "Continued Soil and Ground-Water
Investigation of Parcel 5 and Implementation of a Ground-Water Monitoring
Program and Proposed Remedial Measures in the Northwest Study Area, Marina
Village, Alameda, California" prepared by Levine-Fricke, June 6, 1989.
I. "Results of Soil Investigation, Parcel 2, Northwest Study Area", prepared
by Levine-Fricke, dated November 27, 1989.
J. "Results of 3rd Round of Ground Water Sampling, Northwest Area" prepared by
Levine Fricke, April 13, 1990.
PAGE 1 OF 1
<PAGE>
- --------------------------------------------------------------------------------
AMENDMENT NO. 1
TO
MARINA VILLAGE OFFICE LEASE
(1080 MARINA VILLAGE PARKWAY)
THIS AMENDMENT NO. 1 is made and entered into as of January 29, 1993, by and
between ASK COMPUTER SYSTEMS, INC., a Delaware corporation ("Tenant"), and
ALAMEDA REAL ESTATE INVESTMENTS, a California limited partnership, ("Landlord").
Landlord and Tenant have entered into that certain Marina Village Lease (1080
Marina Village Parkway) dated June 25, 1992 (the "Lease") with respect to
certain premises within 1080 Marina Village Parkway, Alameda, California.
Landlord and Tenant desire to amend the Lease and therefore do hereby agree as
follows:
1. AMENDMENT OF PARAGRAPH 21. Subparagraph (iii) of Paragraph 21 of the Lease
-------------------------
is hereby amended to read as follows:
With respect to any Lender having a security interest in the Premises as of
the Commencement Date, such Lender shall execute either a non-disturbance
agreement in accordance with the aforementioned terms or an instrument
explicitly subordinating its interest in the Premises to the Lease on or
before January 31, 1993. If such subordination instrument or non-
disturbance agreement is not executed on or before such date, then Tenant
shall have the option at any time prior to the execution by the Lender of
such subordination instrument or non-disturbance agreement, but shall not
be obligated to do so, to terminate this Lease whereupon the Previous Lease
shall be reinstated and Tenant shall pay to Landlord the amount by which
(i) all sums which would otherwise have been payable by Tenant under the
Previous Lease during the period commencing April 1, 1992 and continuing
through the date of such termination, exceeds (ii) all amounts actually
paid by Tenant during the same period.
2. AMENDMENT OF PARAGRAPH 31. The following language is hereby added to
-------------------------
Paragraph 31.B. of the Lease to read as follows:
Notwithstanding anything in this Paragraph 31.B. to the contrary, the
following shall apply: (i) any Lender that is an Institutional Lender who
acquires title to the Premises by means of foreclosure or deed in lieu of
foreclosure (a" Foreclosing Institutional Lender") shall not be liable for
any default of any predecessor Landlord arising prior to the date said
Foreclosing Institutional Lender acquires title to the Premises: (ii) a
Foreclosing Institutional Lender who acquires the Premises by foreclosure
who subsequently transfers the title to the Premises to a third party
shall, upon the date of transfer, be relieved of all liability for the
performance of the obligations of the Landlord under this Lease which may
accrue after the date of such transfer: (iii) under no circumstances shall
any Foreclosing Institutional Lender become liable or responsible for the
performance of the obligations of Landlord concerning Hazardous Materials
set forth in Paragraph 31 or Paragraph 37 hereof: (iv) any party who is
Landlord who is divested of title to the Premises by foreclosure or by deed
in lieu of foreclosure shall remain liable for the performance of the
obligations of Landlord under this Lease arising after the date of transfer
of title and shall not be relieved of liability for any default in the
obligations of Landlord arising prior to the date of transfer of title.
3. RATIFICATION. Landlord and Tenant hereby ratify and confirm all of the
------------
terms of the Lease as modified by paragraphs 1 and 2 above.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the
date first above written.
TENANT: LANDLORD:
ASK COMPUTER SYSTEMS, INC. ALAMEDA REAL ESTATE INVESTMENTS
a Delaware corporation a California limited partnership
By: Vintage Properties-Alameda
Commercial, a California corporation,
Managing General Partner
By:/s/ C. Gerald Benton By:/s/ Joseph E. McVeigh
------------------------- ---------------------------------------
Its: C. Gerald Benton Its: Joseph E. McVeigh
------------------------ --------------------------------------
Director, Operations Vice President
The ASK Group
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT A
---------
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT A
---------
(CONTINUED)
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT A
---------
(CONTINUED)
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT A
---------
(CONTINUED)
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT A
---------
(CONTINUED)
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT B
IMPROVEMENT AGREEMENT
FOR 1080 MARINA VILLAGE PARKWAY
INITIAL IMPROVEMENT OF THE BUILDING AND
RENOVATION IMPROVEMENTS
_________________
This Exhibit B is incorporated into that certain Lease dated June 25, 1992,
between ASK COMPUTER SYSTEMS, INC., as "Tenant", and ALAMEDA REAL ESTATE
INVESTMENTS, as "Landlord", (the "Lease). All of the defined terms as used in
the Lease shall have the same meanings herein.
1. RENOVATION IMPROVEMENTS. Landlord shall cause the renovation of the
-----------------------
Premises in phases as described in this Exhibit. In accordance with the
progress schedule outlined below, Landlord, through its general contractor,
shall furnish and install within the Premises substantially in accordance
with the drawings and specifications finally approved by Landlord and
Tenant and generally consistent with the quantities and quality of
improvement in the plans previously prepared by Burns & Nettle Architect,
entitled Scheme #2, Preliminary Space Plan for Second Floor, certain
interior improvements on a "turn-key" basis, including, but not limited to,
installation of Tenant's voice and data cabling within the Premises (the
"Renovation Improvements"). The quantities, character and manner of
installation of all of the Renovation Improvements shall be subject to the
limitations imposed by any applicable governmental regulations and shall
include Landlord's standard Building Finishes as set forth in Exhibit B-1
attached hereto.
2. ALLOCATION OF COST. Landlord shall bear the cost of all Renovation
------------------
Improvements, permits, architectural and engineering services related to
the Renovation Improvements. Tenant acknowledges that Landlord's target
expenditure, including permits and professional services, for the
Renovation Improvements is $20.00 per Rentable Area of the Premises, based
upon May, 1992, costs with such target amount to be increased by a factor
of 4% compounded annually until such funds are expended.
3. DRAWINGS AND SPECIFICATIONS.
---------------------------
a. Landlord, through its architects and engineers, shall furnish drawings
and specifications required for the pricing and construction of the
Renovation Improvements. At its own expense and in accordance with the
schedule outlined below. Tenant shall provide Landlord's architects
and engineers with sufficient instructions, as described below, to
enable Landlord's architects and engineers to prepare complete plans
and specifications for the Renovation Improvements.
b. Tenant's instructions to Landlord's architects and engineers shall
include all relevant information, including, without limitation.
Tenant's budget, special floor loadings, floor openings, air
conditioning, plumbing and electrical loads, location and size of
telephone equipment, location and size of all of the functional
requirements and the nature of desired finishes, casework, millwork,
lightning and any special acoustic treatments. Tenant and Landlord
shall diligently pursue preparation of all such drawings and
specifications which shall be subject to the reasonable approval of
both Landlord and Tenant. If information submitted by Tenant is not
sufficient for Landlord's purposes, Landlord shall so notify Tenant
within fifteen days after receipt of such information specifying the
required additional information. Within five days thereafter, Tenant
shall provide the additional information to Landlord in a form
sufficient to permit Landlord, its architects and engineers, and
general contractor to proceed with the design and construction of the
Renovation Improvements. Tenant shall approve or disapprove the final
drawings and specifications within the time period provided in
paragraph 6 below. If Tenant disapproves the drawings and
specifications submitted by Landlord, the parties shall meet within
five (5) days of such disapproval and confer to develop drawings and
specifications acceptable to both Landlord and Tenant. In the event
Tenant and Landlord do not resolve all of Tenant's objections within
five (5) days after initially conferring to resolve such objections.
Landlord and Tenant shall immediately cause Landlord's architect, or a
representative of Landlord's architect, to meet and confer with
Tenant's architect or construction consultant, who shall apply the
standards set forth in this Agreement to resolve Tenant's objections
and incorporate such resolution into the drawings and specifications
for the Renovation Improvements, which process Landlord and Tenant
shall cause to be completed within five (5) business days after the
conclusion of the five (5) day period referred to in the immediately
preceding sentence. The "standards set forth in this Agreement" to be
applied
<PAGE>
by Landlord's architect and Tenant's architect or construction
consultant to resolve objections pursuant to this paragraph shall be
(i) any drawings and specifications that have been previously approved
by Landlord and Tenant, (ii) the requirement that at each stage of
development, the drawings and specifications in question are to be
the logical and reasonable evolution and development of drawings and
specifications previously approved by Landlord and Tenant, (iii)
Landlord and Tenant are obligated to act reasonably and in good faith,
and (iv) unless there is an agreement to the contrary, Landlord and
Tenant have agreed that the improvement requirements of each shall be
evaluated in accordance with custom prevailing in Alameda County for
the development of comparable facilities.
c. Upon completion and approval of the drawings and specifications by
Landlord and Tenant, Landlord shall obtain a quotation of the cost of
the Renovation Improvements from Landlord's contractor. Landlord may
disapprove such quotation if the total cost of the Renovation
Improvements, permits and professional services would exceed $20.00
per Rentable Area of the Premises, increased as described above, as a
result of Tenant's request for quantities or quality of construction
or finishes not contemplated in Paragraph 1 above. If disapproved,
within five days following disapproval Tenant shall provide Landlord
with additional information adequate to permit the revision of the
drawings and specifications and re-pricing of the Renovation
Improvements which are consistent with those contemplated in paragraph
1.
4. CHANGES TO RENOVATION IMPROVEMENTS. Neither Landlord nor Tenant shall have
----------------------------------
the right to order extra work or change orders with respect to the
construction of the Renovation Improvements without the prior written
consent of the other. All extra work or change orders requested by either
Landlord or Tenant shall be made in writing, shall specify any added or
reduced cost and/or construction time resulting therefrom, and shall become
effective and a part of the Renovation Improvement Drawings once approved
in writing by both parties. If a change order requested by Tenant results
in a net-increase in the cost to Landlord of constructing the Renovation
Improvements. Tenant shall pay the amount of such increase caused by the
change order requested by Tenant, together with a fee payable to Landlord
equal to 15% of such net increase (but only if and when Tenant's changes
have resulted in a net increase in the cost of the Renovation Improvements
in excess of 5% of initial construction hard costs as set forth in
Landlord's contract with its construction contractor) upon completion of
the Renovation Improvements, or, at Landlord's option, within fifteen (15)
days of Landlord's request.
5. TENANT'S WORK.
-------------
a. Any items or work beyond the scope of the Renovation Improvements for
which Tenant contracts separately (hereinafter "Tenant's Work"), shall
be subject to Landlord's and its contractors policies and schedules
and shall be conducted in such a way as not to unreasonably hinder,
cause any disharmony with or delay work of improvements in the
Building and Tenant shall be allowed early entry access to the
Premises in accordance with the terms and conditions of Paragraph 3.C.
of the Lease and this Paragraph 5. To this end, Tenant's Work shall
conform with a schedule determined by Landlord's contractor and no
work shall be done by Tenant which would cause Landlord's contractor
to be dependent upon such work for completion of Landlord's
contractor's work. All of Tenant's Work shall be done with union labor
in accordance with the Northern California Master Labor Agreement. In
no event shall work involving the sprinkler, plumbing, mechanical,
electrical power, lighting or life safety systems of the Building be
performed by other than Landlord's approved subcontractors and all
telecommunications and other special electrical equipment shall be
installed under the supervision of Landlord's electrical
subcontractor.
b. Not less than five business days prior to the date Tenant desires to
commence Tenant's Work, it shall give a written request to Landlord
setting forth or accompanied by all of the following:
1. A description and schedule for the work to be performed:
2. The names and addresses of all contractors, subcontractors and
material suppliers who will perform Tenant's Work:
3. The approximate number of individuals, itemized by trade, who
will be present in the Premises:
4. Copies of all drawings and specifications pertaining to that
portion of Tenant's Work:
5. Copies of all licenses and permits which may be required in
connection with the performance of Tenant's Work:
2
<PAGE>
6. Certificates of insurance indicating compliance with the
insurance requirements set forth in the Lease; and
7. At Landlord's request, evidence of the availability of funds
sufficient to pay for all such Tenant's Work.
All of the foregoing shall be subject to Landlord's approval, which
approval shall not unreasonably be withheld.
c. Tenant shall be responsible for any hoisting charges incurred in
connection with Tenant's Work and for any expenses incurred by
Landlord due to hinderance or delay to Landlord's contractors caused
by those performing Tenant's Work or inadequate cleanup by those
performing Tenant's Work.
d. If any supplier, contractor or worker performing Tenant's Work
unreasonably hinders or delays any other work of improvement in the
Building or performs any work which may or does unreasonably impairs
the quality, integrity or performance of any portion of the Building,
Landlord may give notice to Tenant. If within one business day after
Tenant's receipt of such notice, such supplier, contractor or worker
does not cure the failure set forth in Landlord's notice to Tenant.
Tenant shall cause such supplier, contractor or worker immediately to
remove all of its tools, equipment and materials and to cease working
in the Building. As Additional Rent under the Lease, Tenant shall
reimburse Landlord for any repairs or corrections of the Improvements
or of any portion of the Building or the cost of any delays caused by
or resulting from the actions or omissions of anyone performing
Tenant's Work.
6. PROGRESS SCHEDULE FOR RENOVATION IMPROVEMENTS. Concurrent with the
---------------------------------------------
execution of this Lease and of even date herewith, Landlord and Tenant have
entered into that certain Lease (the "1101 Lease") for premises located in
a two-story, build-to-suit building (the "1101 Premises") referred to as
1101 Marina Village Parkway. Alameda, California, and that certain Lease
(the "1151 Lease") for premises located in a one-story, build-to-suit
building (the "1151 Premises") referred to as 1151 Manna Village Parkway,
Alameda, California. Pursuant to the terms of the 1101 Lease and 1151
Lease, no later than two weeks after completion of construction, providing
certain other conditions have been met as described therein. Tenant is to
occupy the respective premises. No later than the expiration of such two
week period for the 1101 Premises. Tenant shall vacate three floors of the
Premises, one of which shall be the fourth floor. No later than the
expiration of such two week period for the 1151 Premises. Tenant shall
vacate the remaining two floors of the Premises. Once such portions of the
Premises are vacated, Landlord shall commence construction of the
Renovation Improvements therein as described herein. Additionally, Landlord
and Tenant shall maintain the following progress schedule, with dates and
times for performance for actions as follows, subject to delays for events
beyond the control of either party:
ACTION DATE OR TIME
------ ------------
a. Tenant to vacate three floors Two weeks after Term Commencement
of the Premises (including the under the 1101 Lease
4th floor)
b. Landlord to complete Renovation Three months following Term
Improvements in two of vacated Commencement under the 1101 Lease
floors (not including 4th floor)
c. Tenant to vacate two floors of Two weeks after Term Commencement
the Premises under the 1151 Lease
d. Landlord to complete Renovation Three months following Term
Improvements of two floors (not Commencement under 1151 Lease
including 4th floor)
e. Landlord to complete Renovation Fifteen months following Term
Improvements on fourth floor Commencement under the 1151 Lease
f. Delivery of Instructions by Three months prior to Landlord's
Tenant to Landlord's architects estimated date for commencement of
under Paragraph 3 above Renovation Improvements for any
particular floor
g. Approval or disapproval by Ten days after submission or
Tenant of drawings and resubmission
specifications after submission
or resubmission to Tenant by
Landlord's architect
3
<PAGE>
ACTION DATE OR TIME
------ ------------
h. Approval or disapproval of cost Ten days after submission or
quotation by resubmission
Tenant after submission or
resubmission to Tenant
7. COMPLETION AND RENTAL COMMENCEMENT DATE. Notwithstanding anything to the
---------------------------------------
contrary contained in the Lease, Tenant's obligation for the payment of
Base Monthly Rent and Additional Rent under the Lease shall commence two
(2) weeks after Tenant receives notice from Landlord that it has
substantially completed the Renovation Improvements, subject only to the
completion of punch list items as determined by Landlord and Tenant, and
the City of Alameda has issued a temporary Certificate of Occupancy which
permits Tenant to legally occupy that portion of the Premises and to
commence the operation of its business thereon. If Landlord shall be
delayed in substantially completing any portion of the Renovation
Improvements as a result of:
a. Tenant's failure to comply with the schedule set forth in Paragraph 6
above;
b. Tenant's changes to drawings and specifications after approval thereof
pursuant to Paragraph 3(c) above;
c. Changes in the Renovation Improvements at Tenant's request after
commencement of construction in the amount of time of delay specified
in the change order approved by Tenant;
d. Hindrance or disruption of the work of Landlord's contractor resulting
from Tenant's Work or any other reason under-Tenant's control; or
e. Cessation or termination of work in the Premises due to Tenant's
failure to pay when due all amounts payable by Tenant pursuant to this
Exhibit B;
then the commencement date of Tenant's obligation for payment of rental
shall be advanced by the number of days of such delay. Unless otherwise
noted, all time periods referred to in this Exhibit B shall be computed on
a calendar basis with no allowance for holidays or weekends.
Notwithstanding anything to the contrary contained above, Tenant's
obligation for payment of rental shall not be advanced unless within a
reasonable period of time after learning of the occurrence of any delay
caused by Tenant or its contractors, Landlord notifies Tenant in writing of
the fact that such delay has occurred and the known or anticipated extent
of any such delay.
8. DELIVERY OF POSSESSION, PUNCH LIST, AND ACCEPTANCE AGREEMENT. As soon as
------------------------------------------------------------
the improvements to be constructed by Landlord are substantially completed,
Landlord and Tenant shall together inspect the Renovation Improvements.
After such inspection has been completed, each party shall sign an
acceptance agreement which shall (i) include a list of all "punch list"
items which the parties agree are to be corrected by Landlord, and (ii)
shall state the Rent Commencement Date for the portion of the Premises in
which the Renovation Improvements have been constructed. As soon as such
inspection has been completed and such acceptance agreement executed,
Landlord shall deliver possession of the portion of the Premises to Tenant.
Landlord shall use reasonable efforts to complete and/or repair such "punch
list" items within thirty (30) days after executing the acceptance
agreement. Landlord shall have no obligation to deliver possession of the
portion of the Premises to Tenant until such procedures regarding the
preparation of a punch list and the execution of the acceptance agreement
have been completed. Notwithstanding anything contained herein, Tenant's
obligation to pay the Base Monthly Rent and the Additional Rent shall
commence as provided in the Lease, regardless of whether Tenant completes
such inspection or executes such acceptance agreement.
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Exhibit B on the respective
dates they executed the Lease.
TENANT: LANDLORD:
ASK COMPUTER SYSTEMS, INC., ALAMEDA REAL ESTATE INVESTMENTS.
a Delaware corporation a California limited partnership
By: /s/ [SIGNATURE ILLEGIBLE] By: Vintage Properties - Alameda
-------------------------------
Commercial, a California corporation.
Its: VP & General Counsel Managing General Partner
--------------------------
By:_______________________________ By: /s/ Joseph R. Saiger
-----------------------------------
Its:___________________________ Its: President
------------------------------
5
<PAGE>
EXHIBIT B-1
-----------
STANDARD OFFICE FINISHES
Appliances/Utilities Specifications
- ------------------------------- ----------------------------------------
1. Doors 9'0" Plain Sliced Red Oak
2. Hardware Schlage "D" Series Latchset, "Olympiad"
3. Ceiling Tile 2x4 Armstrong "Second Look II"
4. Light Fixtures 2x4 Parabolic Lens, 3 Lamp Florescent
5. Carpet Design Weave "Premiere"
6. Door Frames Western Integrated Series 300, In
Standard Colors
7. Exterior Window Covering 1" Miniblinds
8. Paint 2 Coat Latex System
9. Electrical, Telephone and Data Two Duplex Outlets And One Combination
Telephone/Data Location Per Office
10. Partitioning Metal Studs 5/8 Gypboard
11. Sidelight One 2'0" Sidelight Per Office
12. Cabinets Workroom Upper and Lower Cabinets
PAGE 1 OF 1
<PAGE>
EXHIBIT C
---------
OUTLINE OF PROJECT
[PLAN APPEARS HERE]
PAGE 1 OF 1
<PAGE>
EXHIBIT D
---------
EXISTING HAZARDOUS MATERIAL CONDITION
ENVIRONMENTAL REPORTS:
- ----------------------
A. "Preliminary Site Environmental Review, Portions of Marina Village,
Alameda, California" prepared by Woodward Clyde Consultants, March 1987.
B. "Toxic Hazardous Assessment Marina Village Development, Alameda,
California" prepared by Applied Geosciences, Inc., December 1987.
C. "Toxic Hazard Assessment, Phase II Field Investigation, Marina Village
Development, Alameda, California" prepared by Applied Geosciences, Inc.,
February 1, 1988.
Incorporated into the above "Toxic Hazardous Assessment for Select Portions
of the Marina Village Development, Alameda, California - Draft Report"
prepared by Applied Geosciences Inc., February 26, 1988.
D. "Investigation of Field Area South of Powerhouse, Marina Village, April 25,
1988" prepared by Levine-Fricke.
E. "Removal of Petroleum Affected Soils from the Field Area South of the
Powerhouse, Alameda Marina Village, Alameda, California" prepared by
Levine-Fricke, October 5, 1988.
F. "Investigation of Northwest Area, Marina Village, Alameda, California"
prepared by Levine-Fricke, October 6, 1988.
G. "Phase I Environmental Assessment Report, Vintage Properties/Alameda
Commercial, Alameda, California", prepared by Levine-Fricke, February 16,
1989.
H. "Continued Monitoring and Proposed Remedial Measure in Northwest
Study Area dated June 26, 1989", prepared by Levine-Fricke (Primary
Report).
Supplemental to Primary Report: "Continued Soil and Ground-Water
Investigation of Parcel 5 and Implementation of a Ground-Water Monitoring
Program and Proposed Remedial Measures in the Northwest Study Area, Marina
Village, Alameda, California" prepared by Levine-Fricke, June 6, 1989.
I. "Results of Soil Investigation, Parcel 2, Northwest Study Area", prepared
by Levine-Fricke, dated November 27, 1989.
J. "Results of 3rd Round of Ground Water Sampling, Northwest Area" prepared by
Levine Fricke, April 13, 1990.
PAGE 1 OF 1
<PAGE>
AMENDMENT NO. 1
TO
MARINA VILLAGE OFFICE LEASE
(1080 MARINA VILLAGE PARKWAY)
THIS AMENDMENT NO. 1 is made and entered into as of January___, 1993, by and
between ASK COMPUTER SYSTEMS, INC., a Delaware corporation ("Tenant"), and
ALAMEDA REAL ESTATE INVESTMENTS, a California limited partnership, ("Landlord").
Landlord and Tenant have entered into that certain Marina Village Lease (1080
Marina Village Parkway) dated June 25, 1992 (the "Lease") with respect to
certain premises within 1080 Marina Village Parkway, Alameda, California.
Landlord and Tenant desire to amend the Lease and therefore do hereby agree as
follows:
1. AMENDMENT OF PARAGRAPH 21. Subparagraph (iii) of Paragraph 21 of the Lease
-------------------------
is hereby amended to read as follows:
With respect to any Lender having a security interest in the Premises as of
the Commencement Date, such Lender shall execute either a non-disturbance
agreement in accordance with the aforementioned terms or an instrument
explicitly subordinating its interest in the Premises to the Lease on or
before January 31, 1993. If such subordination instrument or non-
disturbance agreement is not executed on or before such date, then Tenant
shall have the option at any time prior to the execution by the Lender of
such subordination instrument or non-disturbance agreement, but shall not
be obligated to do so, to terminate this Lease whereupon the Previous Lease
shall be reinstated and Tenant shall pay to Landlord the amount by which
(i) all sums which would otherwise have been payable by Tenant under the
Previous Lease during the period commencing April 1, 1992 and continuing
through the date of such termination, exceeds (ii) all amounts actually
paid by Tenant during the same period.
2. AMENDMENT OF PARAGRAPH 31. The following language is hereby added to
-------------------------
Paragraph 31.B. of the Lease to read as follows:
Notwithstanding anything in this Paragraph 31.B. to the contrary, the
following shall apply: (i) any Lender that is an Institutional Lender who
acquires title to the Premises by means of foreclosure or deed in lieu of
foreclosure (a "Foreclosing Institutional Lender") shall not be liable for
any default of any predecessor Landlord arising prior to the date said
Foreclosing Institutional Lender acquires title to the Premises; (ii) a
Foreclosing Institutional Lender who acquires the Premises by foreclosure
who subsequently transfers the title to the Premises to a third party
shall, upon the date of transfer, be relieved of all liability for the
performance of the obligations of the Landlord under this Lease which may
accrue after the date of such transfer; (iii) under no circumstances shall
any Foreclosing Institutional Lender become liable or responsible for the
performance of the obligations of Landlord concerning Hazardous Materials
set forth in Paragraph 31 or Paragraph 37 hereof; (iv) any party who is
Landlord who is divested of title to the Premises by foreclosure or by deed
in lieu of foreclosure shall remain liable for the performance of the
obligations of Landlord under this Lease arising after the date of transfer
of title and shall not be relieved of liability for any default in the
obligations of Landlord arising prior to the date of transfer of title.
3. RATIFICATION. Landlord and Tenant hereby ratify and confirm all of the
------------
terms of the Lease as modified by paragraphs 1 and 2 above.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the
date first above written.
TENANT: LANDLORD:
ASK COMPUTER SYSTEMS, INC. ALAMEDA REAL ESTATE INVESTMENTS
a Delaware corporation a California limited partnership
By: Vintage Properties-Alameda
Commercial, a California corporation,
Managing General Partner
/s/ C. Gerald Benton
By:--------------------------- By:_____________________________________
Its: C. Gerald Benton Its:____________________________________
--------------------------
Director, Operations
The ASK Group
<PAGE>
SUBORDINATION OF MORTGAGE
-------------------------
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA as owner and holder of a
certain Promissory Note dated March 27, 1987, in the principal sum of Twenty
Eight Million Five Hundred Thousand Dollars ($28,500,000.00) and of a certain
Mortgage or Deed of Trust of even date therewith and securing the said Note,
recorded on March 30, 1987, as No. 87-086477, Official Records, Alameda County,
now a first lien upon the premises known as 1080 Marina Village Parkway,
Alameda, California and particularly demised and described in that certain Lease
dated June 30, 1992, by and between ALAMEDA REAL ESTATE INVESTMENTS a California
limited partnership, as Lessor, and ASK COMPUTER SYSTEMS, INC., a Delaware
corporation, as Lessee, and upon other property, in consideration of such
leasing and of the sum of One ($1.00) Dollar and other good and valuable
consideration, receipt of which is hereby acknowledged, the undersigned, DOES
hereby covenant and agree that the said Mortgage or Deed of Trust shall be and
the same is hereby made SUBORDINATE to the said Lease with the same force and
effect as if the said Lease had been executed, delivered and recorded prior to
the execution, delivery and recording of said Mortgage or Deed of Trust;
EXCEPT, HOWEVER, that this Subordination shall not effect nor be applicable to
and does hereby expressly exclude:
(a) The prior right, claim and lien of said Mortgage or Deed of Trust in, to
and upon any award or other compensation heretofore or hereafter to be made
for any taking by eminent domain of any part of the said premises, and to
the right of disposition thereof in accordance with the provisions of the
said Mortgage or Deed of Trust,
(b) The prior right, claim and lien of the said Mortgage or Deed of Trust in,
to and upon any proceeds payable under all policies of fire and rent
insurance upon the said premises and as to the right of disposition thereof
in accordance with the terms of the said Mortgage or Deed of Trust, and
(c) Any lien, right, power or interest, if any, which may have arisen or
intervened in the period between the recording of the said Mortgage or Deed
of Trust and the execution of the said lease, or any lien or judgement
which may arise at any time under the terms of such lease.
This Subordination shall inure to the benefit of and shall be binding upon the
undersigned, its successors and assigns.
IN WITNESS WHEREOF, the Subordination has been duly signed and delivered by the
undersigned this 28th day of August, 1992.
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
a New York Corporation
By:/s/ Margaret Waters
----------------------------
Assistant Secretary
LESSEE'S AGREEMENT
------------------
The undersigned, as Lessee under the lease herein described, does hereby accept
and agree to the terms of the foregoing Subordination, which shall inure to the
benefit of and be binding upon the undersigned and the ???? executors,
administrators, legal representatives, successors and assigns of the
undersigned.
ASK COMPUTER SYSTEMS, INC
a Delaware corporation
By:/s/ Scott C. Neeley
-------------------------
Its:[SIGNATURE ILLEGIBLE]
------------------------
VICE PRESIDENT & GENERAL COUNSEL
ASK COMPUTER SYSTEMS, INC
<PAGE>
STATE OF NEW YORK )
)SS
COUNTY OF NEW YORK )
On this 9 day of February, 1993, before me, a Notary Public in and for said
State, duly commissioned and sworn, personally appeared Margaret Waters
______ and _____________________ personally known to me (or proved to me on the
basis of satisfactory evidence) to be the [ILLEGIBLE] and ________________ of
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA, a New York corporation,
the officers executing the within instrument, and acknowledged to me that such
corporation executed the within instrument pursuant to its bylaws or a
resolution of its board of directors.
IN WITNESS WHEREOF, I have hereunder set my hand and affixed my official seal on
the date in this certificate first above written.
/s/ Marie A. Moffett
- -----------------------------
Notary Public
[STAMP]
TENANT
------
STATE OF CALIFORNIA )
) SS
COUNTY OF SANTA CLARA )
On this 28th day of August, 1992, before me, a Notary Public in and for said
State, duly commissioned and sworn, personally appeared Scott C. Neely,
personally known to me to be the Vice President & General Counsel of ASK
COMPUTER SYSTEMS, INC., a California corporation, the officer executing the
within instrument, and acknowledged to me that such corporation executed the
within instrument pursuant to its bylaws or a resolution of its board of
directors, and acknowledged to me that he subscribed his name on the within
instrument.
IN WITNESS WHEREOF, I have hereunder set my hand and affixed my official seal on
the date in this certificate first above written.
/s/ S. E. MUSURLIAN
- ------------------------------
Notary Public
[STAMP APPEARS HERE]
<PAGE>
ACKNOWLEDGEMENT
================================================================================
[ILLEGIBLE] On this the 4th day of January 199?, before me,
- --------------------- )
)
) SS. S. E. MUSURLIAN
[ILLEGIBLE] ) ------------------------------------------------
- --------------------- )
the undersigned Notary Public, personally
appeared
C. Gerald M. Benton
------------------------------------------------
[STAMP APPEARS HERE] [X] personally known to me to be the person
whose name is subscribed to the within
instrument, and acknowledged that he executed
it.
WITNESS my hand and official seal.
/s/ S. E. Musurlian
------------------------------------------------
Notary's Signature
- --------------------------------------------------------------------------------
[ILLEGIBLE]ARY: Although the information requested below is OPTIONAL, it could
prevent fraudulent attachment of this certificate to another document.
Title or Type of Document Subordination, Estoppel, Non-Disturbance +
-------------------------------------------
Attornment Agr.
--------------
Number of Pages Seven Date of Document December 1, 1992
-------------- -----------------------
Signer(s) Other Than Named Above none (to be signed by 4 other
-----------------------------
parties)
--------
================================================================================
<TABLE>
ACKNOWLEDGEMENT NO 209
====================================================================================================================================
<S> <C>
CAPACITY CLAIMED BY SIGNER
[ILLEGIBLE]
- --------------------- ) [_] INDIVIDUAL(S)
)
) SS.
[ILLEGIBLE] )
- --------------------- ) [X] CORPORATE VICE PRESIDENT OF
1993 before me, Alice Cy Chan, Notary Public -----------------
- ---- ------------------------------------------------------, OFFICER(S) GENERAL PARTNERS
NAME, TITLE OF OFFICER .E.G. "JANE DOE, NOTARY PUBLIC" ----------------
TITLE(S)
Joseph E. McVeigh [_] PARTNER(S) Which is a Corporation
- -------------------------------------------------------------------------
NAME(S) OF SIGNER(S) [_] ATTORNEY-IN-FACT
[ILLEGIBLE] me- OR- [_] proved to me on the basis of satisfactory evidence to be [_] TRUSTEE(S)
the person whose name is subscribed to the within
instrument and acknowledged to me that he executed [_] SUBSCRIBING WITNESS
the same in his authorized capacity, and that by his
[STAMP APPEARS HERE] signature on the instrument the person or the entity [_] GUARDIAN\CONSERVATOR
upon behalf of which the person acted, executed the
instrument. [_] OTHER: _________________________
Witness my hand and official seal. ________________________________
________________________________
SIGNER IS REPRESENTING:
NAME OF PERSON(S) OR ENTITY(IES)
VINTAGE PROPERTIES -
------------------------------------
ALAMEDA COMMERCIAL
------------------------------------
/s/ Alice Cy Chan
----------------------------------------------------- ____________________________________
SIGNATURE OF NOTARY
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[ILLEGIBLE] though the information requested below is OPTIONAL, it could prevent
fraudulent attachment of this certificate to unauthorized document.
Title or Type of Document Subordination, Estoppel, Non-Disturbance +
-------------------------------------------
Attornment Agreement
--------------------
Number of Pages Seven Date of Document December 1, 1992
-------------- ----------------------
[ILLEGIBLE] Signer(s) Other Than Named Above (to be signed by Wells Fargo Bank
----------------------------------
and Copley
- ----------
================================================================================
<PAGE>
RECORDING REQUESTED BY:
WHEN RECORDED MAIL TO:
WELLS FARGO BANK, N.A.
Real Estate Group
420 Montgomery Street, 6th Floor
San Francisco, California 94163
Attention: Mr. Stephen Merchant
Loan No. 5038ZS
- --------------------------------------------------------------------------------
SUBORDINATION, ESTOPPEL, NON-DISTURBANCE
----------------------------------------
AND ATTORNMENT AGREEMENT
------------------------
NOTICE: THIS SUBORDINATION AGREEMENT RESULTS IN YOUR LEASE BECOMING SUBJECT TO
AND OF LOWER PRIORITY THAN THE LIEN OF A LATER SECURITY INSTRUMENT.
THIS AGREEMENT is made as of this 1st day of December, 1992, by and
among ASK COMPUTER SYSTEMS, INC., a Delaware corporation ("Lessee"), ALAMEDA
REAL ESTATE INVESTMENTS, a California limited partnership ("Borrower"), and
WELLS FARGO BANK, N.A. ("Lender").
RECITALS
--------
A. Lender has made, or has agreed to make, a loan to Borrower in the
principal amount of FOUR MILLION SEVEN HUNDRED THOUSAND AND NO/100 DOLLARS
($4,700,000.00) ("Loan") which is or will be evidenced by, among other things,
a promissory note executed by Borrower in favor of Lender in the principal
amount of the Loan ("Note").
B. The Note and certain other obligations of Borrower under the Loan
are secured by, among other things, a deed of trust ("Deed of Trust") executed
by Borrower, as Trustor, in favor of Lender, as Beneficiary, covering real
property situated in the County of Alameda, State of California, and more
particularly described on Exhibit A, attached hereto, and incorporated herein by
---------
this reference ("Property"). Said Deed of Trust will be recorded concurrently
herewith in the records of the County Recorded of Alameda County, California
("Official Records").
C. Subject to the terms and provisions of a lease dated June 25,
1992 ("Lease"), Borrower granted to Lessee a leasehold estate in and to the
Property. Paragraph 36 of the Lease grants Lessee the option ("Option") to
extend the term of the Lease. Unless otherwise stated herein, all references to
the Lease shall include the Option.
D. The Loan is further secured by, among other things, an Assignment
of Lessor's Interest in Leases ("Assignment"), wherein all of the Borrower's
interest in and to the Lease was assigned to Lender. The Assignment will be
recorded concurrently herewith in the records of the County Recorder of the
Official Records. In making the loan, Lender is relying, in part, upon the
statements, acknowledgements, representations and agreements set forth in this
Agreement.
Therefore, for good and sufficient consideration and subject to
the terms and conditions of this Agreement, Lessee acknowledges, represents and
agrees for the benefit of Lender, with knowledge that Lender is relying thereon,
as follows:
-1-
<PAGE>
1. SUBORDINATION.
-------------
(1) The Deed of Trust and the Assignment, and any
modifications, renewals, extensions or replacements thereof, and of the Note
secured thereby, shall unconditionally be and at all times remain liens or
charges on the Property prior and superior to the Lease;
(2) Lessee and Borrower acknowledge and agree that Lender
would not make the Loan to Borrower without this Agreement;
(3) This Agreement shall be the whole and only agreement
with regard to the subordination of the Lease to the liens or charges of the
Deed of Trust and the Assignment and shall supersede and cancel, but only
insofar as would affect the priority between the Deed of Trust and the
Assignment and the Lease, any prior agreements as to such subordination,
including, but not limited to, those provisions, if any, contained in the Lease
which provide for the subordination of the Lease to a deed of trust or to a
mortgage or mortgages;
(4) Lessee consents to and approves (i) all provisions of
the Note, Deed of Trust and Assignment in favor of Lender, and (ii) all other
agreements including but not limited to any loan or other agreements, between
Borrower and Lender relating to the Loan or the disbursement of the proceeds of
the Loan (together with the Note, Deed of Trust and Assignment, "Loan
Documents");
(5) Lender, in making disbursements pursuant to any of the
Loan Documents, is under no obligation or duty to, nor has Lender represented
that it will, see to the application of such proceeds by the person or persons
to whom Lender disburses such proceeds, and any application or use of such
proceeds for purposes other than those provided for in the Loan Documents shall
not defeat the subordination herein made in whole or in part;
(6) Lessee intentionally and unconditionally waives,
relinquishes and subordinates all of Lessee's right, title and interest under
the Lease and in and to the Property to the lien or charge of the Deed of Trust
and the Assignment and understands that in reliance upon and in consideration
of, this waiver, relinquishment and subordination, specific loans and advances
are being and will be made by Lender and, as part and parcel thereof, specific
monetary and other obligations are being and will be entered into which would
not be made or entered into but for said reliance upon this wavier,
relinquishment and subordination; and
(7) Lender may provide future financing to Borrower in
connection with the development, construction and/or holding of the Property.
Lessee agree that the Lease shall be subject and subordinate to, the lien of the
deed of trust securing any such future financing and all the terms, conditions
and provisions thereof, and Lender's rights in the Property and any related
security, to all advances made thereunder, and any renewals, extensions,
modifications or replacements thereof, in all cases on the same terms and
conditions as provided in this Agreement. Lessee and Borrower agree to execute
and record an agreement confirming the foregoing in substantially the same form
as this Agreement.
2. ESTOPPEL. Lessee acknowledges and represents that:
--------
(a) Lease Effective. The Lease has been duly executed and
---------------
delivered by Lessee and that, subject to the terms and conditions thereof, the
Lease is in full force and effect and the obligations of Lessee thereunder are
valid and binding and there have been no modifications or additions, written or
oral, to the Lease;
-2-
<PAGE>
(b) No Default. As of the date hereof and to the best of
----------
Lessee's knowledge (i) there exists no breach, default, or event or condition
which, with the giving of notice or the passage of time or both, would
constitute such a breach or default; and (ii) there are no existing claims,
defenses or offsets against rental due or to become due under the terms of the
Lease;
(c) Entire Agreement. The Lease constitutes the entire
----------------
agreement between Borrower and Lessee with respect to the Lease and the Property
and Lessee claims no rights with respect to the Property other than as set forth
in the Lease;
(d) No Prepaid Rent. No deposits or prepayments of rent
---------------
have been made in connection with the Lease;
(e) Term. The original term of the Lease commences on
----
the Date provided in Section 3 of the Lease and shall continue for a period
ending September 30, 2004 unless sooner terminated or extended pursuant to any
provision of the Lease thereafter. Lessee has three (3) options to extend the
term of the Lease for five (5) years each.
(f) Rent. The base rent payable under the Lease is an
----
amount shown pursuant to paragraph 4.B of the Lease. Tenant has provided
Borrower with $ NONE as the security deposit under the Lease;
-----
(g) No Transfer. Tenant has received no notice of any
-----------
prior sale, transfer, assignment, hypothecation or pledge of the Lease or the
rents secured thereunder except for the Assignment; and
(h) Pursuant to Section 7.B of the Lease, Lessee is to
reimburse Borrower for all "Property Taxes" assessed in respect of the premises
during the term of the Lease and "Property Taxes" shall mean that definition
shown in paragraph 7.C of the Lease.
3. AGREEMENT. Lessee hereby covenants and agrees that, during
---------
all such times as Lender is the beneficiary under the Deed of Trust:
(a) Modification, Termination and Cancellation. Lessee will
------------------------------------------
not consent to any modification, termination or cancellation of the Lease unless
Lender first consents thereto in writing;
(b) Notice of Default. Lessee shall notify Lender in
-----------------
writing concurrently with any notice given to Borrower of any default on the
part of Borrower under the Lease, and Lessee agrees that Lender shall have the
right (but not the obligation) to cure any breach or default specified in such
notice within the time periods set forth below and Lessee shall not declare a
default of the Lease, as to Lender, if Lender cures such default within thirty
(30) days from and after expiration of the time period provided in the Lease for
the cure thereof by Borrower; provided, however, that if such default cannot
with diligence be cured by lender within such thirty (30) day period, the
commencement of action by Lender within such thirty (30) day period to remedy
the same shall be deemed sufficient so long as Lender pursues such cure with
diligence;
(c) No Advance Rent. Lessee will make no payments or
---------------
prepayments of rent more than one (1) month in advance of the time when the same
become due under the Lease; and
(d) Assignment of Rents. Upon receipt by Lessee of written
-------------------
notice from Lender that Lender has elected to terminate the license granted to
Borrower to collect rents, as provided in the Deed of Trust and Assignment, and
directing the
-3-
<PAGE>
payment thereof to Lender, Lessee shall comply with such direction to pay and
shall not be required to determine whether Borrower is in default under the
Loan.
4. ATTORNMENT. Lessee hereby agrees for the benefit of Lender
----------
(which term shall include, for purposes of this Section 4 and for purposes of
Section 5 hereof, any transferee of Borrower's title in and to the Property by
Lender's exercise of its remedies under the Assignment or Deed of Trust by
foreclosure or otherwise, or any transferee by deed in lieu thereof, and any
subsequent transferee of such title, whether Lender or any other party) as
follows:
(a) Payment of Rent. Lessee shall pay to Lender all rental
---------------
payments required to be made by Lessee pursuant to the terms of the Lease for
the duration of the term of the Lease;
(b) Continuation of Performance. Lessee shall be bound to
---------------------------
Lender in accordance with all of the terms of the Lease for the balance of the
term thereof, and Lessee hereby attorns to Lender as its landlord, such
attornment to be effective and self-operative without the execution of any
further instrument immediately upon Lender succeeding to the lessor's interest
in the Lease and giving written notice thereof to Lessee. Lessee agrees to
provide written confirmation of the foregoing upon request of Lender;
(c) No Offset. Lender shall not be liable for, nor subject
---------
to, any offsets or defenses which Lessee may have by reason of any act or
omission of Borrower as prior lessor, nor for the return of any sums which
Lessee may have paid to Borrower as prior lessor as and for security deposits,
advance rentals or otherwise, except to the extent that such sums are actually
delivered by Borrower to Lender; and
(d) Subsequent Transfer. If Lender, by succeeding to the
-------------------
interest of lessor under the Lease, should become obligated to perform the
covenants of lessor thereunder, then, upon any further transfer of the lessor's
interest by Lender, all of such obligations shall terminate as to Lender.
5. NON-DISTURBANCE. In the event of a foreclosure of the Deed
---------------
of Trust or deed in lieu thereof, so long as there shall then exist no breach,
default, or event of default on the part of Lessee under the Lease, nor any
event or condition which, with notice or passage of time or both, would
constitute such a breach, default, or event of default, the leasehold interest
of Lessee under the Lease shall not be extinguished or terminated by reason of
such foreclosure, but rather the Lease shall continue in full force and Lender
shall recognize and accept Lessee as tenant under the Lease subject to the terms
and provisions of the Lease except as modified by this Agreement.
6. MISCELLANEOUS.
-------------
(a) Heirs, Successors, Assigns and Transferees. The
------------------------------------------
covenants herein shall be binding upon, and inure to the benefit of, the heirs,
successors and assigns of the parties hereto;
(b) Notices. All notices or other communications required
-------
or permitted to be given pursuant to the provisions hereof shall be deemed
served upon delivery or, if mailed, upon the first to occur of receipt or the
expiration of seventy-two (72) hours after deposit in the United States
Postal Service, certified mail, postage prepaid and addressed to the address of
Lessee or Lender appearing below:
- 4 -
<PAGE>
LESSEE
---------------------------------------
ASK Computer System, Inc.
2440 West El Camino Real
Mountain Veiw, CA 94039
Attention: Chief Financial Officer
LENDER
-----------------------------------------
Wells Fargo Bank, N.A.
Real Estate Group
420 Montgomery Street, 6th Floor
San Francisco, California 94163
Attention: Mr. Stephen Merchant
BORROWER
-----------------------------------------
Alameda Real Estate Investments
c/o Vintage Properties
393 Vintage Park Drive
Suite 210
Foster City, California 94404-1179
Attention: Joseph E. McVeigh
Provided, however, that any party shall have the right to change its address for
notice hereunder by giving written notice thereof to the other party in the
manner set forth hereinabove;
(c) Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute and be construed as one and the same instrument;
(d) Remedies cumulative. All remedies provided herein are
-------------------
cumulative and shall be in addition to any and all other rights and remedies
provided by law and by other agreements between Lender and Borrower or others;
(e) Paragraph Headings. Paragraph headings in this Agreement
------------------
are for convenience only and are not to be construed as part of this Agreement
or in any way limiting or applying the provisions hereof;
(f) Further Assurances. At the request of either party
------------------
hereto, the other party shall execute, acknowledge and deliver such other
documents and/or instruments as may be reasonably required by the
requesting party in order to carry out the purpose of this Agreement, provided
that no such document or instrument shall modify the rights and obligations of
the parties provided herein;
(g) Conflicts. In the event of any inconsistency between the
---------
terms of this Agreement and the Lease, the terms of this Agreement shall
control; and
(h) Attorneys' Fees. The prevailing party shall be entitled
---------------
to recover from the other party its reasonable costs, including reasonable
attorneys' fees, in any action brought by any party against the other to enforce
any rights or obligations under this Agreement.
NOTICE: THIS SUBORDINATION AGREEMENT CONTAINS A PROVISION WHICH ALLOWS THE OWNER
TO OBTAIN A LOAN THE PROCEEDS OF WHICH MAY BE EXPENDED FOR PURPOSES OTHER THAN
IMPROVEMENT OF THE LAND.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of this day and year first above written.
"Lender" "Borrower"
WELL FARGO BANK, N.A., ALAMEDA REAL ESTATE INVESTMENTS,
a national banking a California limited partnership
association
By: C/O DEVELOPMENT ASSOCIATES,
a Massachusetts general
BY: /s/ [SIGNATURE ILLEGIBLE] partnership
--------------------------------
By: Copley/Ohio Associates,
Its: Vice President Partner
-------------------------------
By: Copley Real Estate
Advisors, Inc.,
its managing Partner
"Lessee"
ASK COMPUTER SYSTEMS, INC., By: /s/ James D. Flynn
----------------------
a Delaware corporation Authorized Signatory
James D. Flynn
By: /s/ C. Gerald Benton By: New England Mutual Life
-------------------------------
C. Gerald Benton Insurance Company, Partner
Its: Director Operations
-------------------------------
By: Copley Real Estate
Advisors, Inc.,
its asset manager
hereunder duly authorized
By: /s/ James D. Flynn
----------------------
Authorized Officer
James D. Flynn
By: VINTAGE PROPERTIES - ALAMEDA
COMMERCIAL
a California corporation
By: /s/ Joseph E. McVeigh
------------------------------
Joseph E. McVeigh
Vice President
(ALL SIGNATURES MUST BE ACKNOWLEDGED)
IT IS RECOMMENDED THAT, PRIOR TO THE EXECUTION OF THIS SUBORDINATION AGREEMENT,
THE PARTIES CONSULT WITH THEIR ATTORNEYS WITH RESPECT THERETO.
-6-
<PAGE>
EXHIBIT A
---------
(Description of Property)
EXHIBIT A to Subordination, Estoppel, Non-Disturbance and
---------
Attornment Agreement executed by ALAMEDA REAL ESTATE INVESTMENTS, a
California limited partnership, "Borrower", and ASK COMPUTER SYSTEMS, INC.,
a Delaware corporation, as "Lessee", in favor of WELLS FARGO BANK, NATIONAL
ASSOCIATION, dated as of December 1, 1992.
REAL PROPERTY in the City of Alameda, County of Alameda, State of California,
described as follows:
Parcel One:
Lot 2, Parcel Map 6346, filed December 14, 1992, Map Book 205, Pages 10-11,
Alameda County Records.
Parcel Two:
Non-exclusive easements appurtenant to Parcel One above for (a) use of the
common area, (b) for pedestrian and vehicular ingress and egress, (c) for the
purpose of accommodating any ecxroachment over or onto any part of the common
area due to roof overhang or the settlement or shifting of building
improvements, (d) for the purpose of parking, (e) for the purpose of
accommodating private utilities, private storm drain lines and private sanitary
sewer lines which cross the lot lines, all as defined in Article 3, Section
3.02(a), (b), (c), (d) and (e) of that certain document entitled "Declaration of
Reciprocal Easements, Covenants and Restrictions (Office Buildings and
Powerhouse)" recorded February 28, 1989, Series No. 89-56055, Official Records.
Parcel Three:
Non-exclusive easements appurtenant to Parcel One above, for pedestrian and
vehicular ingress and egress and related appurtenances, landscaping and similar
improvements, as defined in that certain document entitled "Roadway Easement
Agreement" recorded April 20, 1987, Series No. 87-107258, Official Records.
A.P. No. 074-1334-050
074-1334-051
074-1334-052
<PAGE>
THIS SUBLEASE (the "Sublease") is entered into as of the date set forth in
Section 1.1(e) below, by and between the Sublandlord and the Subtenant set forth
below.
W I T N E S S E T H
- - - - - - - - - -
1. SUBLEASE SUMMARY AND DEFINITIONS.
--------------------------------
1.1. The Sublease provisions and definitions set forth in this Section 1.1
in summary form are solely to facilitate convenient reference by the parties.
If there is any conflict between this Section and any other provisions of this
Sublease, the latter shall control.
(a) Sublandlord's Name COMPUTER ASSOCIATES
and address: INTERNATIONAL, INC.
1 Computer Associates Plaza
Islandia, N.Y. 11788-7000
Attn: Senior Vice President - Facilities
Rent payments to above address: Attention:
Treasurer-Rent Collection
(b) Sublandlord's State of
Incorporation: Delaware
(c) Subtenant's Name and TCSI Corporation
address: 2121 Alston Way
Berkeley, CA 94704
Attn: PAUL PARMER
------------
(d) Subtenant's State of
Incorporation: Nevada
(e) Sublease Date: July 12, 1996
(f) Overlandlord's Name and Alameda Real Estate Investors
Address: Vintage Properties
393 Vintage Park Drive, Ste. 210
Foster City, CA 94404
(g) Overlease: Lease dated June 25, 1992 between
Overlandlord and Sublandlord as amended by
Amendment No.1 dated January 29, 1993, and
Amendment No.2 dated December 1, 1994.
(h) Unincorporated provisions
of the Overlease: Articles: 2B, 2C, 3A, 3B(XV), 3C, 3D, 4B, 4C,
4E, 4H, 5, 14, 32, 36, 45 and 46.
Exhibits: A, B, B-1 and C
<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
(i) Building: 1080 MARINA VILLAGE PARKWAY
ALAMEDA, CALIFORNIA
(j) Premises: Initially, 34,684 Rentable Square Feet,
subsequently increased to 54,504 RSF and
finally increased to 72,967 Rentable
Square Feet comprised of the entire 1st,
2nd, 3rd and 4th Floors, such square
footage to be provided to Subtenant in
stages during the Sublease Term.
(k) Sublease Commencement Date: September 1, 1996
(l) Sublease Expiration Date: September 30, 2004
(m) Base Rent:
<TABLE>
<CAPTION>
Annual
Rent per rentable
Monthly Periods Square Feet square foot Monthly Base Rent Annual Base Rent
- --------------- ----------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
months 1-7 34,684 $19.20 $ 55,494.40 $ 665,932.80
months 8-18 54,504 $19.20 $ 87,206.40 $1,046,476.80
months 19-60 72,967 $19.20 $116,747.20 $1,400,966.40
months 61-97 72,967 $20.76 $126,232.91 $1,514,794.92
</TABLE>
(n) Prepaid Base Rent: $55,494.40
(o) Operating Expenses/Taxes: Increases over 1997 Base Year Subtenant
temporarily responsible for all
operating/taxes for entire space - See
Article 13.
(p) Subtenant's Proportionate
Share: 81.747%
----------
(q) Electric Charge: Included. See Article 14.
(r) Security Deposit: $500,000 to be reduced pursuant to Article
16.
(s) Alterations: "As Is". See Article 7
(t) Brokers: For Sublandlord: BT Commmercial
For Subtenant: Aegis Corporate Services
2
<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
(u) Parking: 3.4 spaces per 1,000 square feet at no cost.
(v) Renewal Option: See Article 21.
(w) Expansion Option: Entire 5th Floor subject to current tenant;
See Article 22.
2. SUBLEASE GRANT
--------------
2.1. By lease (hereinafter referred to as the "Overlease") described above,
the Overlandlord leased to Sublandlord certain space (hereinafter called the
"Leased Space") in the Building in accordance with the terms of the Overlease. A
copy of the Overlease (from which certain terms which do not relate to
Subtenant's obligations hereunder may have been deleted) is annexed hereto as
EXHIBIT A.
2.2. In consideration of the obligation of Subtenant to pay rent as herein
provided and in consideration of the other terms, covenants and conditions
hereof, Sublandlord hereby leases to Subtenant and Subtenant hereby hires from
Sublandlord, upon and subject to the provisions of this Sublease and the
Overlease, the square feet of rentable area as set forth in SECTION 1.1 herein
and as shown hatched on EXHIBIT B annexed hereto and made a part hereof
(hereinafter called the "Premises"). Sublandlord shall make the computer room
available on or about June 1, 1997.
3. SUBLEASE TERM
-------------
3.1. Subject to the other provisions hereof, this Sublease shall continue
in full force and effect for a primary term beginning on the Sublease
Commencement Date and ending on the Sublease Expiration Date as defined above.
Such term, as it may be extended or modified only by written agreement of the
parties or pursuant to an express provision of this Sublease, is herein called
the "Sublease Term".
4. RENT
----
4.1. Subtenant, in consideration of this Sublease agrees to pay to
Sublandlord as rent ("Base Rent") the amounts set forth in SECTION 1.1 hereof.
Base Rent is payable in advance and without demand, at Sublandlord's office (or
such other location as Sublandlord shall designate) by check in equal monthly
installments, on the first day of each month during the Sublease Term without
any set-off, off-set, abatement or reduction whatsoever. Subtenant's failure to
receive an invoice from Sublandlord for the rent shall not relieve Subtenant
from its obligation of timely payment hereunder. The Prepaid Base Rent shall be
paid upon Subtenant's execution of this Sublease. In the event the Sublease
Commencement Date is after the first day of the month, Subtenant shall be
entitled to a pro rated credit for each such day after the first day of the
month to be applied towards the next month's payment.
4.2. As used in this Sublease, "Rent" shall mean the Base Rent, the
Operating Expense reimbursements pursuant to SECTION 1.1, and all other monetary
obligations provided for in this
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<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
Sublease to be paid by Subtenant, all of which constitute rental in
consideration for this Sublease.
4.3. In the event the rent is not paid when due as aforesaid, interest
shall accrue thereon at the lesser of 18% per annum or the maximum rate
permitted by law. In addition, if the rent is not paid by the tenth day of any
given month. Subtenant shall pay as a penalty to Sublandlord an additional
amount equal to five percent (5%) of the rent which is due, but not less than
$100.
5. ASSIGNMENT OR UNDERLETTING
--------------------------
5.1. Subtenant shall not (a) assign this Sublease, nor (b) permit this
Sublease to be assigned by operation of law or otherwise, nor (c) underlet all
or any desk space therein to be occupied by any person(s), without first
obtaining:
(a) Overlandlord's consent and all other required consents to such
assignment or subletting as set forth in and pursuant to the
Overlease, and
(b) Sublandlord's consent.
Notwithstanding anything hereinbefore contained in Section 5.1
hereof, in the event Subtenant desires Sublandlord's consent to an assignment of
this Sublease or an underletting of all of the Premises, Subtenant by notice in
writing (a) shall notify Sublandlord of the name of the proposed assignee or
undertenant, furnish such information as to the proposed assignee's or
undertenant's financial responsibility and standing as Sublandlord may require,
and advise Sublandlord of the covenants, agreements, terms, provisions and
conditions contained in the proposed assignment or underlease and (b) shall
offer to vacate the Premises and to Surrender the same to Sublandlord as of a
date (hereafter called the " Surrender Date") specified in said offer which
shall be the last day of any calendar month during the term hereof, provided,
--------
however, that the Surrender Date shall not be earlier than the date occurring
- -------
120 days after the giving of such notice nor be later than the effective date of
the proposed assignment or the commencement date of the term of the proposed
underlease. Sublandlord may accept such offer by notice to Subtenant given
within 60 days after the receipt of such notice from Subtenant. If Sublandlord
accepts such offer, Subtenant shall surrender to Sublandlord, effective as of
the Surrender Date, all Subtenant's right, title and interest in and to the
entire Premises. If the Premises be so surrendered by Subtenant, this Sublease
shall be canceled and terminated as of the Surrender Date with the same force
and effect as if the Surrender Date were the date hereinbefore specified for the
expiration of the full term of this Sublease.
5.2. In the event Sublandlord does not accept such offer of Subtenant
referred to in Section 5.1 hereof, Sublandlord covenants not to unreasonably
withhold its consent to such proposed assignment or underletting by Subtenant
of the Premises to the proposed assignee or undertenant on said covenants,
agreements, terms, provisions and conditions set forth in notice
4
<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
to Sublandlord referred to in SECTION 5.1 hereof; provided, however, that
-------- -------
Sublandlord shall not in any event be obligated to consent to any such proposed
assignment or underletting unless:
(a) the proposed assignee or undertenant is of a financial standing
and is engaged in a business and the Premises will be used in a manner
which is in keeping with the then standards of the Building;
(b) the proposed assignee or undertenant is a reputable party;
(c) the assignment or underletting shall not have the effect (or give
the utility company servicing the Building with electricity cause to
claim) that Sublandlord may not service the Premises, or any part
thereof, with electricity on a "rent inclusion" basis;
(d) Sublandlord shall have the right, upon five (5) days prior
written notice to Subtenant, to require Subtenant thereafter to pay to
Sublandlord a sum equal to fifty percent (50%) of: (i) any rent or
other consideration paid to Subtenant by any undertenant which is in
excess of the fixed annual rent and additional rent then being paid by
Subtenant to Sublandlord pursuant to the terms of this Sublease, and
(ii) any other profit or gain realized by Subtenant from any such
assignment or underletting in connection with any underletting; all
sums payable hereunder by Subtenant shall be paid to Sublandlord as
additional rent immediately upon receipt thereof by Subtenant and, if
requested by Sublandlord, Subtenant shall promptly enter into a
written agreement with Sublandlord setting forth the amount of
additional rent to be paid to Sublandlord pursuant to this Section;
(e) there shall be no default by Subtenant under any of the terms,
convenants and conditions of this Sublease at the time that
Sublandlord's consent to any such assignment or underletting is
requested and on the effective date of the assignment or the proposed
underlease;
(f) the proposed assignee or undertenant shall not be (i) a
government or any subdivision or agency thereof, (ii) a school
college, university or educational institution of any type, whether
for profit or non-profit, (iii) a direct competitor of Sublandlord or
(iv) an employment or recruitment agency;
(g) Subtenant shall reimburse Sublandlord for any reasonable expenses
that may be incurred by Sublandlord in connection with the proposed
assignment or underlease, including without limitation the reasonable
costs of making investigations as to the acceptability of a proposed
assignee or undertenant and reasonable legal expenses incurred in
connection with the granting of any
5
<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
requested consent to the assignment or underlease;
(h) such proposed underletting will result in there being no more
than four occupants of the Premises including Subtenant.
5.3. Provided Subtenant received Overlandlord's consent, Sublandlord will
not withhold its consent to any exempt transfers described in Section 25(D) of
the Overlease, and the provisions of Section 5.2(d) above shall not apply to
such exempt transfers.
5.4. Anything contained in the foregoing provisions of this section to the
contrary notwithstanding, neither Subtenant nor any other person having an
interest in the possession, use, occupancy or utilization of the Premises shall
enter into any lease, sublease, license, concession or other agreement for the
use, occupancy or utilization of space in the Premises which provides for rental
or other payment for such use, occupancy or utilization based, in whole or in
part, on the net income or profits derived by any person from the Premises
leased, used, occupied or utilized (other than an amount based on a fixed
percentage or percentages of receipts or sales), and any such purported lease,
sublease, license, concession or other agreements shall be absolutely void and
ineffective as a conveyance of any right or interest in the possession, use,
occupancy or utilization of any part of the Premises.
6. TERMS OF THE OVERLEASE
----------------------
6.1. Except as herein otherwise expressly provided and except for the
obligation to pay rent and additional rent under the Overlease, all of the
terms, covenants, conditions and provisions in the Overlease are hereby
incorporated in, and made a part of this Sublease, and such rights and
obligations as are contained in the Overlease are hereby imposed upon the
respective parties hereto; the Sublandlord herein being substituted for the
Landlord in the Overlease, and the Subtenant herein substituted for the Tenant
named in the Overlease; provided, however, that the Sublandlord herein shall not
be liable for any defaults by Overlandlord and, if Overlandlord is not the fee
owner, the owner in fee of the land and Building of which the Premises are a
part. Neither Sublandlord nor Subtenant shall take any action that shall cause
there to occur a default under the terms of the Overlease, nor shall either fail
to take any action the failure of which shall cause there to occur such default.
If the Overlease shall be terminated for any reason during the term hereof,
except due to a default by Sublandlord or a written agreement between
Overlandlord and Sublandlord, then and in that event this Sublease shall
therefore automatically terminate and Sublandlord shall have no liability to
Subtenant by reason thereof. Upon the termination of this Sublease, whether by
forfeiture, lapse of time or otherwise, or upon the termination of Subtenant's
right to possession, Subtenant will at once surrender and deliver up the
Premises in good condition and repair, reasonable wear and tear expected.
Sublandlord and Subtenant shall promptly deliver to the other any and all
notices received from the Overlandlord or its agents which effect the other's
right or obligations under the Overlease or this Sublease.
6
<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
6.2. This Sublease is subject to, and Subtenant accepts this Sublease
subject to, any amendments and supplements to the Overlease hereafter made
between Overlandlord and Sublandlord, provided that any such amendment or
supplement to the Overlease will not prevent or adversely affect the use by
Subtenant of the Premises in accordance with the terms of this Sublease,
increase the obligations of Subtenant or decrease its rights under the Sublease
or in any other way materially adversely affect Subtenant.
6.3. This Sublease is subject and subordinate to the Overlease and to all
ground or underlying leases and to all mortgages which may now or hereafter
affect such leases or the real property of which the Premises are a part and all
renewals, modifications, replacements and extensions of any of the foregoing.
This SECTION 6.3 shall be self-operative and no further instrument of
subordination shall be required. To confirm such subordination, Subtenant shall
execute promptly any certificate that Sublandlord may reasonably request,
provided that such certificate does not materially adversely affect Subtenant's
right hereunder.
7. CONDITION OF PREMISES
---------------------
7.1. Subtenant has examined the Premises, is aware of the physical
condition thereof, and agrees to take the same "as is," (unless otherwise
provided in SECTION 15 herein) with the understanding that there shall be no
obligation on the part of Sublandlord to incur any expense whatsoever in
connection with the preparation of the Premises for Subtenant's occupancy
thereof. Any work performed by Subtenant shall be in accordance with the terms
of the Overlease and SECTION 15 herein. Notwithstanding anything herein to the
contrary, Sublandlord shall provide Subtenant with an allowance (from monies
provided by the Overlandlord) equal to $1,641,757 ($22.50/square foot) for the
purpose of performing improvements in the Premises and, provided that (a)
Overlandlord approves, and (b) Subtenant spends some of its own monies on
approved tenant improvements so that at least $1,641,757 is spent on approved
tenant improvements, Subtenant may use a portion of the allowance monies for
reimbursement of moving expenses for Subtenant's relocation to the Premises. All
plans for improvements must first be approved in writing by Sublandlord and
Subtenant shall provide Sublandlord with paid invoices indicating all such work
which was performed, at which point Sublandlord will reimburse Subtenant for
such expenditures up to the amount of the allowance.
8. USE OF PREMISES
---------------
8.1. Subtenant agrees that the Premises shall be occupied only as
executive, administrative and general offices for Subtenant's business.
9. CONSENT OF OVERLANDLORD
-----------------------
9.1. This Sublease is conditioned upon the consent thereto by
Overlandlord which consent shall be evidenced by Overlandlord's signature
appended hereto or a separate consent in the form utilized by Overlandlord for
such purposes. Subtenant and Sublandlord shall share equally the cost of any
fees or charges imposed by the Overlandlord in connection with the obtaining of
such consent. Provided Overlandlord's consent does not materially affect the
terms
7
<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
of this Sublease, Subtenant shall immediately execute any documents requested by
Overlandlord in order to obtain Overlandlord's approval, and in the event such
documents are not signed and returned by Subtenant within five (5) days of
receipt, Subtenant hereby appoints Sublandlord as its attorney in fact and
authorizes Sublandlord to execute same on Subtenant's behalf.
9.2 Sublandlord makes no representation with respect to obtaining
Overlandlord's approval of this Sublease and, in the event that Overlandlord
notifies Sublandlord that Overlandlord will not give such approval, Sublandlord
will so notify Subtenant and, upon receipt of such notification by Sublandlord
of the disapproval by Overlandlord, this Sublease shall be deemed to be null and
void and without force or effect, and Sublandlord and Subtenant shall have no
further obligations or liabilities to the other with respect to this Sublease.
9.3 Except as otherwise specifically provided herein, wherever in this
Sublease Subtenant is required to obtain Sublandlord's consent or approval,
Subtenant understands that Sublandlord may be required to first obtain the
consent or approval of Overlandlord. If Overlandlord should refuse such consent
or approval, Sublandlord shall be released of any obligation to grant its
consent or approval whether or not Overlandlord's refusal, in Subtenant's
opinion, is arbitrary or unreasonable.
10. DEFAULT
-------
10.1 Subtenant acknowledges that the services to be rendered to the
Premises are to be rendered by Overlandlord. Anything in this Sublease to the
contrary notwithstanding, if there exists a breach by Sublandlord of any of its
obligations under this Sublease and, concurrently, a corresponding breach by
Overlandlord under the Overlease of its obligations under the Overlease exists,
then and in such event, Subtenant's sole remedy against Sublandlord in the
event of any breach of obligations under this Sublease shall be the right to
pursue a claim in the name of Sublandlord against Overlandlord, and Sublandlord
agrees that it will, at Subtenant's expense, cooperate with Subtenant in the
pursuit of such claim.
10.2 Anything contained in any provisions of this Sublease to the contrary
notwithstanding, Subtenant agrees, with respect to the premises, to comply with
and remedy any default claimed by Overlandlord and caused by Subtenant, within
the period allowed to Sublandlord as tenant under the Overlease, even if such
time period is shorter than the period otherwise allowed in the Overlease, due
to the fact that notice of default from Sublandlord to Subtenant is given after
the corresponding notice of default from Overlandlord. Sublandlord agrees to
forward to Subtenant, upon receipt thereof by Sublandlord, a copy of each
notice of default received by Sublandlord in its capacity as tenant under the
Overlease. Subtenant agrees to forward to Sublandlord, upon receipt thereof,
copies of any notices received by Subtenant with respect to the Premises from
Overlandlord or from any governmental authorities.
10.3 Subtenant acknowledges that upon breach of any provisions of this
Sublease by Subtenant which breach is not cured within the time period provided
below, any rights or options
8
<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
granted to Subtenant under this Sublease or the Overlease relating to expansion,
renewal, or any other equity option, shall immediately terminate and shall not
be exercisable for the remainder of the Sublease term. Subtenant shall be
entitled to a thirty day (30) cure period for all non-monetary breaches
(provided that if the nature of the breach is such that more than thirty (30)
days are reasonably required for its cure, then no event of default shall be
deemed to have occurred if Subtenant commences such cure within such thirty (30)
day period and thereafter diligently prosecutes such cure to completion), and if
any breach is not cured within any applicable cure period, such breach shall be
deemed an event of default. If and whenever there shall occur any event of
default of this Sublease, Sublandlord may, at Sublandlord's option, in addition
to any other remedy or right given under the Overlease or by law or equity, do
any one or more of the following in compliance with applicable provisions of the
California Code of Civil Procedure and California Civil Code governing
enforcement of leases and/or subleases of commercial real property:
(a) Terminate this Sublease, in which event Subtenant shall
immediately surrender possession of the Premises to Sublandlord;
(b) Terminate Subtenant's right to possession of the Premises under
this Sublease without terminating the Sublease itself, by written
notice to Subtenant, in which event Subtenant shall immediately
surrender possession of the Premises to Sublandlord;
(c) Enter upon the Premises by force if necessary without being
liable for prosection or any claim for damages therefor, and do
whatever Subtenant is obligated to do under the terms of this
Sublease; and Subtenant agrees to reimburse Sublandlord on demand for
any direct or indirect expenses which Sublandlord or Overlandlord may
incur in thus effecting compliance with Subtenant's obligations under
this Sublease, and Subtenant further agrees that Sublandlord shall not
be liable for any damages resulting to Subtenant from such action.
10.4 It is hereby expressly stipulated by Sublandlord and Subtenant that
any of the above listed actions including, without limitation, termination of
this Sublease, termination of Subtenant's right to possession, and re-entry by
Sublandlord, will not affect the obligations of Subtenant for the unexpired
Sublease Term, including the obligations to pay unaccrued monthly rentals and
other charges provided in this Sublease for the remaining portion of the
Sublease Term. Sublandlord is entitled to the same remedies as Overlandlord has
under the Overlease in addition to the above.
11. SUBLANDLORD REPRESENTATION
--------------------------
11.1 Sublandlord represents (a) that it is the holder of the interest of
the tenant under the Overlease, and (b) that the Overlease is full force and
effect and no default exits under
9
<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
the Overlease.
12. BROKERS
-------
12.1 Each party hereto covenants, represents and warrants to the other
that it has had no dealing or communications with any broker or agent in
connection with the consummation of this Sublease other than set forth in
Section 1.1 hereof, and each party covenants and agrees to pay, hold harmless
and indemnify the other from and against any and all cost, expense (including
reasonable attorney's fees) or liability for any compensation, commissions or
charges claimed by any broker or agent other than such brokers with respect to
this Sublease or the negotiation thereof. Sublandlord shall pay any applicable
commission to such brokers in accordance with separate agreements between
Sublandlord and such brokers.
13. OPERATING EXPENSES/TAXES
------------------------
13.1. All charges for standard Operating Expenses and Property Taxes,
as defined in the Overlease, incurred during normal business hours for the Base
Year set forth in Subsection 1.1 (o) hereof shall be included in the rent paid
by Subtenant to Sublandlord as additional rent upon receipt of an invoice for
such charges.
13.2. In addition to Base Rent, Subtenant shall be responsible for all
operating expenses and taxes for the entire 72,967 square feet beginning on the
Sublease Commencement Date (less the area comprising the computer room until
Sublandlord vacates such space, and the area for which Subtenant is paying gross
rent).
14. ELECTRIC CHARGE
---------------
14.1 All charges for standard electric incurred during normal business
hours shall be included in the Base Rent paid herein. Any additional charges
shall be paid by Subtenant to Sublandlord as additional rent upon receipt of an
invoice for such services at actual cost.
15. ALTERATIONS
-----------
15.1 In the event Subtenant is permitted to perform alterations in the
Premises hereunder, Subtenant may make no changes, alterations in the Premises
hereunder, Subtenant may make no changes, alternations, additions, improvements
or decorations in, to or about the Premises without submitting detailed plans
and construction schedules to Sublandlord and receiving Sublandlord's prior
written consent to such plans. Subtenant shall make no changes, alterations,
additions, improvements or decorations which would result in Overlandlord
charging Sublandlord for the cost of same, including any removal costs
associated therewith and Subtenant shall comply with all laws and regulations
relating to such construction including, but not limited to, receipt of
certificates of occupancy, permits and ADA requirements, and shall be
responsible for all costs associated therewith. Sublandlord may impose
reasonable guidelines as may be necessary to protect its occupancy and rights
provided in the Overlease, including placing reasonable restrictions on times
when certain types of work in the Overlease, including placing reasonable
restrictions of times when certain types of work may be performed in order to
prevent undue intrusion and noise to Sublandlord or other tenants
10
<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
in the Leased Premises.
16. SECURITIES DEPOSIT
------------------
16.1. As security for the faithful performance and observance by Subtenant
of the terms, provisions, covenants and conditions of this Sublease, Subtenant
is simultaneously herewith delivering to Sublandlord a security deposit in the
amount set forth in Section 1.1(r) (the "Security Deposit"), which shall earn a
five percent (5%) rate of interest. Upon the first anniversary of the Sublease
Commencement Date, provided Subtenant is not then in default under this Sublease
(or if Subtenant is in default, at such time as the default has been cured),
Sublandlord shall pay over to Subtenant the interest then earned on the Security
Deposit. Upon each anniversary thereafter, provided Subtenant is not then in
default under this Sublease (or if Subtenant is in default, at such time as the
default has been cured), Sublandlord shall pay over to Subtenant all interest
earned on the Security Deposit plus $100,000, provided however that the Security
Deposit shall not be thereby reduced below the sum of $100,000. In the event
that Sublandlord applies any portion of the security in respect of a default by
Subtenant, Subtenant shall forthwith restore the amount so applied so that at
all times the amount of the Security Deposit shall be not less than the security
required to be maintained from time to time. Sublandlord may apply the whole or
any part of the Security Deposit to the extent required for the payment of any
sum as to which Subtenant is in default, or for any sum which Sublandlord may
expend or may be required to expend by reason of Subtenant's default.
16.2. In the event that Subtenant shall fully and faithfully comply with
all of the terms, provisions, covenants and conditions of this Sublease, that
portion of the Security Deposit not used or applied by Overlandlord, plus
interest accrued thereon, shall be returned to Subtenant (i) within thirty (30)
days after the Sublease Expiration Date and after delivery of entire possession
of the Premises to Sublandlord, or (ii) upon Sublandlord's receipt of an
equivalent amount of security from a assignee or undertenant pursuant to an
assignment or underletting permitted by Section 5 of this Sublease. In the event
of an assignment of the Overlease by Sublandlord, Sublandlord shall have the
right to transfer any interest it may have in the security to the assignee and
Sublandlord shall thereupon be released by Subtenant from all liability for the
return of such security, provided such assignee assumes any responsibilities of
Sublandlord with respect to such security, and Subtenant agrees to look solely
to the new sublandlord for the return of said security; and it is agreed that
the provisions hereof shall apply to every transfer or assignment made of the
security to a new sublandlord. Subtenant further covenants that it will not
assign or encumber or attempt to assign or encumber the monies deposited herein
as security and that neither Sublandlord nor its successors or assigns shall be
bound by any such assignment, encumbrance, attempted assignment or attempted
encumbrance.
17. QUIET ENJOYMENT
---------------
17.1. So long as Subtenant pays all of the rent and additional rent due
under this Sublease and performs all of Subtenant's other obligations hereunder,
Subtenant shall peacefully and quietly have, hold and enjoy the Premises
subject, however, to the terms, provisions and
11
<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
obligations of this Sublease and the Overlease.
17.2. In the event Subtenant does not completely vacate the Premises by
the Sublease Expiration Date or earlier termination of this Sublease, Subtenant
shall indemnify and hold harmless Sublandlord in respect of any all holdover
charges or penalties imposed under the Overlease upon Sublandlord in respect of
the entire Leased Space and in respect of any and all costs, liabilities or
expenses (including attorneys fees) suffered by Sublandlord in respect of same,
as and when such costs, liabilities or expenses are incurred. In this regard,
Subtenant shall, if requested by Sublandlord, in Sublandlord's sole discretion,
defend Sublandlord against any action or proceeding brought against Sublandlord
which arises out of said holdover.
18. INTENTIONALLY OMITTED
19. NO WAIVER
---------
19.1. The failure of Sublandlord to seek redress for violation of, or to
insist upon the strict performance of any covenant or condition of this Sublease
or of any of the Rules and Regulations set forth or hereafter adopted by
Sublandlord, shall not prevent a subsequent act which would have originally
constituted a violation from having all the force and effect of an original
violation. The receipt by Sublandlord of rent with knowledge of the breach of
any covenant of this Sublease shall not be deemed a waiver of such breach and no
provision of this Sublease shall be deemed to have been waived by Sublandlord
unless such waiver be in writing signed by Sublandlord. No payment by Subtenant
or receipt by Sublandlord of a lesser amount than the monthly rent herein
stipulated shall be deemed to be other than on account of the earliest
stipulated base rent, additional rent or other charge, nor shall any endorsement
or statement on any check or any letter accompanying any check or payment as
rent be deemed an accord and satisfaction, and Sublandlord may accept such check
or payment without prejudice to Sublandlord's right to recover the balance of
such base rent, additional rent or other charge, or pursue any other remedy in
this Sublease provided. No act or thing done by Sublandlord or Sublandlord's
agents during the term hereby demised shall be deemed an acceptance of a
surrender of the demised premises and no agreement to accept such surrender
shall be valid unless in writing signed by Sublandlord. No employee of
Sublandlord of Sublandlord's agent shall have any power to accept the keys of
the demised premises prior to the termination of the Sublease and the delivery
of keys to any such agent or employee shall not operate as a termination of the
Sublease or a surrender of the demised premises.
20. NOTICES
-------
20.1. Any notice, demand or communication which, under the terms of this
Sublease or under statute or municipal regulation must or may be given or made
by the parties hereto, shall be in writing and given or made by mailing the same
by registered or certified mail, return receipt requested to the address and
person designated in Section 1.1(a) and (c) herein.
Either party, however, may designate such new or other address to which
such notices,
12
<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
demands or communications thereafter shall be given, made or mailed by notice
(given in the manner prescribed herein). Any such notice, demand or
communication shall be deemed given or served, as the case may be, on the date
of the posting thereof. In the event Subtenant's address is not set forth above,
notice to Subtenant shall be deemed sufficient if sent to the Premises.
21. RENEWAL OPTION
--------------
21.1. Sublandlord will cooperate with Subtenant, without the obligation to
incur any costs, in Subtenant's efforts to secure a direct lease with
Overlandlord after the Sublease Expiration Date.
22. EXPANSION
---------
22.1. Pursuant to the terms of the Overlease, Sublandlord has also leased
the Fifth Floor of the Building. The Fifth Floor is currently subject to the
sublease Pilot Network Services, Inc. ("Pilot"). Provided that Pilot has not
exercised its option to renew its sublease pursuant to Article 18 thereof,
Subtenant shall have the option to sublease the Fifth Floor beginning on the
termination of the Pilot sublease and continuing for the remainder of the
Sublease Term, upon the terms and conditions set forth herein, except that the
Base Rent shall be at Fair Market Value at the time of the expansion. Subtenant
shall notify Sublandlord in writing of its intent to exercise this expansion
option on or before December 31, 1999, but not earlier than June 30, 1999.
Within ten (10) business days of receipt of such notice, Sublandlord shall
advise Subtenant whether Pilot has exercised its option to renew its sublease.
If Pilot has not elected to so renew, Subtenant and Sublandlord shall execute a
sublease amendment to reflect the additional square footage.
22.2. "Fair Market Value" as used above shall mean the going market rental
and any adjustment or adjustments to such rental at such time and in such amount
or using such formula as is prevailing at the time of the commencement of the
expansion term, for comparably equipped space in buildings containing between
50,000 and 250,000 square feet, located within a five(5) mile radius of the
expansion space, and in a condition comparable to the then condition of the
expansion space, taking into account all legal uses for which the expansion
space could be used without material alteration thereto and the value of all the
improvements in the expansion space made by Sublandlord or Overlandlord (but
adjusting for the age and the then condition of such improvements) for a tenant
proposing to sign a lease for a similar term and having financial qualifications
similar to Subtenant and using as a guide equivalent space in the size range of
the expansion space of a similar age, construction, quality , use and location.
Any determination of Fair Market Value shall take into account rental
concessions then prevailing in the market (e.g., "free rent," lease assumptions,
---
payments of moving expenses, etc.).
23. MISCELLANEOUS
-------------
23.1. Where applicable, Subtenant shall be responsible for all additional
costs incurred as a result of this Sublease including, but not limited to,
security cards, keys and parking cards.
13
<PAGE>
STANDARD SUBLEASE AGREEMENT
AS OF JUNE 21, 1996
23.2. This Sublease may not be changed orally, but only by an agreement in
writing signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought.
23.3. This Sublease shall not be binding upon Sublandlord unless and until
it is signed by Sublandlord and delivered to Subtenant. This SECTION 23.3 shall
not be deemed to modify the provisions of SECTION 9 hereof.
23.4. This Sublease constitutes the entire agreement between the parties
and all representations and understandings have been merged herein.
23.5. This Sublease shall inure to the benefit of all of the parties
hereto, their successors and (subject to the provisions hereof) their assigns.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals of
the day and year first above written.
ATTEST: COMPUTER ASSOCIATES INTERNATIONAL, INC.,
Sublandlord
/s/ [SIGNATURE ILLEGIBLE] By /s/ [SIGNATURE ILLEGIBLE]
- ---------------------------- -------------------------------
ATTEST: TCSI CORPORATION, Subtenant
By /s/ [SIGNATURE ILLEGIBLE]
- ---------------------------- -------------------------------
ACKNOWLEDGED AND AGREED:
ALAMEDA REAL ESTATE INVESTORS, Overlandlord
By /s/ [SIGNATURE ILLEGIBLE]
--------------------------
14
<PAGE>
EXHIBIT 10.14
MASTER LOAN AND SECURITY AGREEMENT
THIS AGREEMENT dated as of September 1, 1997, is made by Pilot Network
Services, Inc. (the "Borrower"), a California corporation having its principal
place of business and chief executive office at 1080 Marina Village Parkway,
Alameda, CA, 94501 in favor of Transamerica Business Credit Corporation, a
Delaware corporation (the "Lender"), having its principal office at Riverway II,
West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018.
WHEREAS, the Borrower has requested that the Lender make Loans to it
from time to time; and
WHEREAS, the Lender has agreed to make such Loans on the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and to induce the
Lender to extend credit, the Borrower hereby agrees with the Lender as follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms shall have the following meanings,
and shall be equally applicable to both the singular and plural forms of the
terms defined:
Agreement shall mean this Master Loan and Security Agreement together with all
schedules and exhibits hereto, as amended, supplemented, or otherwise modified
from time to time.
Applicable Law shall mean the laws of the State of Illinois (or any other
jurisdiction whose laws are mandatorily applicable notwithstanding the parties'
choice of Illinois law) or the laws of the United States of America, whichever
laws allow the greater interest, as such laws now exist or may be changed or
amended or come into effect in the future.
Business Day shall mean any day other than a Saturday, Sunday, or public holiday
or the equivalent for banks in New York City.
Code shall have the meaning specified in Section 8(d).
Collateral shall have the meaning specified in Section 2.
Collateral Access Agreement shall mean any landlord waiver, mortgagee waiver,
bailee letter, or similar acknowledgement of any warehouseman or processor in
possession of any Equipment, in each case substantially in the form of Exhibit
A.
Effective Date shall mean the date on which all of the conditions specified in
Section 3.3 shall have been satisfied.
Equipment shall have the meaning specified in Section 2.
Event of Default shall mean any event specified in Section 7.
Financial Statements shall have the meaning specified in Section 6.1.
GAAP shall mean generally accepted accounting principles in the United States of
America, as in effect from time to time.
<PAGE>
Loans shall mean the loans and financial accommodations made by the Lender to
- -----
the Borrower in accordance with the terms of this Agreement and the Notes.
Loan Documents shall mean, collectively, this Agreement, the Notes, and all
- --------------
other documents, agreements, certificates, instruments, and opinions executed
and delivered in connection herewith and therewith, as the same may be modified,
extended, restated, or supplemented from time to time.
Material Adverse Change shall mean, with respect to any Person, a material
- -----------------------
adverse change in the business, operations, results of operations, assets,
liabilities, or condition (financial or otherwise) of such Person taken as a
whole.
Material Adverse Effect shall mean, with respect to any Person, a material
- -----------------------
adverse effect on the business, operations, results of operations, assets,
liabilities, or condition (financial or otherwise) of such Person taken as a
whole.
Note shall mean each Promissory Note made by the Borrower in favor of the
- ----
Lender, as amended, supplemented, or otherwise modified from time to time, in
each case substantially in the form of Exhibit B.
Obligations shall mean all indebtedness, obligations, and liabilities of the
- -----------
Borrower under the Notes and under this Agreement, whether on account of
principal, interest, indemnities, fees (including, without limitation,
attorneys' fees, remarketing fees, origination fees, collection fees, and all
other professionals' fees), costs, expenses, taxes, or otherwise.
Permitted Liens shall mean such of the following as to which no enforcement,
- ---------------
collection, execution, levy, or foreclosure proceeding shall have been
commenced: (a) liens for taxes, assessments, and other governmental charges or
levies or the claims or demands of landlords, carriers, warehousemen, mechanics,
laborers, materialmen, and other like Persons in the ordinary course of business
for sums which are not yet due and payable, or liens which are being contested
in good faith by appropriate proceedings diligently conducted and with respect
to which adequate reserves are maintained to the extent required by GAAP; (b)
deposits or pledges to secure the payment of worker's compensation, unemployment
insurance, or other social security benefits or obligations, public or statutory
obligations, surety or appeal bonds, bid or performance bonds, or other
obligations of a like nature incurred in the ordinary course of business; (c)
licenses, restrictions, or covenants for or on the use of the Equipment which do
not materially impair either the use of the Equipment in the operation of the
business of the Borrower or the value of the Equipment; and (d) attachment or
judgment liens that do not constitute an Event of Default; and (e) any liens
specifically permitted in writing by the Lender.
Person shall mean any individual, sole proprietorship, partnership, joint
- ------
venture, trust, unincorporated organization, association, corporation,
institution, entity, party, or government (including any division, agency, or
department thereof), and the successors, heirs, and assigns of each.
Schedule shall mean each Schedule in the form of Schedule A hereto delivered by
- --------
the Borrower to the Lender from time to time.
Solvent means, with respect to any Person, that as of the date as to which such
- -------
Person's solvency is measured:
(a) the fair saleable value of its assets is in excess of the total
amount of its liabilities (including contingent liabilities as valued in
accordance with GAAP) as they become absolute and matured;
(b) it has sufficient capital to conduct its business; and
(c) it is able generally to meet its debts as they mature.
Taxes shall have the meaning specified in Section 5.5.
- -----
2
<PAGE>
SECTION 2. CREATION OF SECURITY INTEREST: COLLATERAL. The Borrower
-----------------------------------------
hereby assigns and grants to the Lender a continuing general, first priority
lien on, and security interest in, all the Borrower's right, title, and interest
in and to the collateral described in the next sentence (the "Collateral") to
secure the payment and performance of all the Obligations. The Collateral
consists of all equipment set forth on all the Schedules delivered from time to
time under the terms of this Agreement (the "Equipment"), together with all
present and future additions, parts, accessories, attachments, substitutions,
repairs, improvements, and replacements thereof or thereto, and any and all
proceeds thereof, including, without limitation, proceeds of insurance and all
manuals, blueprints, know-how, warranties, and together with all substitutes for
any of the foregoing.
SECTION 3. THE CREDIT FACILITY.
-------------------
SECTION 3.1. BORROWINGS. Each Loan shall be in an amount not
less than $100,000, and in no event shall the sum of the aggregate Loans made
exceed the amount of the Lender's written commitment to the Borrower in effect
from time to time. Notwithstanding anything herein to the contrary, the Lender
shall be obligated to make the initial Loan and each other Loan only after the
Lender, in its sole discretion exercised in good faith, determines that the
applicable conditions for borrowing contained in Sections 3.3 and 3.4 are
satisfied. The timing and financial scope of Lender's obligation to make Loans
hereunder are limited as set forth in a commitment letter executed by Lender and
Borrower, dated as of July 9, 1997 and attached hereto as Exhibit C (the
"Commitment Letter").
SECTION 3.2. APPLICATION OF PROCEEDS. The Borrower shall not
directly or indirectly use any proceeds of the Loans, or cause, assist, suffer,
or permit the use of any proceeds of the Loans, for any purpose other than for
the purchase, acquisition, installation, or upgrading of Equipment or the
reimbursement of the Borrower for its purchase, acquisition, installation, or
upgrading of Equipment.
SECTION 3.3. CONDITIONS TO INITIAL LOAN.
(a) The obligation of the Lender to make the initial Loan is subject
to the Lender's receipt of the following, each dated the date of the initial
Loan or as of an earlier date acceptable to the Lender, in form and substance
satisfactory to the Lender and its counsel:
(i) completed requests for information (Form UCC-11) listing
all effective Uniform Commercial Code financing statements naming the
Borrower as debtor and all tax lien, judgment, and litigation searches
for the Borrower as the Lender shall deem necessary or desirable (to
be completed by the Lender);
(ii) Uniform Commercial Code financing statements (Form UCC-1)
duly executed by the Borrower (naming the Lender as secured party and
the Borrower as debtor and in form acceptable for filing in all
jurisdictions that the Lender deems necessary or desirable to perfect
the security interests granted to it hereunder) and, if applicable,
termination statements or other releases duly filed in all
jurisdictions that the Lender deems necessary or desirable to perfect
and protect the priority of the security interests granted to it
hereunder in the Equipment related to such initial Loan;
(iii) a Note duly executed by the Borrower evidencing the amount
of such Loan;
(iv) a Collateral Access Agreement duly executed by the lessor
or mortgagee, as the case may be, of each premises where the Equipment
is located;
(v) -certificates of insurance required under Section 5.4 of
this Agreement together with loss payee endorsements for all such
policies naming the Lender as lender loss payee and as an additional
insured;
3
<PAGE>
(vi) a copy of the resolutions of the Board of Directors of the
Borrower (or a unanimous consent of directors in lieu thereof)
authorizing the execution, delivery, and performance of this
Agreement, the other Loan Documents to which the Borrower is a party,
and the transactions contemplated hereby and thereby, attached to
which is a certificate of the Secretary or an Assistant Secretary of
the Borrower certifying (A) that the copy of the resolutions is true,
complete, and accurate, that such resolutions have not been amended or
modified since the date of such certification and are in full force
and effect and (B) the incumbency, names, and true signatures of the
officers of the Borrower authorized to sign the Loan Documents to
which it is a party;
(vii) a copy of the Borrower's audited financial statements for
the fiscal year ended March 3l, 1997 and a copy of the Borrower's
internally-prepared financial statements for the quarter ended June
30, 1997; and
(viii) such other agreements and instruments as the Lender deems
necessary in its commercially reasonable judgment in connection with
the transactions contemplated hereby.
(b) There shall be no pending or, to the knowledge of the Borrower,
threatened litigation, proceeding, inquiry, or other action (i) seeking an
injunction or other restraining order, damages, or other relief with respect to
the transactions contemplated by this Agreement or the other Loan Documents to
which the Borrower is a party or (ii)which affects or could affect the business,
prospects, operations, assets, liabilities, or condition (financial or
otherwise) of the Borrower, except, in the case of clause (ii), where such
litigation, proceeding, inquiry, or other action could not reasonably be
expected to have a Material Adverse Effect.
(c) The Borrower shall have paid all fees and expenses required to be
paid by it to the Lender as of such date.
(d) The security interests in the Equipment related to the initial
Loan granted in favor of the Lender under this Agreement shall have been duly
perfected and shall constitute first priority liens, except with respect to
Permitted Liens.
SECTION 3.4. CONDITIONS PRECEDENT TO EACH LOAN. The obligation
of the Lender to make each Loan is subject to the satisfaction of the following
conditions precedent:
(a) the Lender shall have received the documents, agreements, and
instruments set forth in Section 3.3(a)(i) through (v) applicable to such Loan,
each in form and substance reasonably satisfactory to the Lender and its counsel
and each dated the date of such Loan or as of an earlier date acceptable to the
Lender;
(b) the Lender shall have received a Schedule of the Equipment
related to such Loan, in form and substance satisfactory to the Lender and its
counsel, and the security interests in such Equipment related to such Loan
granted in favor of the Lender under this Agreement shall have been duly
perfected and shall constitute first priority liens, except with respect to
Permitted Liens;
(c) all representations and warranties by the Borrower contained in
this Agreement and the other Loan Documents shall be true and correct on and as
of the date of such Loan as if then made, other than representations and
warranties that expressly relate solely to an earlier date, in which case they
shall have been true and correct as of such earlier date; and
(d) no Event of Default or event which with the giving of notice or
the passage of time, or both, would constitute an Event of Default shall have
occurred and be continuing or would result from the making of the requested Loan
as of the date of such request.
4
<PAGE>
SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES.
---------------------------------------------
SECTION 4.1. GOOD STANDING; QUALIFIED TO DO BUSINESS. The
Borrower (a)is duly organized, validly existing, and in good standing under the
laws of the State of its organization, (b) has the power and authority to own
its properties and assets and to transact the businesses in which it is
presently, or plans to be, engaged, and (c) is duly qualified and authorized to
do business and is in good standing in every jurisdiction in which the failure
to be so qualified could have a Material Adverse Effect on (i) the Borrower,
(ii) the Borrowers ability to perform its obligations under the Loan Documents,
or (iii) the rights of the Lender hereunder.
SECTION 4.2. DUE EXECUTION, ETC. The execution, delivery, and
performance by the Borrower of each of the Loan Documents to which it is a party
are within the powers of the Borrower, do not contravene the charter documents,
if any, of the Borrower, and do not (a) to the knowledge of the Borrower violate
in any material respect any law or regulation, or any order or decree of any
court or governmental authority, (b) in any material respect, conflict with or
result in a breach of, or constitute a default under, any material indenture,
mortgage, or deed of trust or any material lease, agreement, or other instrument
binding on the Borrower or any of its properties, or (c) require the consent,
authorization by, or approval of or notice to or filing or registration with any
governmental authority or other Person. This Agreement is, and each of the other
Loan Documents to which the Borrower is or will be a party, when delivered
hereunder or thereunder, will be, the legal, valid, and binding obligation of
the Borrower enforceable against the Borrower in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency, or similar
laws affecting creditors' rights generally and by general principles of equity.
SECTION 4.3. SOLVENCY; NO LIENS. The Borrower is Solvent and
will be Solvent upon the completion of all transactions contemplated to occur
hereunder (including, without limitation, the Loan to be made on the Effective
Date); the security interests granted herein constitute and shall at all times
constitute the first liens on the Collateral other than Permitted Liens; and the
Borrower is, or will be at the time additional Collateral is acquired by it, the
absolute owner of the Collateral with full right to pledge, sell, consign,
transfer, and create a security interest therein, free and clear of any and all
claims or liens in favor of any other Person other than the Lender and other
than Permitted Liens.
SECTION 4.4. NO JUDGMENTS, LITIGATION. No judgments are
outstanding against the Borrower nor is there now pending or, to the Borrower's
knowledge, threatened any litigation, contested claim, or governmental
proceeding by or against the Borrower except judgments and pending or threatened
litigation, contested claims, and governmental proceedings which would not, in
the aggregate, have a Material Adverse Effect on the Borrower.
SECTION 4.5. NO DEFAULTS. The Borrower is not in material
default or has not received a notice of default under any contract, lease, or
commitment to which it is a party or by which it is bound. The Borrower knows of
no dispute regarding any contract, lease, or commitment which could have a
Material Adverse Effect on the Borrower.
SECTION 4.6. COLLATERAL LOCATIONS. On the date hereof, each
item of the Collateral is located at the place of business specified in the
applicable Schedule.
SECTION 4.7. NO EVENTS OF DEFAULT. To the knowledge of the
Borrower, no Event of Default has occurred and is continuing nor has any event
occurred which, with the giving of notice or the passage of time, or both, would
constitute an Event of Default.
SECTION 4.8. NO LIMITATION ON LENDER'S RIGHTS. Except as
permitted herein, none of the Collateral is subject to contractual obligations
that may restrict or inhibit the Lender's rights or abilities to sell or dispose
of the Collateral or any part thereof after the occurrence of an Event of
Default.
SECTION 4.9. PERFECTION AND PRIORITY OF SECURITY INTEREST. The
Borrower has not knowingly taken any action which would prevent this Agreement
from creating a valid and, upon completion of all
5
<PAGE>
required filings of financing statements, perfected first priority and exclusive
security interest in the Collateral (other than Permitted Liens), securing the
payment of all the Obligations.
SECTION 4.10. MODEL AND SERIAL NUMBERS. The Schedules set forth
the true and correct model number and serial number of each item of Equipment
that constitutes Collateral.
SECTION 4.11. ACCURACY AND COMPLETENESS OF INFORMATION. All
data, reports, and information heretofore, contemporaneously, or hereafter
furnished by or on behalf of the Borrower in writing to the Lender or for
purposes of or in connection with this Agreement or any other Loan Document, or
any transaction contemplated hereby or thereby, are or will be true and accurate
in all material respects to the Borrower's knowledge on the date as of which
such data, reports, and information are dated or certified and not incomplete by
omitting to state any material fact known to the Borrower and necessary to make
such data, reports, and information not misleading at such time.
SECTION 4.12. PRICE OF EQUIPMENT. To the Borrower's knowledge,
the cost of each item of Equipment does not exceed the fair and usual price for
such type of equipment purchased in like quantity and reflects all discounts,
rebates and allowances for the Equipment (including, without limitation,
discounts for advertising, prompt payment, testing, or other services) given to
the Borrower by the manufacturer, supplier, or any other person.
SECTION 5. COVENANTS.
---------
SECTION 5.1. EXISTENCE, ETC. The Borrower shall: (a) maintain
its existence, (b) maintain in full force and effect all licenses, bonds,
franchises, leases, trademarks, patents, contracts, and other rights reasonably
necessary for the conduct of its business unless the failure to do so could not
reasonably be expected to have a Material Adverse Effect on the Borrower, (c)
continue in the same general lines of business as those presently conducted by
it, and (d) comply with all applicable laws and regulations of any federal,
state, or local governmental authority, except for such laws and regulations the
violations of which would not, in the aggregate, have a Material Adverse Effect
on the Borrower.
SECTION 5.2. NOTICE TO THE LENDER. As soon as possible, and in
any event within ten business days after the Borrower learns of the following,
the Borrower will give written notice to the Lender of (a) any proceeding
instituted or threatened to be instituted by or against the Borrower in any
federal, state, local, or foreign court or before any commission or other
regulatory body (federal, state, local, or foreign) which would have a Material
Adverse Affect on the Borrower, (b) the occurrence of any Material Adverse
Change with respect to the Borrower, and (c) the occurrence of any Event of
Default or event or condition which, with notice or lapse of time or both, would
constitute an Event of Default, together with a statement of the action which
the Borrower has taken or proposes to take with respect thereto.
SECTION 5.3. MAINTENANCE OF BOOKS AND RECORDS. The Borrower
will maintain books and records pertaining to the Collateral in such detail,
form, and scope as the Lender shall require in its commercially reasonable
judgment. The Borrower agrees that the Lender or its agents may enter upon the
Borrower's premises upon reasonable notice at any time and from time to time
during normal business hours, and at any time upon the occurrence and
continuance of an Event of Default, for the purpose of inspecting the Collateral
and any and all records pertaining thereto.
SECTION 5.4. INSURANCE. The Borrower will maintain insurance on
the Collateral under such policies of insurance, with such insurance companies,
in such amounts, and covering such risks as are at all times reasonably
satisfactory to the Lender. All such policies shall be made payable to the
Lender, in case of loss, under a standard non-contributory "lender" or "secured
party" clause and are to contain such other provisions as the Lender may
reasonably require to protect the Lender's interests in the Collateral and to
any payments to be made under such policies. Certificates of insurance policies
are to be delivered to the Lender, premium prepaid, with the loss payable
endorsement in the Lender's favor, and shall provide for not less than thirty
days' prior written notice to the Lender, of any alteration or cancellation of
coverage. If the Borrower fails to maintain such insurance,
6
<PAGE>
the Lender may arrange for (at the Borrower's expense and without any
responsibility on the Lender's part for) obtaining the insurance. In such case,
unless the Lender shall otherwise agree with the Borrower in writing, the Lender
shall have the sole right, in the name of the Lender or the Borrower, to file
claims under any insurance policies, to receive and give acquittance for any
payments that may be payable thereunder, and to execute any endorsements,
receipts, releases, assignments, reassignments, or other documents that may be
necessary to effect the collection, compromise, or settlement of any claims
under any such insurance policies.
SECTION 5.5. TAXES. The Borrower will pay, when due, all taxes,
assessments, and other similar charges ("Taxes") lawfully levied or assessed
against the Borrower or the Collateral other than taxes that are being
diligently contested in good faith by the Borrower by appropriate proceedings
promptly instituted and for which an adequate reserve is being maintained by the
Borrower in accordance with GAAP. If any Taxes remain unpaid after the date
fixed for the payment thereof and is not contested in good faith by appropriate
proceedings diligently pursued, or if any lien shall be claimed therefor, then,
without notice to the Borrower, but on the Borrower's behalf, the Lender may pay
such Taxes, and the amount thereof shall be included in the Obligations.
SECTION 5.6. BORROWER TO DEFEND COLLATERAL AGAINST CLAIMS; FEES
ON COLLATERAL. The Borrower will defend the Collateral against all claims and
demands of all Persons at any time claiming the same or any interest therein.
The Borrower will not knowingly permit any notice creating or otherwise relating
to liens on the Collateral or any portion thereof to exist or be on file in any
public offer other than Permitted Liens. Except where failure to do so would not
have a Material Adverse Effect on the Borrower, the Borrower shall promptly pay,
when payable, all transportation, storage, and warehousing charges and license
fees, registration fees, assessments, charges, permit fees, and taxes
(municipal, state, and federal) which may now or hereafter be imposed upon the
ownership, leasing, renting, possession, sale, or use of the Collateral, other
than taxes on or measured by the Lender's income and fees, assessments, charges,
and taxes which are being contested in good faith by appropriate proceedings
diligently conducted and with respect to which adequate reserves are maintained
to the extent required by GAAP.
SECTION 5.7. NO CHANGE OF LOCATION, STRUCTURE, OR IDENTITY. The
Borrower will not (a) change the location of its chief executive office without
providing prompt notice of such change to Lender or (b) move or permit the
movement of any item of Collateral from the location specified in the applicable
Schedule, except that the Borrower may change its chief executive office and
keep Collateral at other locations within the United States provided that the
Borrower has delivered to the Lender (i) prior written notice thereof and (ii)
duly executed financing statements and other agreements and instruments (all in
form and substance satisfactory to the Lender) necessary or, in the reasonable
opinion of the Lender, desirable to perfect and maintain in favor of the Lender
a first priority security interest in the Collateral. Notwithstanding anything
to the contrary in the immediately preceding sentence, the Borrower may keep any
Collateral consisting of motor vehicles or rolling stock at any location in the
United States provided that the Lender's security interest in any such
Collateral is conspicuously marked on the certificate of title thereof and the
Borrower has complied with the provisions of Section 5.9.
SECTION 5.8. USE OF COLLATERAL; LICENSES; REPAIR. The
Collateral shall be tolerated by competent, qualified personnel in connection
with the Borrower's business purposes, for the purpose for which the Collateral
was designed and in accordance with applicable operating instructions, laws, and
government regulations in all material respects, and the Borrower shall use
every reasonable precaution to prevent loss or damage to the Collateral from
fire and other hazards. The Collateral shall not be used or operated for
personal, family, or household purposes. The Borrower shall procure and maintain
in effect all orders, licenses, certificates, permits, approvals, and consents
required by federal, state, or local laws or by any governmental body, agency,
or authority in connection with the delivery, installation, use, and operation
of the Collateral, except where failure to do so would not have a Material
Adverse Effect on the Borrower. The Borrower shall keep all of the Equipment in
a satisfactory state of repair and satisfactory operating condition in
accordance with industry standards, subject to normal wear and tear, and will
make all repairs and replacements when and where necessary and practical. The
Borrower will not waste or destroy the Equipment or any part thereof, and will
use reasonable care in the use thereof. The Equipment shall not be annexed or
affixed to or become part of any realty without the Lender's prior written
consent.
7
<PAGE>
SECTION 5.9. FURTHER ASSURANCES. The Borrower will, promptly
upon request by the Lender, execute and deliver or use good faith efforts to
obtain any document reasonably required by the Lender (including, without
limitation, warehouseman or processor disclaimers, mortgagee waivers, landlord
disclaimers, or subordination agreements with respect to the Obligations and the
Collateral), give any notices, execute and file any financing statements, or
other documents (all in form and substance satisfactory to the Lender), mark any
chattel paper, deliver any chattel paper or instruments to the Lender, and take
any other actions that are necessary or, in the opinion of the Lender, desirable
to perfect or continue the perfection and the first priority of the Lender's
security interest in the Collateral, to protect the Collateral against the
rights, claims, or interests of any Persons, or to effect the purposes of this
Agreement. A carbon, photographic, or other reproduction of this Agreement or
any financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law. To the extent
required under this Agreement, the Borrower will pay all reasonable costs
incurred in connection with any of the foregoing.
SECTION 5.10. NO DISPOSITION OF COLLATERAL. The Borrower will
not in any way hypothecate or create or permit to exist any lien, security
interest, charge, or encumbrance on or other interest in any of the Collateral,
except for the lien and security interest granted hereby and Permitted Liens,
and the Borrower will not sell, transfer, assign, pledge, collaterally assign,
exchange, or otherwise dispose of any of the Collateral. In the event the
Collateral, or any part thereof, is sold, transferred, assigned, exchanged, or
otherwise disposed of in violation of these provisions, the security interest of
the Lender shall continue in such Collateral or part thereof notwithstanding
such sale, transfer, assignment, exchange, or other disposition, and the
Borrower will hold the proceeds thereof in a separate account for the benefit of
the Lender. Following such a sale, the Borrower will transfer such proceeds to
the Lender in kind.
SECTION 5.11. NO LIMITATION ON LENDER'S RIGHTS. The Borrower
will not enter into any contractual obligations which may restrict or inhibit
the Lender's rights or ability to sell or otherwise dispose of the Collateral or
any part thereof.
SECTION 5.12. PROTECTION OF COLLATERAL. Upon notice to the
Borrower, the Lender shall have the right at any time to make any payments (if
an Event of Default has occurred and is continuing) and do any other acts the
Lender may deem necessary to protect its security interests in the Collateral,
including, without limitation, the rights to satisfy, contest, or compromise any
encumbrance, charge, or lien which, in the reasonable judgment of the Lender,
appears to be prior to or superior to the security interests granted hereunder,
and appear in, and defend any action or proceeding purporting to affect its
security interests in, or the value of, any of the Collateral. The Borrower
hereby agrees to reimburse the Lender for all payments made and reasonable out-
of-pocket expenses incurred under this Agreement including fees, expenses, and
disbursements of attorneys and paralegals (including the allocated costs of in-
house counsel) acting for the Lender, including any of the foregoing payments
under, or acts taken to protect its security interests in, any of the
Collateral, which amounts shall be secured under this 'Agreement, and agrees it
shall be bound by any payment made or act taken by the Lender hereunder absent
the Lender's gross negligence or willful misconduct. The Lender shall have no
obligation to make any of the foregoing payments or perform any of the foregoing
acts.
SECTION 5.13. DELIVERY OF ITEMS. The Borrower will (a) promptly
after its receipt thereof, deliver to the Lender any documents or certificates
of title issued with respect to any property included in the Collateral, and any
promissory notes, letters of credit or instruments related to or otherwise in
connection with any property included in the Collateral, which in any such case
come into the possession of the Borrower, or shall cause the issuer thereof to
deliver any of the same directly to the Lender, in each case with any necessary
endorsements in favor of the Lender and (b) deliver to the Lender as soon as
available copies of any and all press releases and other similar communications
issued by the Borrower to the public.
SECTION 5.14. NAMECHANGE. The Borrower shall give Lender prompt
notice of amendment or modification of its name, and in connection with such
change deliver executed Uniform Commercial Code financing statements (in form
and substance satisfactory to the Lender).
8
<PAGE>
SECTION 5.15. ADDITIONAL REQUIREMENTS. The Borrower shall take
all such further actions and execute all such further documents and instruments
as the Lender may reasonably request.
SECTION 5.16. CONFIDENTIALITY. Each of the Lender and the
Borrower shall at all times keep confidential and not disclose to third parties
any information identified as confidential and/or proprietary.
SECTION 5.17. QUIET ENJOYMENT. The Lender shall use commercially
reasonable efforts to take no action which could reasonably be expected to
interfere with Borrower's quiet enjoyment of the Equipment.
SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction
--------------------
in full of all Obligations, the Borrower shall deliver to the Lender the
following financial information:
SECTION 6.1. ANNUAL FINANCIAL STATEMENTS. As soon as available,
but not later than 120 days after the end of each fiscal year of the Borrower
and its consolidated subsidiaries, the consolidated balance sheet, income
statement, and statements of cash flows and shareholders equity for the Borrower
and its consolidated subsidiaries (the "Financial Statements") for such year,
reported on by independent certified public accountants without an adverse
qualification; and
SECTION 6.2. QUARTERLY FINANCIAL STATEMENTS. As soon as
available, but not later than 60 days after the end of each of the first three
fiscal quarters in any fiscal year of the Borrower and its consolidated
subsidiaries, the Financial Statements for such fiscal quarter, together with a
certification duly executed by a responsible officer of the Borrower that such
Financial Statements have been prepared in accordance with GAAP and are fairly
stated in all material respects (subject to normal year-end audit adjustments
and excluding notes thereto).
SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the following
-----------------
events shall constitute an Event of Default hereunder:
(a) the Borrower shall fail to pay within five days after
receipt of written notice of such failure to pay when due any amounts required
to be paid by the Borrower under any Note and this Agreement;
(b) any representation or warranty made by the Borrower under
any Loan Document shall prove to have been false or incorrect in any manner when
made which has a Material Adverse Effect on the Lender's rights under any Note
or this Agreement;
(c) the Borrower shall fail to perform or observe any term,
covenant, or agreement contained in any Loan Document (other than the other
Events of Default specified in this Section 7) in any manner which has a
Material Adverse Effect on the Lender's rights under any Note or this Agreement
and such failure remains unremedied for the earlier of thirty days from (A) the
date on which the Lender has given the Borrower written notice of such failure
and (B) the date on which the Borrower had actual knowledge of such failure;
(d) dissolution, liquidation, winding up, or cessation of the
Borrower's business, failure of the Borrower generally to pay its debts as they
mature, admission in writing by the Borrower of its inability generally to pay
its debts as they mature, or calling of a meeting of the Borrower's creditors
for purposes of compromising any of the Borrower's debts;
(e) the commencement by or against the Borrower of any
bankruptcy, insolvency, arrangement, reorganization, receivership, or similar
proceedings under any federal or state law and, in the case of any such
involuntary proceeding, such proceeding remains undismissed or unstayed for
sixty days following the commencement thereof, or any action by the Borrower is
taken authorizing any such proceedings;
9
<PAGE>
(f) an assignment for the benefit of creditors is made by the
Borrower, whether voluntary or involuntary, the appointment of a trustee,
custodian, receiver, or similar official for the Borrower or for any substantial
property of the Borrower, or any action by the Borrower authorizing any such
proceeding;
(g) there shall be an event of default by the Borrower under
any indebtedness for borrowing in excess of $100,000 (other than the
Obligations) beyond the period of cure, if any, provided in the instrument or
agreement under which such indebtedness was created and the holder of such
indebtedness has taken action to cause such indebtedness to become due prior to
its stated maturity;
(h) any material tax lien, other than a Permitted Lien, is
filed of record against the Borrower and is not bonded or discharged within
fifteen Business Days;
(i) any judgment which has had or could reasonably be
expected to have a Material Adverse Effect on the Borrower and such judgment
shall not be satisfied, stayed, vacated, bonded, or discharged within sixty
days;
(j) the Borrower shall deny or disaffirm the Obligations
under any of the Loan Documents or any liens granted in connection therewith; or
any liens granted on any of the Collateral in favor of the Lender shall be
determined to be void, voidable, or invalid, or shall not be given the priority
contemplated by this Agreement (except if caused by a filing error by the
Lender) and is not repaired to the satisfaction of the Lender; or
(k) there is a change, other than a change which results from
a merger or from the sale of newly issued securities to investors, in more than
40% of the ownership of any equity interests of the Borrower on the date hereof
or more than 40% of such interests become subject to any contractual, judicial,
or statutory lien, charge, security interest, or encumbrance.
SECTION 8. REMEDIES. If any Event of Default shall have occurred and
--------
be continuing:
(a) The Lender may, without prejudice to any of its other
rights under any Loan Document or Applicable Law, declare all Obligations to be
immediately due and payable (except with respect to any Event of Default set
forth in Section 7(e) hereof, in which case all Obligations shall automatically
become immediately due and payable without necessity of any declaration) without
presentment, representation, demand of payment, or protest, which are hereby
expressly waived.
(b) The Lender may take possession of the Collateral and, for
that purpose may enter, with the aid and assistance of any person or persons,
any premises where the Collateral or any part hereof is, or may be placed, and
remove the same.
(c) The obligation of the Lender, if any, to make additional
Loans or financial accommodations of any kind to the Borrower shall immediately
terminate.
(d) The Lender may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein (or in any Loan
Document) or otherwise available to it, all the rights and remedies of a secured
party under the applicable Uniform Commercial Code (the "Code") whether or not
the Code applies to the affected Collateral and also may (i) require the
Borrower to, and the Borrower hereby agrees that it will at its expense and upon
request of the Lender forthwith, assemble all or part of the Collateral as
directed by the Lender and make it available to the Lender at a place to be
designated by the Lender that is reasonably convenient to both parties and
(ii)without notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any of the Lender's
offices or elsewhere, for cash, on credit, or for future delivery, and upon such
other terms as the Lender may deem commercially reasonable. The Lender shall
provide Borrower at least ten days' notice to the Borrower of the time and place
of any public sale or the time after which any private sale is to be made. The
Lender shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. The Lender may adjourn any public or private
sale from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to
10
<PAGE>
which it was so adjourned.
(e) All cash proceeds received by the Lender in respect of
any sale of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Lender, be held by the Lender as
collateral for (to the extent that such proceeds held as collateral do not
exceed the amount of the Obligations), or then or at any time thereafter applied
in whole or in part by the Lender against, all or any part of the Obligations in
such order as the Lender shall elect. Any surplus of such cash or cash proceeds
held by the Lender and remaining after the full and final payment of all the
Obligations shall be paid over to the Borrower or to such other Person to which
the Lender may be required under applicable law, or directed by a court of
competent jurisdiction, to make payment of such surplus.
SECTION 9. MISCELLANEOUS PROVISIONS.
------------------------
SECTION 9.1. NOTICES. Except as otherwise provided herein, all
notices, approvals, consents, correspondence, or other communications required
or desired to be given hereunder shall be given in writing and shall be
delivered by overnight courier, hand delivery, or certified or registered mall,
postage prepaid, if to the Lender, then to Transamerica Technology Finance
Division, 76 Batterson Park Road, Farmington, Connecticut 06032, Attention:
Assistant Vice President, Lease Administration, with a copy to the Lender at
Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois
60018, Attention: Legal Department, and if to the Borrower, then to Pilot
Network Services, Inc., 1080 Marina Valley Parkway, Alameda, CA 94501,
Attention: Chief Financial Officer or such other address as shall be designated
by the Borrower or the Lender to the other party in accordance herewith. All
such notices and correspondence shall be effective when received.
SECTION 9.2. HEADINGS. The headings in this Agreement are for
purposes of reference only and shall not affect the meaning or construction of
any provision of this Agreement.
SECTION 9.3. ASSIGNMENTS. The Borrower shall not have the right
to assign any Note or this Agreement or any interest therein unless the Lender
shall have given the Borrower prior written consent and the Borrower and its
assignee shall have delivered assignment documentation in form and substance
satisfactory to the Lender in its sole discretion. The foregoing sentence shall
apply even if such assignment occurs by operation of law, as in the case of a
merger of the Borrower with or into another entity. The Lender may assign its
rights and delegate its obligations under any Note or this Agreement; provided,
however, that such assignment will not relieve Lender of its obligations to
Borrower and will not change Borrower's obligations or rights under any Note or
this Agreement or increase the burdens or risks imposed on Borrower.
SECTION 9.4. AMENDMENTS, WAIVERS, AND CONSENTS. Any amendment
or waiver of any provision of this Agreement and any consent to any departure by
the Borrower or Lender from any provision of this Agreement shall be effective
only by a writing signed by the Lender and the Borrower and shall bind and
benefit the Borrower and the Lender and their respective successors and assigns,
subject to the first sentence of Section 9.3.
SECTION 9.5. INTERPRETATION OF AGREEMENT. Time is of the
essence in each provision of this Agreement of which time is an element. All
terms not defined herein or in a Note shall have the meaning set forth in the
applicable Code, except where the context otherwise requires. To the extent a
term or provision of this Agreement conflicts with any Note, or any term or
provision thereof, and is not dealt with herein with more specificity, this
Agreement shall control with respect to the subject matter of such term or
provision. Acceptance of or acquiescence in a course of performance rendered
under this Agreement shall not be relevant in determining the meaning of this
Agreement even though the accepting or acquiescing party had knowledge of the
nature of the performance and opportunity for objection.
SECTION 9.6. CONTINUING SECURITY INTEREST. This Agreement shall
create a continuing security interest in the Collateral and shall (i)remain in
full force and effect until the indefeasible payment in full of the Obligations,
(ii) be binding upon the Borrower and its successors and assigns and (iii)
inure,
11
<PAGE>
together with the rights and remedies of the Lender hereunder, to the benefit of
the Lender and its successors, transferees, and assigns.
SECTION 9.7. REINSTATEMENT. To the extent permitted by law,
this Agreement and the rights and powers granted to the Lender hereunder and
under the Loan Documents shall continue to be effective or be reinstated if at
any time any amount received by the Lender in respect of the Obligations is
rescinded or must otherwise be restored or returned by the Lender upon the
insolvency, bankruptcy, dissolution, liquidation, or reorganization of the
Borrower or upon the appointment of any receiver, intervenor, conservator,
trustee, or similar official for the Borrower or any substantial part of its
assets, or otherwise, all as though such payments had not been made.
SECTION 9.8. SURVIVAL OF PROVISIONS. All representations,
warranties, and covenants of the Borrower contained herein shall survive the
execution and delivery of this Agreement, and shall terminate only upon the full
and final payment and performance by the Borrower of the Obligations secured
hereby.
SECTION 9.9. INDEMNIFICATION. The Borrower agrees to indemnify
and hold harmless the Lender and its directors, officers, agents, employees, and
counsel from and against any and all costs, expenses, claims, or liability
incurred by the Lender or such Person hereunder and under any other Loan
Document or in connection herewith or therewith, unless such claim or liability
shall be due to willful misconduct or gross negligence on the part of the Lender
or such Person.
SECTION 9.10. COUNTERPARTS; TELECOPIED SIGNATURES. This
Agreement may be executed in counterparts, each of which when so executed and
delivered shall be an original, but both of which shall together constitute one
and the same instrument. This Agreement and each of the other Loan Documents and
any notices given in connection herewith or therewith may be executed and
delivered by telecopier or other facsimile transmission all with the same force
and effect as if the same was a fully executed and delivered original manual
counterpart.
SECTION 9.11. SEVERABILITY. In case any provision in or
obligation under this Agreement or any Note or any other Loan Document shall be
invalid, illegal, or unenforceable in any jurisdiction, the validity, legality,
and enforceability of the remaining provisions or obligations, or of such
provision or obligation in any other jurisdiction, shall not in any way be
affected or impaired thereby.
SECTION 9.12. DELAYS; PARTIAL EXERCISE OF REMEDIES. No delay or
omission of the Lender to exercise any right or remedy hereunder, whether before
or after the happening of any Event of Default, shall impair any such right or
shall operate as a waiver thereof or as a waiver of any such Event of Default.
No single or partial exercise by the Lender of any right or remedy shall
preclude any other or further exercise thereof, or preclude any other right or
remedy.
SECTION 9.13. ENTIRE AGREEMENT. The Borrower and the Lender
agree that this Agreement, the Schedule hereto, and the Commitment Letter are
the complete and exclusive statement and agreement between the parties with
respect to the subject matter hereof, superseding all proposals and prior
agreements, oral or written, and all other communications between the parties
with respect to the subject matter hereof. Should there exist any inconsistency
between the terms of the Commitment Letter and this Agreement, the terms of this
Agreement shall prevail.
SECTION 9.14. SETOFF. In addition to and not in limitation of
all rights of offset that the Lender may have under Applicable Law, and whether
or not the Lender has made any demand or the Obligations of the Borrower have
matured, the Lender shall have the right to appropriate and apply to the payment
of the Obligations of the Borrower-all deposits and other obligations then or
thereafter owing by the Lender to or for the credit or the account of the
Borrower.
SECTION 9.15. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR
12
<PAGE>
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN
DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
SECTION 9.16. GOVERNING LAW. THE VALIDITY, INTERPRETATION, AND
ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF.
SECTION 9.17. VENUE; SERVICE OF PROCESS. ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF
THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION
OF THE AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION
WITH ANY SUCH ACTION OR PROCEEDING, (a)ANY OBJECTION, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY
SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND (b)THE RIGHT TO
INTERPOSE ANY NONCOMPULSORY SETOFF, COUNTERCLAIM, OR CROSS-CLAIM. THE BORROWER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS
FOR IT SPECIFIED IN SECTION 9.1 HEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT OF
THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE
LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER
JURISDICTION, SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH RESPECT TO
RIGHTS AND REMEDIES.
IN WITNESS WHEREOF, the undersigned Borrower has caused this Agreement
to be duly executed and delivered by its proper and duly authorized officer as
of the date first set forth above.
PILOT NETWORK SERVICES, INC.
By: /s/ M. Marketta Silvera
-----------------------------
Name: M. Marketta Silvera
Title: President & CEO
Federal Tax ID:94-3164036
Accepted as of the
____ day of ______, 1997
TRANSAMERICA BUSINESS CREDIT CORPORATION
By:_____________________________________
Name:
Title:
13
<PAGE>
[LETTERHEAD OF TRANSAMERICA BUSINESS CREDIT CORPORATION APPEARS HERE]
April 1, 1998
Mr. Robert G. Carrade
Vice President of Finance & Administration
PILOT NETWORK SERVICES, INC.
1080 Marina Village Parkway
Alameda, CA 94501
Dear Rob:
Transamerica Business Credit Corporation - Technology Finance Division
("Lender") is pleased to offer this commitment (this "Commitment") to finance
the equipment described below to Pilot Network Services, Inc. ("Borrower").
Except with respect to the transactions consummated (or to be consummated) under
a commitment letter dated as of July 9, 1997 (the "Prior Commitment") and the
Master Loan and Security Agreement dated as of September 1, 1997, this
Commitment supersedes all prior correspondence, commitments, and oral or other
communications relating to equipment financing arrangements between Lender and
Borrower.
The outline of this offer is as follows:
Lender: Transamerica Business Credit Corporation - Technology
- ------ Finance Division and/or its affiliates, successors or
assigns.
Borrower: PILOT NETWORK SERVICES, INC.
- --------
Equipment Cost: Not to exceed $5,000,000.00. (in addition to amounts
- -------------- covered under the "Prior Commitment")
Equipment: Various computers, servers, routers plus UPS and
- --------- generators (the "Equipment"). Soft costs may not exceed
15% of Equipment Cost. All equipment is subject to the
final approval of Lender prior to funding.
Equipment Location: Various locations throughout the continental United
- ------------------ States, subject to execution of Collateral Access
Agreements as may be required by the Lender.
Draw-Down Expiration: No Loans will be funded after June 30, 1999.
- --------------------
Security: Lender shall receive a perfected first priority security
- -------- interest in the Equipment described above, including,
without limitation, all additions, improvements, repairs
appurtenances, substitutions and attachments, and all
cash and non-cash proceeds (including insurance
proceeds) of the foregoing.
Anticipated Draw-Down A minimum of $1,000,000 will be drawn on or before
- --------------------- September 18, 1998, with the remaining $4,000,000 to be
Schedule: drawn on or before June 30, 1999.
- --------
<PAGE>
Loan Term
- ---------
Commencement: Upon making each Loan, which will occur upon delivery
- ------------ and acceptance of the Equipment or upon each delivery
and acceptance of items of Equipment with aggregate cost
of not less than $250,000.00, but no later than June 30,
1999.
Term: From each Loan Term Commencement until 48 months from
- ---- the first day of the month next following or coincident
with that Loan Term Commencement.
Repayment Terms: Monthly Payments equal to 2.532% of the Loan will be
- --------------- payable monthly in advance. The first month's Payment
will be due and payable on or before each Loan Term
Commencement.
The Lender reserves the right to increase the Monthly
Payment as of the date of each Loan Term Commencement
commensurate to the change in the weekly average of the
interest rates of like-term US Treasury Securities from
the week ending March 20, 1998 to the week preceding the
date of each Loan Term Commencement, as published in the
Wall Street Journal. As of the date of each Loan Term
Commencement, the Monthly Payment will be fixed for the
term. A schedule of the actual Monthly Payments will be
provided by the Lender following each Loan Term
Commencement.
Balloon Payment: At the end of each 48 month Loan, the Borrower will be
- --------------- obligated to make one final Balloon Payment equal to 10%
of the original principal amount of such Loan, plus any
other amounts due and owing to Lender.
Interim Payment: An Interim Payment will accrue from each Loan Term
- --------------- Commencement until the next following first day of a
month (unless the Loan Term Commencement is on the first
day of a month). The Interim Payment will be calcualted
at the daily equivalent of the currently adjusted
Monthly Payment.
Insurance: Prior to any delivery of Equipment, the Borrower will
- --------- furnish confirmation of insurance acceptable to the
Lender covering the Equipment including primary, all
risk, physical damage, property damage and bodily injury
with appropriate loss payee and additional insured
endorsements in favor of the Lender.
Conditions Precedent 1. No material adverse change in the financial
- -------------------- condition, operations or prospects of the Borrower
to Each Loan Term prior to funding. The Lender reserves the right to
- ----------------- rescind any unused portion of its commitment in the
Commencement: event of a material adverse change in the financial
- ------------ condition, operation or prospects of the Borrower.
2. Completion of the documentation and final terms of
the proposed financing satisfactory to Lender and
Lender's counsel.
3. Results of all due diligence, including satisfactory
discussions with GE Capital, Arthur Andersen and El
Dorado Ventures, lien, judgment and tax searches and
other matters Lender may reasonably request shall be
satisfactory to Lender and Lender's counsel.
<PAGE>
4. Receipt by Lender of duly executed loan documentation
in form and substance satisfactory to Lender and its
counsel.
5. Lender shall receive a valid first priority lien and
security interest in all of the Equipment acquired
through the use of this Commitment and Lender shall
have received satisfactory evidence that there are no
liens on any of the Equipment except as expressly
permitted herein.
6. Evidence of repayments of existing indebtedness
relating to any of the Collateral, and UCC and other
lien releases, as Lender deems appropriate.
7. For the first Loan Term Commencement only, Borrower's
opinion of counsel satisfactory to Lender and its
counsel.
8. Up to $2,000,000 of this Commitment will be available
immediately (subject to these conditions to funding)
and the remainder will be available only after Lender
has reviewed and found to be satisfactory the
Borrower's revised operating plan.
Documentation and All Loans under this Commitment will be governed by and
- ----------------- subject to the Master Loan and Security Agreement dated
Reporting: September 1, 1997, as it may be amended from time to
- --------- time. Borrower will continue to execute all
documentation containing terms and conditions as deemed
necessary and satisfactory to Lender and its counsel.
The Borrower will continue to provide quarterly
financial information to the Lender.
Expenses: All costs and expenses incurred by the Lender in
- -------- connection with the underwriting and closing of the
Loans will be paid by the Borrower whether or not any
Loans are consummated and funds are advanced by the
Lender.
Representation and There will be no actual or threatened conflict with, or
- ------------------ violation of, any regulatory statute, standard or rule
Additional Covenants: relating to the Borrower, its present or future
- -------------------- operations, or the Equipment.
All information supplied by the Borrower shall be
correct and shall not omit any statement the omission of
which would cause the information supplied to be
misleading. There will be no material breach of the
representation and warranties of the Borrower in the
Loan. The representation will include that the Equipment
cost of each item of Equipment does not exceed the fair
and usual price for such type of equipment purchased in
like quantity and reflects all discounts, rebates and
allowances for the Equipment given to Borrower by the
manufacturer, supplier or any other person including,
without limitation, discounts for advertising, prompt
payment, testing or other services.
Indemnity: Borrower agrees to indemnify and to hold harmless
- --------- Lender, and its officers, directors and employees
against all claims, damages, liabilities and expenses
which may be incurred by or asserted against any such
person in connection with or arising out of this letter
and the transactions contemplated hereby, other than
claims, damages, liability, and expense resulting from
such person's gross negligence or willful misconduct.
<PAGE>
Commitment Fee: A non-refundable Commitment Fee equal to 1/2% of the
- -------------- Equipment Cost will be due Lender upon acceptance of
this Commitment.
Commitment Expiration: This Commitment shall expire on April 8, 1998.
- ---------------------
This Commitment Letter is intended to be a summary of the most important
elements of the agreement to enter into a loan transaction with Borrower, and it
is subject to all requirements and conditions contained in Loan documentation
proposed by Lender or its counsel in the course of closing the Loans described
herein. Not every provision that imposes duties, obligations, burdens, or
limitations on Borrower is contained herein, but shall be contained in the final
Loan documentation satisfactory to Lender and its counsel.
This letter and the proposed Loans are intended to be governed by and construed
in accordance with Illinois law without regard to its conflict of law
provisions. Lender and Borrower hereby waive any right to a trial by jury in
connection with any litigation arising directly or indirectly out of this letter
and any related transaction or documentation contemplated hereunder.
Should you have any questions, please call me. If you wish to accept this
Commitment, please so indicate by signing and returning this letter, along with
a check for the $25,000 Commitment Fee, to me by April 8, 1998.
Yours truly, Accepted this 8th day of April 1998
Transamerica Business Credit Corporation PILOT NETWORK SERVICES, INC.
Technology Finance Division
By: /s/ GERALD A. MICHAUD By: /s/ M. MARKETTA SILVERA
--------------------------------- --------------------------------
Gerald A. Michaud M. Marketta Silvera
Senior Vice President - Marketing Title: President & CEO
-----------------------------
<PAGE>
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
1080 Marina Village Parkway
Alameda, California 94501
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:
<PAGE>
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
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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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"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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<PAGE>
(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,
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<PAGE>
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.
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(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
<PAGE>
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
<PAGE>
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
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<PAGE>
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
------------------
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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
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 Embarcadero Center
Suite 2200
San Francisco, California 94111
Telephone No.: 415-955-3200
Telecopier No.: 415-955-3493
Attention: Contract Administration
with a copy of all financial information to:
MEIER MITCHELL & COMPANY
4 Orinda Way, Suite 200B
Orinda, California 94563
and
TRANSAMERICA BUSINESS CREDIT CORPORATION
76 Batterson Park Road
Farmington, Connecticut 060032-2571
19
<PAGE>
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: Dallas, Texas 75202
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: One First National Plaza
Chicago IL 60670
Account No.: 55-75427
ABA Routing No.: 071-000-013
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
<PAGE>
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
<PAGE>
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, sue 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
<PAGE>
23
<PAGE>
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
<PAGE>
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:_______________________
<PAGE>
SCHEDULE 2
DISCLOSURE SCHEDULE
<PAGE>
SCHEDULE 2
DISCLOSURE SCHEDULE
<PAGE>
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;
---------
<PAGE>
(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.
<PAGE>
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
<PAGE>
LOAN INTEREST RATE AND PAYMENTS OF PRINCIPAL
<TABLE>
<CAPTION>
Principal Scheduled
Date Amount Interest Rate Payment Amount Notation By
- ---- ------ ------------- -------------- -----------
<S> <C> <C> <C> <C>
</TABLE>
A-3
<PAGE>
LOAN INTEREST RATE AND PAYMENTS OF PRINCIPAL
<TABLE>
<CAPTION>
Principal Scheduled
Date Amount Interest Rate Payment Amount Notation By
- ---- ------ ------------- -------------- -----------
<S> <C> <C> <C> <C>
</TABLE>
A-3
<PAGE>
EXHIBIT B
FORM OF WARRANT
<PAGE>
EXHIBIT C
FORM OF OPINION OF COUNSEL
June 30, 1998
MMC/GATX PARTNERSHIP NO. 1
c/o GATX Capital Corporation, Agent
Four Embarcadero Center
Suite 2200
San Francisco, California 94111
and
TRANSAMERICA BUSINESS CREDIT CORPORATION
76 Batterson Park Road
Farmington, Connecticut 060032-2571
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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: 1080 Marina Village Parkway
Alameda, California 94501
16
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBIT B
CHARTER
<PAGE>
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,
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:_____________________________________
<PAGE>
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.
<PAGE>
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:________________________________
<PAGE>
EXHIBIT 23.1
When the reincorporation of the Company in Delaware and stock split described
in Note 6 of the Notes to Financial Statements has been consummated, we will be
in position to render the following consent:
/s/ KPMG Peat Marwick, LLP
July 16, 1998
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Pilot Network Services, Inc.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
Oakland, California
July 16, 1998
