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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended December 31, 1999.
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number: 0-24507
PILOT NETWORK SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3305774
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1080 MARINA VILLAGE PARKWAY
ALAMEDA, CA 94501
(Address of principal executive offices, including zip code)
(510) 433-7800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ___
At December 31, 1999, there were 14,821,384 shares of the Registrant's Common
Stock outstanding.
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PILOT NETWORK SERVICES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 3
Condensed Balance Sheets as of
March 31, 1999 and December 31, 1999............................. 3
Condensed Statements of Operations for the three months and nine
months ended December 31, 1998 and 1999.......................... 4
Condensed Statements of Cash Flows for the
nine months ended December 31, 1998 and 1999..................... 5
Notes to Condensed Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 14
PART II. OTHER INFORMATION................................................ 15
Item 2. Changes in Securities and Use of Proceeds........................ 15
Item 6. Exhibits and Reports on Form 8-K................................. 16
SIGNATURES................................................................... 16
INDEX TO EXHIBITS............................................................ 17
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PILOT NETWORK SERVICES, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1999
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 10,660 $ 1,759
Short-term investments...................................................... 12,352 1,097
Trade receivables, less allowance for doubtful accounts of $157 and $302 as
of March 31, 1999 and December 31, 1999, respectively...................... 3,438 6,754
Receivable from sale of common stock........................................ - 15,000
Prepaid and other current assets............................................ 783 1,426
-------- --------
Total current assets....................................................... 27,233 26,036
Property and equipment, net.................................................. 14,184 20,560
Other assets................................................................. 698 1,404
-------- --------
$ 42,115 $ 48,000
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 2,334 $ 4,374
Accrued expenses............................................................ 1,675 1,856
Line of credit.............................................................. 1,439 4,830
Term loan................................................................... 3,000 3,000
Current portion of capital lease obligation................................. 2,175 2,380
Deferred revenue............................................................ 2,027 1,894
-------- --------
Total current liabilities.................................................. 12,650 18,334
Capital lease obligations, net of current portion............................ 4,830 4,061
-------- --------
Total liabilities.......................................................... 17,480 22,395
-------- --------
Common stock held in escrow, net of issuance costs; 919,540 shares........... - 14,750
-------- --------
Stockholders' equity:
Common stock, $0.001 par value; 40,000,000 shares authorized; 13,913,024
and 13,901,844 shares issued and outstanding as of March 31, 1999 and
December 31, 1999, respectively............................................ 14 15
Additional paid-in capital.................................................. 59,563 61,247
Accumulated other comprehensive income...................................... 127 40
Deferred stock compensation................................................. (1,097) (443)
Accumulated deficit......................................................... (31,278) (47,310)
Treasury stock, 450,936 shares of common stock at cost
as of March 31, 1999 and December 31, 1999........................... (2,694) (2,694)
-------- --------
Total stockholders' equity................................................. 24,635 10,855
-------- --------
$ 42,115 $ 48,000
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
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PILOT NETWORK SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1998 1999 1998 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Service revenues............................... $ 4,480 $ 8,465 $ 11,970 $ 21,411
Cost of service revenues....................... 5,263 8,188 13,867 21,997
------- ------- -------- --------
Gross margin................................... (783) 277 (1,897) (586)
------- ------- -------- --------
Operating costs and expenses:
Sales and marketing........................... 2,724 3,342 6,992 9,498
Engineering and development................... 386 1,134 1,071 2,536
General and administrative.................... 722 983 2,138 2,713
------- ------- -------- --------
Operating expenses............................ 3,832 5,459 10,201 14,747
------- ------- -------- --------
Operating loss................................. (4,615) (5,182) (12,098) (15,333)
Interest expense, net.......................... (47) (412) (1,286) (699)
------- ------- -------- --------
Net loss....................................... (4,662) (5,594) (13,384) (16,032)
Accretion on redeemable convertible preferred
stock......................................... - - (488) -
------- ------- -------- --------
Net loss attributable to common stockholders... $(4,662) $(5,594) $(13,872) $(16,032)
======= ======= ======== ========
Basic and diluted net loss per share........... $ (0.34) $ (0.40) $ (1.68) $ (1.17)
======= ======= ======== ========
Shares used in computing net loss per share.... 13,580 13,859 8,266 13,705
======= ======= ======== ========
</TABLE>
See accompanying notes to condensed financial statements.
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PILOT NETWORK SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Nine months ended
December 31,
1998 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $(13,384) $(16,032)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 2,816 5,294
Amortization of deferred compensation.......................... 1,111 225
Amortization of loan fees...................................... 900 275
Changes in operating assets and liabilities:
Trade receivables............................................. (2,150) (3,316)
Prepaid and other assets...................................... (688) (624)
Accounts payable.............................................. 160 2,040
Accrued expenses.............................................. 802 181
Deferred revenue.............................................. 177 (133)
-------- --------
Net cash used in operating activities......................... (10,256) (12,090)
-------- --------
Cash flows used in investing activities:
Purchases of property and equipment............................. (3,646) (10,496)
Purchases of short-term investments............................. (14,553) -
Proceeds from short-term investments............................ - 11,168
-------- --------
Net cash provided by (used in) investing activities........... (18,199) 672
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of receivable....... 43,335 864
Proceeds from working capital line of credit.................... 673 3,391
Proceeds from term loan......................................... 6,000 3,000
Payments of term loan........................................... (3,000) (3,000)
Purchases of treasury stock..................................... (2,694) -
Principal payments of obligations under capital leases.......... (1,498) (1,738)
-------- --------
Net cash provided by financing activities..................... 42,816 2,517
-------- --------
Net increase (decrease) in cash and cash equivalents............. 14,361 (8,901)
Cash and cash equivalents, beginning of period................... 1,447 10,660
-------- --------
Cash and cash equivalents, end of period......................... $ 15,808 $ 1,759
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest........................ $ 1,095 $ 1,014
======== ========
Noncash financing activities:
Assets acquired under capital lease obligations................ $ 2,754 $ 1,174
======== ========
Accretion on preferred stock................................... $ 488 $ -
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of presentation
The financial statements included herein for Pilot Network Services, Inc.
(the "Company") have been prepared by the Company, without audit, pursuant to
the rules and regulations for Form 10-Q of the Securities and Exchange
Commission. In management's opinion, the interim financial data presented
includes all adjustments (which include only normal and recurring adjustments)
necessary for a fair presentation. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. The results of operations for the three months
ended December 31, 1999 are not necessarily indicative of the operating results
expected for the entire year. The financial statements included herein should be
read in conjunction with other documents the Company files from time to time
with the Securities and Exchange Commission, including the Company's March 31,
1999, financial statements and notes thereto included in the Company's Annual
Report on Form 10-K dated June 29, 1999 and its Quarterly Reports on Form 10-Q
dated August 16, 1999, and November 15, 1999.
2. Basic and diluted net loss per share
Basic and diluted loss per share is computed using the weighted average
number of common shares outstanding during the period. Inclusion of common share
equivalents would be anti-dilutive and have been excluded from per share
calculations.
As part of Pilot's initial public offering on August 10, 1998, 7,763,030
shares of common stock were issued from the conversion of the Series A, B, C, D,
E and F preferred stock. Prior to August 10, 1998, those shares were not
included in calculating diluted earnings per share because the effects would be
anti-dilutive. Also excluded from the computation of diluted earnings per share
for the three and nine-month periods ending December 31, 1998, are options to
acquire 1,901,568 shares of common stock and 292,910 common share equivalents
from the assumed exercise of common stock warrants because their effects would
be anti-dilutive. Excluded from the computation of diluted earnings per share
for the three and nine-month periods ending December 31, 1999, are options to
acquire 2,336,134 shares of common stock and 464,086 common share equivalents
from the assumed exercise of common stock warrants because their effects would
be anti-dilutive.
3. Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes standards for
accounting for derivative instruments and hedging activities. The Company is
required to adopt SFAS No. 133, as amended by SFAS No. 137, in the first quarter
of fiscal year 2002. The Company does not anticipate that SFAS No. 133 will have
a material impact on its financial statements.
4. Comprehensive Loss
Total comprehensive loss for the quarter and nine months ended December 31,
1999, was $5,594,000 and $16,119,000, respectively.
5. Subsequent Event
On December 28, 1999, the Company entered into an agreement with Primus
Telecommunications Group, Inc. ("Primus") that included the purchase by Primus
of 919,540 shares of the Company's common stock for $16.3125 per share for a
total purchase price of $15.0 million. The $16.3125 per share price was
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the closing price of the Company's common stock on December 27, 1999.
Additionally, the Company issued to Primus a warrant to purchase 200,000 shares
of common stock at $25 per share. The warrant is exercisable for three years
following its issuance. As of December 31, 1999, the purchase price, the common
stock shares and the warrant were held in escrow. On January 5, 2000, the
Company received the full amount of the purchase price in cash and the shares
and warrant were released to Primus.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this Quarterly Report contains
forward-looking statements. The forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results and Market Price of Stock." Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors that may be
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including its Annual Report on Form 10-K
filed by the Company on June 29, 1999, its Quarterly Reports on Form 10-Q filed
by the Company on August 16, 1999, and November 15, 1999, and any Quarterly
Reports on Form 10-Q filed by the Company in the future.
OVERVIEW
Pilot Network Services, Inc. provides a wide range of secure Internet
services that incorporate high-bandwidth connectivity and enable secure
electronic business over the Internet. The services are offered for a fixed
monthly fee on an annual subscription-basis. The Company's services include
secure hosting and Internet connectivity services that enable secure
connectivity between a corporate network and the Internet and secure virtual
private networking services that enable remote users and wide-area networks to
securely communicate enterprise-wide and over the Internet. The Company offers a
scalable solution that allows customers to quickly deploy and expand electronic
business capabilities by subscribing to Pilot's secure Internet services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1999
SERVICE REVENUES. In the three months ended December 31, 1999, service
revenues increased 89% to $8.5 million from $4.5 million in the three months
ended December 31, 1998. This growth was due primarily to increases in service
agreements and project revenues from new and current customers. To a lesser
extent, annual price increases for various offered services also contributed to
this growth. Additionally, the Company was able to shorten the implementation
time for certain new services, allowing for earlier recognition of
implementation fees and billing of fees for recurring services.
COST OF SERVICE REVENUES. Cost of service revenues increased 56% to $8.2
million, or 97% of service revenues, in the three months ended December 31,
1999, compared to $5.3 million, or 117% of service revenues, in the three months
ended December 31, 1998. The increase in cost of service revenue was a result of
an increase in security implementation, customer service and operations
personnel from 75 at December 31, 1998, to 91 at December 31, 1999, as well as
increases in the average cost of those personnel. Other incremental expenses
included consulting and temporary labor, facilities rent, telecommunications,
equipment leases and depreciation directly related to the Company's revenue
growth. Additionally, incremental costs associated with the opening of a new
Network Security Center in Alameda,
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California contributed to the increase in cost of service revenues. The Company
expects the cost of service revenues to continue to increase on an absolute
basis as a result of expected customer expansion in the Company's Network
Security Centers.
SALES AND MARKETING. Sales and marketing expenses increased 23% to $3.3
million in the three months ended December 31, 1999, from $2.7 million in the
three months ended December 31, 1998, but decreased as a percentage of service
revenues to 39% for the three months ended December 31, 1999, from 61% for the
three months ended December 31, 1998. The increase in sales and marketing
expense was a result of an increase in sales and marketing personnel from 43 at
December 31, 1998, to 51 at December 31, 1999, as well as in recruiting and
commissions directly related to the expanded sales activity. The Company expects
that its sales and marketing expenses will continue to increase in absolute
dollars for at least the next twelve months as the Company makes additional
investments in expanding its sales and marketing activities.
ENGINEERING AND DEVELOPMENT. Engineering and development expenses increased
194% to $1.1 million in the three months ended December 31, 1999, from $0.4
million in the three months ended December 31, 1998, and increased as a
percentage of service revenues to 13% for the three months ended December 31,
1999, from 9% for the three months ended December 31, 1998. The increase in
engineering and development expense was a result of an increase in personnel
from 11 at December 31, 1998, to 26 at December 31, 1999, as well as an increase
in consulting and other professional services. The Company expects that its
engineering and development expenses will continue to increase in absolute
dollars for at least the next twelve months as the Company makes additional
investments in developing its secure electronic commerce services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 36%
to $1.0 million in the three months ended December 31, 1999 from $0.7 million in
the three months ended December 31, 1998, but decreased as a percentage of
service revenues to 12% for the three months ended December 31, 1999, from 16%
for the three months ended December 31, 1998. The increase in general and
administrative expense was a result of an increase in personnel from 15 at
December 31, 1998, to 18 at December 31, 1999, as well as increases in
professional fees and business taxes as well as other costs associated with
being a public company. The Company expects that its general and administrative
expenses will continue to increase in absolute dollars for at least the next
twelve months as the Company continues to expand its operations.
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999
SERVICE REVENUES. In the nine months ended December 31, 1999, service
revenues increased 79% to $21.4 million from $12.0 million in the nine months
ended December 31, 1998. This growth was due primarily to increases in service
agreements and project revenues from new and current customers. To a lesser
extent, annual price increases for various offered services also contributed to
this growth. Additionally, the Company was able to shorten the implementation
time for certain new services, allowing for earlier recognition of
implementation fees and billing of fees for recurring services.
COST OF SERVICE REVENUES. Cost of service revenues increased to $22.0
million, or 103% of service revenues, in the nine months ended December 31,
1999, compared to $13.9 million, or 116% of service revenues, in the nine months
ended December 31, 1998. The increase in cost of service revenue was a result of
an overall increase in security implementation, customer service and operations
personnel as well as an increase in the average cost of such personnel.
Additionally, increases in consulting, telecommunications, facilities rent,
equipment leases and depreciation, all associated with existing operations as
well as the opening of a new Network Security Center in Alameda, California
contributed to the increase in cost of service revenue. The Company expects that
cost of service revenues will continue to increase in absolute dollars for the
remainder of the fiscal year.
SALES AND MARKETING. Sales and marketing expenses increased 36% to $9.5
million in the nine months ended December 31, 1999 from $7.0 million in the nine
months ended December 31, 1998 but
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decreased as a percentage of service revenues to 44% for the nine months ended
December 31, 1999 from 58% for the nine months ended December 31, 1998. The
increase in sales and marketing expense resulted from increase in sales and
marketing personnel as well as in recruiting and commissions directly related to
the expanded sales activity in connection with the Company's expansion of its
operations. The Company expects that sales and marketing expenses will continue
to increase in absolute dollars for the remainder of the fiscal year.
ENGINEERING AND DEVELOPMENT. Engineering and development expenses increased
137% to $2.5 million in the nine months ended December 31, 1999 from $1.1
million in the nine months ended December 31, 1998 and increased as a percentage
of service revenues to 12% for the nine months ended December 31, 1999 from 9%
for the nine months ended December 31, 1998. The increase in engineering and
development expense was a result of increases in personnel and consulting
related expenses in connection with continuing efforts to develop new security
methodologies, integrate and enhance acquired third-party technologies to
support the Company's security and add new service offerings. The Company
expects that its engineering and development expenses will continue to increase
in absolute dollars for the remainder of the fiscal year as a result of this
increased investment activity.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 27%
to $2.7 million in the nine months ended December 31, 1999 from $2.1 million in
the nine months ended December 31, 1998 but decreased as a percentage of service
revenues to 13% for the nine months ended December 31, 1999 from 18% for the
nine months ended December 31, 1998. The increase in general and administrative
expense was a result of increases in personnel, professional fees and business
taxes. The Company expects that its general and administrative expenses will
continue to increase in absolute dollars for the remainder of the fiscal year as
the Company continues to expand its operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's cash, cash equivalents and short-term
investments totaled $2.9 million compared to cash, cash equivalents and short-
term investments of $23.0 million at March 31, 1999.
As of December 31, 1999, the Company had an $8.0 million equipment line of
credit and lease facility for financing of equipment purchases at interest rates
of approximately 15%. Borrowings under the facilities are repayable in monthly
installments of principal and interest over 48 months and are secured by a lien
on the financed equipment. As of December 31, 1999, the Company had fully
utilized these lines of credit and lease facilities. The Company intends to
secure additional equipment lease lines of credit to fund growth in capital
equipment purchases.
On December 28, 1999, the Company entered into an agreement with Primus
Telecommunications Group, Inc. ("Primus") that included the purchase by Primus
of 919,540 shares of the Company's common stock for $16.3125 per share for a
total purchase price of $15.0 million. The $16.3125 per share price was the
closing price of the Company's common stock on December 27, 1999. Additionally,
the Company issued to Primus a warrant to purchase 200,000 shares of common
stock at $25 per share. The warrant is exercisable for three years following its
issuance. As of December 31, 1999, the purchase price, the common stock shares
and the warrant were held in escrow. On January 5, 2000, the Company received
the full amount of the purchase price in cash and the shares and warrant were
released to Primus. Under the terms of the agreement, Pilot will configure
Primus Operations Centers around the world with Pilot's Heuristic Defense
Infrastructure.
On November 10, 1999, the Company completed an $8.0 million credit facility
with a financial institution consisting of a $5.0 million revolving line of
credit and a $3.0 million term loan. The line of credit is renewable in
successive one-year terms the term loan matures in one year. Both loans
currently bear interest of 10.50% per annum. Additionally, the term loan must be
pre-paid, without penalty, if the Company raises more than $15 million in
equity. The credit facility is secured by the general assets of the Company. As
additional consideration, the Company issued a warrant to purchase 121,212
shares of
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common stock at $8.25 per share. The Company calculated a fair value of the
warrants of $1.0 million which amount will be capitalized and amortized over the
expected terms of the loans. At December 31, 1999, $170,000 of the revolving
line of credit remained available.
On October 19, 1998, the Company announced an open-market common stock
repurchase program under which the Company would repurchase up to 1.5 million
shares of its Common Stock. As of June 30, 1999, 450,936 shares had been
repurchased, at an aggregate cost to the Company of approximately $2.7 million.
The Company does not anticipate making any additional repurchases under this
program.
On June 30, 1998, the Company completed a borrowing arrangement with two
lenders providing $6.0 million of short term financing bearing interest at 13.5%
per annum. The loans expired in June 1999. The loans contained various pre-
payment options available after the Company's initial public offering date of
August 10, 1998. As additional consideration, the Company issued 150,000
warrants to purchase common stock at $11.20 per share. The Company calculated a
fair value of the warrants of $1.2 million which amount was capitalized and
amortized over the expected terms of the loans. One of the lenders exercised its
option for repayment of $3.0 million which was repaid in October 1998. On July
1, 1999, the Company repaid the remaining $3.0 million liability to the other
lender.
On May 11, 1998, the Company negotiated a line of credit with a financial
institution for an aggregate amount of $1.5 million and was secured by assets of
the Company. This line of credit has since been repaid from proceeds of the $3.0
million term loan and terminated.
The Company's working capital and capital requirements will depend upon
numerous factors including plans to incur substantial additional capital
expenditures primarily for additions to and expansions of its Network Security
Centers, developing, acquiring or licensing new applications and technologies,
and the level of resources that the Company devotes to its sales and marketing
activities. In addition to the recently completed $15.0 million equity
investment and $8.0 million credit facility, the Company believes that it will
require additional equity financing, which it is actively pursuing. In addition,
the Company will pursue additional equipment lease financing. However, there can
be no assurance that the Company will be successful in generating anticipated
levels of cash from operations or in obtaining equity or equipment lease
financing. If the Company is unable to generate sufficient cash flow from
operations, or is unable to obtain additional equity or equipment lease
financing, 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 impact 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.
YEAR 2000 RISKS
The Company experienced no material adverse effects from the Year 2000
problem and does not believe it will incur significant incremental costs in
order to comply with Year 2000 requirements in the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
The Company operates in a rapidly changing environment that involves numerous
risks, some of which are beyond the Company's control. The following discussion
highlights some of these risks.
FUTURE CAPITAL NEEDS. The Company's working capital and capital requirements
will depend upon numerous factors including plans to incur substantial
additional capital expenditures primarily for additions to and expansions of its
Network Security Centers, developing, acquiring or licensing new applications
and technologies, and the level of resources that the Company devotes to its
sales and
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marketing activities. In addition to the recently completed $15.0 million equity
investment and $8.0 million credit facility, the Company believes that it will
require additional equity financing, which it is actively pursuing. In addition,
the Company will pursue additional equipment lease financing. However, there can
be no assurance that the Company will be successful in generating anticipated
levels of cash from operations or in obtaining equity or equipment lease
financing. If the Company is unable to generate sufficient cash flow from
operations, or is unable to obtain additional equity or equipment lease
financing, 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 impact 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.
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 December 31, 1999, the
Company had an accumulated deficit of approximately $47.3 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 security technologies, 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 1998 and fiscal 1999 and expects to continue
experiencing significant net losses on a quarterly and annual basis for the
foreseeable future, including a negative gross margin at least for the next six
months. 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. 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.
POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS. The Company derives revenue
from its customers primarily through initial setup 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 continued growth in its customer base
and the retention of its customers for sufficient periods to provide returns on
the Company's investment. 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.
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.
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 Heuristic Defense
Infrastructure delivered through its Network Security Centers is 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
Page 11 of 17
<PAGE>
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. 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.
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'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.
In addition, the Company will be required to expend substantial resources for
leases and improvements of 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.
The Company has recently hired large numbers of new employees. This growth
has placed and may continue to place a significant strain on the Company's
financial, management, operational and other resources. If the Company's
executives were unable to manage growth effectively, the Company's business,
results of operations and financial condition would be materially adversely
affected.
COMPETITION. The market served by the Company is new, rapidly evolving,
highly competitive and largely undefined. There are few general barriers to
entry, and the Company expects that it will face additional competition from
existing competitors and new market entrants in the future. 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. 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, 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.
RISK OF SYSTEM FAILURE. The Company's success depends on the excellence of
security protection and uninterrupted operation of its network infrastructure.
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. 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
Page 12 of 17
<PAGE>
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.
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, any of which could adversely
affect the Company's international operations.
DEPENDENCE UPON SCALABILITY OF THE COMPANY'S NETWORK. The Company must
continue to expand and adapt its network infrastructure as the number of
customers 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. 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. 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.
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.
DEPENDENCE UPON THIRD PARTY NETWORK INFRASTRUCTURE PROVIDERS. The Company's
success will depend upon third party network infrastructure providers. 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
or to refuse to offer services to the Company 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. 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.
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. 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
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.
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 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. The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its services
Page 13 of 17
<PAGE>
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. 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.
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. Any officer or employee of the Company can terminate
his or her relationship with the Company at any time. 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.
RISKS ASSOCIATED WITH INFORMATION DISSEMINATED THROUGH THE COMPANY'S NETWORK.
The law relating to the liability of on-line 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 on-line 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. 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.
PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS. The Company
relies on a combination of copyright, trademark, patent, service mark and trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in technology underlying its services. There can be no
assurance that patents or trademarks will be issued or granted from currently
pending or any future applications, or that any patents or trademarks that may
be issued or granted will be sufficient in scope or strength to provide
meaningful protection or any commercial advantage to the Company. 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.
There can be no assurance that 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.
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. 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. As a result, any such claim could
have a material adverse effect upon the Company's business, results of
operations and financial condition.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company has limited exposure to financial market risks, including changes
in interest rates. The fair value of Pilot's investment portfolio or related
income would not be significantly impacted by a 100 basis point increase or
decrease in interest rates due mainly to the short-term nature of the major
portion of our investment portfolio. An increase or decrease in interest rates
would not significantly increase or decrease interest expense on debt
Page 14 of 17
<PAGE>
obligations due to the fixed nature of the Company's debt obligations. Pilot's
foreign operations are limited in scope and thus the Company is not materially
exposed to foreign currency fluctuations.
PART II. OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Company filed a registration statement on Form S-1, File No. 333-57453,
for an initial public offering of Common Stock which was declared effective by
the Securities and Exchange Commission on August 10, 1998. In that offering, the
Company sold an aggregate of 3,110,000 shares of its Common Stock with net
offering proceeds of $39.4 million. As of December 31, 1999, the Company had
used approximately $39.4 million of those proceeds as follows:
Construction of plant, building and facilities: $4.3 million
Purchase and installation of machinery and equipment: $9.4 million
Purchases of real estate: None
Acquisition of other businesses: None
Repayment of indebtedness: $9.5 million
Working capital: $1.1 million
Repurchase of Common Stock: $2.7 million
Cash loss from operations: $12.4 million
The foregoing amounts represent the Company's best estimate of its use of
proceeds for the period indicated. No payments were made to directors or
officers of the Company or their associates, holders of 10% or more of any class
of equity securities of the Company or to affiliates of the Company.
On December 28, 1999, the Company sold unregistered shares of its common
stock and a warrant to purchase common stock to Primus, as more fully described
in "Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources," which is hereby
incorporated by reference. The securities were exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933 as they were sold in a privately-
negotiated transaction not involving any public offering.
Page 15 of 17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.2 Common Stock Purchase Agreement dated December 28, 1999, between the
Company and Primus Telecommunications Group, Inc.
10.3 Warrant to Purchase Stock dated December 28, 1999, between the Company and
Primus Telecommunications Group, Inc.
10.4 Loan and Security Agreement dated November 9, 1999, between the Company
and Greyrock Capital, a division of Banc of America Commercial Finance
Corporation.
10.5 Warrant to Purchase Stock dated November 9, 1999, between the Company and
Greyrock Capital, a division of Banc of America Commercial Finance
Corporation.
10.6 Patent and Trademark Security Agreement dated November 9, 1999, between
the Company and Greyrock Capital, a division of Banc of America Commercial
Finance Corporation.
27.1 Financial Data Schedule.
B. Reports on Form 8-K
On January 5, 2000, the Company filed with the Securities and Exchange
Commission a Report on Form 8-K dated December 28, 1999, describing the
Company's sale of securities to Primus as well as certain other agreements with
Primus.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
February 14, 2000 /s/ William C. Leetham
- ----------------- ----------------------
William C. Leetham
Senior Vice President, Finance and Administration
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
Page 16 of 17
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.2 Common Stock Purchase Agreement dated December 28, 1999, between the
Company and Primus Telecommunications Group, Inc.
10.3 Warrant to Purchase Stock dated December 28, 1999, between the Company
and Primus Telecommunications Group, Inc.
10.4 Loan and Security Agreement dated November 9, 1999, between the Company
and Greyrock Capital, a division of Banc of America Commercial Finance
Corporation.
10.5 Warrant to Purchase Stock dated November 9, 1999, between the Company
and Greyrock Capital, a division of Banc of America Commercial Finance
Corporation.
10.6 Patent and Trademark Security Agreement dated November 9, 1999, between
the Company and Greyrock Capital, a division of Banc of America
Commercial Finance Corporation.
27.1 Financial Data Schedule
Page 17 of 17
<PAGE>
EXHIBIT 10.2
PILOT NETWORK SERVICES, INC.
COMMON STOCK PURCHASE AGREEMENT
December 28, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. PURCHASE AND SALE OF COMMON STOCK................................... 1
1.1 Sale and Issuance of Common Stock............................. 1
1.2 Closing; Delivery............................................. 1
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................... 1
2.1 Organization, Good Standing and Qualification................. 1
2.2 Authorization................................................. 1
2.3 Valid Authorization and Issuance of Shares.................... 2
2.4 Litigation.................................................... 2
2.5 Compliance with Other Instruments............................. 2
2.6 Rights of Registration and Voting Rights...................... 3
2.7 Financial Statements.......................................... 3
2.8 Corporate Documents........................................... 3
2.9 Capitalization................................................ 3
2.10 No Material Adverse Change.................................... 4
2.11 Real Property................................................. 4
2.12 Insurance..................................................... 4
2.13 Intellectual Property......................................... 4
2.14 Consents...................................................... 4
2.15 Labor Agreements and Actions.................................. 4
2.16 Disclosure.................................................... 5
2.17 Securities Filings............................................ 5
2.18 Year 2000 Compliance.......................................... 5
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER..................... 5
3.1 Authorization................................................. 6
3.2 Purchase Entirely for Own Account............................. 6
3.3 Disclosure of Information..................................... 6
3.4 Restricted Securities......................................... 6
3.5 Legends....................................................... 6
3.6 Accredited Investor........................................... 7
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
4. CONDITIONS OF THE PURCHASER'S OBLIGATIONS AT CLOSING................ 7
4.1 Representations and Warranties................................ 7
4.2 Qualifications................................................ 7
4.3 Warrant....................................................... 7
4.4 Strategic Business Relationship Agreement..................... 7
4.5 Escrow Agreement.............................................. 7
4.6 Opinion....................................................... 7
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING.................. 7
5.1 Representations and Warranties................................ 7
5.2 Qualifications................................................ 7
6. COVENANTS OF THE COMPANY............................................ 8
6.1 Nomination of Director........................................ 8
6.2 Amendment to Existing Investors' Rights Agreement............. 8
7. MISCELLANEOUS....................................................... 8
7.1 Survival of Warranties........................................ 8
7.2 Transfer; Successors and Assigns.............................. 8
7.3 Governing Law................................................. 9
7.4 Counterparts.................................................. 9
7.5 Titles and Subtitles.......................................... 9
7.6 Notices....................................................... 9
7.7 Fees and Expenses............................................. 9
7.8 Amendments and Waivers........................................ 9
7.9 Severability.................................................. 9
7.10 Delays or Omissions........................................... 9
7.11 Entire Agreement.............................................. 10
7.12 Corporate Securities Law...................................... 10
7.13 Confidentiality............................................... 10
</TABLE>
EXHIBIT A FORM OF WARRANT
EXHIBIT B FORM OF ESCROW AGREEMENT
-ii-
<PAGE>
PILOT NETWORK SERVICES, INC.
COMMON STOCK PURCHASE AGREEMENT
-------------------------------
This Common Stock Purchase Agreement (the "Agreement") is made as of the
---------
28th day of December, 1999 by and between Pilot Network Services, Inc., a
Delaware corporation (the "Company") and Primus Telecommunications Group,
-------
Incorporated (the "Purchaser").
---------
The parties hereby agree as follows:
1. Purchase and Sale of Common Stock.
---------------------------------
1.1 Sale and Issuance of Common Stock. Subject to the terms and
---------------------------------
conditions of this Agreement, the Purchaser agrees to purchase at the Closing
and the Company agrees to sell and issue to the Purchaser at the Closing,
919,540 shares of Common Stock at a purchase price of $16.3125 per share, for an
aggregate purchase price of $14,999,996.25. The shares of Common Stock issued to
the Purchaser pursuant to this Agreement shall be hereinafter referred to as the
"Shares."
------
1.2 Closing; Delivery.
-----------------
(a) The purchase and sale of the Shares shall take place at the
offices of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, at
10:00 a.m., on December 28, 1999 (which time and place are designated as the
"Closing").
-------
(b) At the Closing, the Company shall deliver to the Purchaser a
certificate representing the Common Stock and the Warrant (as defined herein)
being purchased hereby against payment of the purchase price therefor by a check
payable to the Company. The stock certificate, the Warrant and the check shall
be delivered to the escrow holder pursuant to the Escrow Agreement in the form
of Exhibit B hereto (the "Escrow Agreement").
----------------
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Purchaser that:
2.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business and enter into the Agreements (as defined below). The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure so to qualify would have a material adverse
effect on its business or properties.
2.2 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Warrant in the form attached
hereto as Exhibit A (the "Warrant"), the Escrow Agreement and Strategic Business
--------- -------
Relationship Agreement to be entered into between the Company and the Purchaser
(the "Strategic Business Relationship Agreement" and, collectively
-----------------------------------------
<PAGE>
with this Agreement, the Escrow Agreement and the Warrant, the "Agreements") and
----------
the performance of all obligations of the Company hereunder and thereunder has
been taken prior to the Closing. The Agreements, when executed and delivered by
the Company, shall constitute valid and legally binding obligations of the
Company, enforceable against the Company in accordance with their terms, except
as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and other laws of general application affecting
enforcement of creditors' rights generally, as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies.
2.3 Valid Authorization and Issuance of Shares. The Shares that are
------------------------------------------
being issued to the Purchaser hereunder have been duly authorized for issuance
and, when issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable and free of restrictions on transfer other than applicable state
and federal securities laws. Based in part upon the representations of the
Purchaser in this Agreement and subject to the filing of any applicable notices
under federal and state securities laws, the Shares will be issued in compliance
with all applicable federal and state securities laws.
2.4 Litigation. There is no action, suit, proceeding or
----------
investigation pending or, to the Company's knowledge, currently threatened
against the Company or any of its subsidiaries that questions the validity of
the Agreements or the right of the Company to enter into them, or to consummate
the transactions contemplated hereby or thereby, or that might result, either
individually or in the aggregate, in any material adverse changes in the assets,
condition or affairs of the Company, financially or otherwise, or any change in
the current equity ownership of the Company, nor is the Company aware that there
is any basis for the foregoing. Neither the Company nor any of its subsidiaries
is a party or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality. There is no
action, suit, proceeding or investigation by the Company or any of its
subsidiaries currently pending or which the Company or any of its subsidiaries
intends to initiate.
2.5 Compliance with Other Instruments. Neither the Company nor any
---------------------------------
of its subsidiaries is in violation or default of any provisions of (i) their
respective charters or bylaws (or similar applicable organizational documents),
(ii) any instrument, judgment, order, writ, decree, agreement (written or oral)
or contract to which any of them is a party or by which any of them is bound or
(iii) any federal or state statute, rule or regulation, except in the case of
clause (ii) or (iii) above, where any such violation or default would not be
material or have a material adverse effect on the Company. The execution,
delivery and performance of the Agreements by the Company and the consummation
by the Company of the transactions contemplated hereby or thereby (1) will not
be an event which results in the creation of any lien, charge or encumbrance
upon any assets of the Company or any of its subsidiaries and (2) will not
result in any violation or be in conflict with or constitute, with or without
the passage of time and giving of notice, a default under (a) the Company's
charter or bylaws, (b) any instrument, judgment, order, writ, decree, agreement
(written or oral) or contract or (c) any federal or state statute, rule or
regulation, except in the case of clause (b) or (c) above, where any such
violation, conflict or default would not be material or have a material adverse
effect on the Company.
-2-
<PAGE>
2.6 Rights of Registration and Voting Rights. Except as provided in
----------------------------------------
that certain Amended and Restated Investors' Rights Agreement, dated as of March
31, 1997, among the Company and the investors listed on Schedule I thereto, as
amended by that certain Amendment to Investors' Rights Agreement dated as of
December 22, 1997 and that certain Second Amendment to Investors' Rights
Agreement dated February 26, 1998, including the obligation of the Company to
amend such agreement to grant registration rights to Greyrock Capital (the
"Existing Investors' Rights Agreement"), the Company has not granted or agreed
------------------------------------
to grant any registration rights, including piggyback rights, to any person or
entity. To the Company's knowledge, no stockholder of the Company has entered
into any agreements with respect to the voting of capital shares of the Company.
2.7 Financial Statements. The Company has made available to the
--------------------
Purchaser its audited financial statements (including balance sheet, income
statement and statement of cash flows) for the fiscal year ended March 31, 1999
included in the Company's Annual Report on Form 10-K for such year and the
unaudited financial statements for the quarters ended June 30, 1999 and
September 30, 1999 included in the Company's Quarterly Reports on Form 10-Q for
such quarters (collectively, the "Financial Statements"). The Financial
--------------------
Statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods indicated. The
Financial Statements fairly present the financial condition and operating
results of the Company as of the dates, and for the periods, indicated therein,
subject, in the case of the unaudited financial statements, to normal year-end
audit adjustments. Except as set forth in the Financial Statements, the Company
(i) has no material liabilities, contingent or otherwise, other than (a)
liabilities incurred in the ordinary course of business subsequent to September
30, 1999 and (b) obligations under contracts and commitments incurred in the
ordinary course of business and not required under generally accepted accounting
principles to be reflected in the Financial Statements, which, in both cases,
individually or in the aggregate are not material to the financial condition or
operating results of the Company and (ii) has not entered into any material
transaction other than transactions in the ordinary course of business or which
are not material to the Company, other than the transaction with Greyrock
Capital, a description of which has been provided to the Purchaser. The net
operating loss carryforwards of the Company are accurately described in the
Financial Statements.
2.8 Corporate Documents. The Restated Certificate of Incorporation
-------------------
and Bylaws of the Company are in the form provided by the Company to the
Purchaser. Such documents are in full force and effect and have not since been
amended.
2.9 Capitalization. The authorized and outstanding capital of the
--------------
Company as of September 30, 1999 is as set forth on Schedule 2.9 hereto. There
have been no changes to such capitalization since such date except for the
exercise of options by option holders, the exercise or conversion of warrants to
purchase 75,000 shares of Common Stock of the Company by warrant holders and the
issuance of warrants to purchase 121,212 shares of Common Stock of the Company
to Greyrock Capital for $8.25 per share.
2.10 No Material Adverse Change. Since September 30, 1999, there has
--------------------------
not been any change in the assets, liabilities, financial condition or operating
results of the Company
-3-
<PAGE>
from that reflected in the Financial Statements, except changes in the ordinary
course of business that have not been, in the aggregate, materially adverse.
2.11 Real Property. The Company does not own any real property. With
-------------
respect to the real property it leases, the Company is in compliance with such
leases and, to its knowledge, holds a valid leasehold interest free of any
liens, claims or encumbrances.
2.12 Insurance. The Company has in full force and effect fire,
---------
casualty and liability insurance policies, with extended coverage on its
properties in such amounts as are customarily maintained by persons engaged in
similar businesses and owning similar properties in the same general areas in
which the Company operates.
2.13 Intellectual Property. The Company owns or possesses sufficient
---------------------
legal rights to all patents, trademarks, service marks, tradenames, copyrights,
trade secrets, source or object code, licenses, information and proprietary
rights and processes necessary for its business without any conflict with, or
infringement of, the rights of others. The Company has not received any
communications alleging that the Company has violated or, by conducting its
business, would violate any of the patents, trademarks, service marks,
tradenames, copyrights, trade secrets, source or object code, or other
proprietary rights or processes of any other person or entity and, to the
Company's knowledge, it is not in violation of any of the foregoing rights with
respect to any third party. The Company is not aware that any of its employees
is obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of such
employee's best efforts to promote the interest of the Company or that would
conflict with the Company's business.
2.14 Consents. No consent, approval, order or authorization of, or
--------
registration, qualification, designation, declaration or filing with, any third
party or any federal, state or local governmental authority on the part of the
Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for filings that may be required under
applicable securities laws and compliance with the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 in connection with the exercise of the Warrant under
certain circumstances.
2.15 Labor Agreements and Actions. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives or agents
of the Company. There is no strike or other labor dispute involving the Company
pending, or to the knowledge of the Company threatened, which could have a
material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company, nor is the Company aware of any
labor organization activity involving its employees. The employment of each
officer and employee of the Company is terminable at the will of the Company.
The Company has complied in all material respects with all applicable state and
federal equal employment opportunity laws and with other laws related to
employment.
-4-
<PAGE>
2.16 Disclosure. No representation or warranty of the Company
----------
contained in this Agreement and the exhibits and schedules attached hereto, any
certificate furnished or to be furnished to the Purchaser at the Closing, or any
other information regarding the Company provided by the Company to the Purchaser
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made.
2.17 Securities Filings. The Company has made available to the
------------------
Purchaser each registration statement, report, proxy statement or information
statement and all exhibits thereto (collectively, the "Company Reports")
---------------
prepared by it since the effective date of the Company's initial registration
statement, each in the form (including exhibits and any amendments thereto)
filed with the Securities and Exchange Commission (the "SEC"). The Company
---
Reports were filed with the SEC in a timely manner and constitute all forms,
reports and documents required to be filed by the Company pursuant to the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "Securities Laws"). As of their respective dates,
---------------
the Company Reports (a) complied as to form in all material respects with the
applicable requirements of the Securities Laws and (b) did 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 made therein, in light of
the circumstances under which they were made, not misleading. There is no
unresolved violation asserted by any governmental authority with respect to any
of the Company Reports.
2.18 Year 2000 Compliance. The Company has (a) conducted a review and
--------------------
assessment of all areas within its business and operations (including those
affected by suppliers and vendors) that could be adversely affected by the risk
that computer applications used by the Company (or its suppliers and vendors)
may be unable to recognize and perform properly date-sensitive functions
involving any date after December 31, 1999 (the "Year 2000 Problem") and (b)
-----------------
developed and implemented a plan for addressing the Year 2000 Problem on a
timely basis. All computer applications that are necessary to the Company's
business and operations (including, to the Company's knowledge, the computer
applications of the Company's suppliers and vendors) will be Year 2000 compliant
by being able to perform properly on a timely basis date-sensitive functions for
all dates after December 31, 1999, except to the extent that a failure to do so
could not reasonably be expected to have a material adverse effect on the
Company. The Company will promptly notify the Purchaser in the event the Company
discovers or determines that any computer application (including those of its
suppliers and vendors) that is necessary to its business and operations will not
be Year 2000 compliant on a timely basis. The Company will cooperate fully with
the Purchaser in connection with any due diligence review that the Purchaser may
conduct in determining whether the Company has a Year 2000 Problem.
3. Representations and Warranties of the Purchaser. The Purchaser hereby
-----------------------------------------------
represents and warrants to the Company that:
3.1 Authorization. The Purchaser has full power and authority to
-------------
enter into this Agreement. The Agreements, when executed and delivered by the
Purchaser, will constitute valid and legally binding obligations of the
Purchaser, enforceable in accordance with their
-5-
<PAGE>
terms, except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, and any other laws of general application
affecting enforcement of creditors' rights generally, and as limited by laws
relating to the availability of a specific performance, injunctive relief, or
other equitable remedies.
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
the Purchaser in reliance upon the Purchaser's representation to the Company,
which by the Purchaser's execution of this Agreement, the Purchaser hereby
confirms, that the Shares to be acquired by the Purchaser will be acquired for
investment for the Purchaser's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof except in
accordance with the restrictions on transfer set forth in any legends thereon,
this Agreement and in accordance with the Existing Investors' Rights Agreement.
By executing this Agreement, the Purchaser further represents that the Purchaser
does not presently have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person, with respect to any of the Shares. The Purchaser has not been
formed for the specific purpose of acquiring the Shares.
3.3 Disclosure of Information. The Purchaser has had an opportunity
-------------------------
to discuss the Company's business, management, financial affairs and the terms
and conditions of the offering of the Shares with the Company's management and
has had an opportunity to review the Company's facilities.
3.4 Restricted Securities. The Purchaser understands that the Shares
---------------------
have not been registered under the Securities Act of 1933 (the "Securities
----------
Act"), by reason of a specific exemption from the registration provisions of the
- ---
Securities Act which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Purchaser's representations as
expressed herein. The Purchaser understands that the Shares are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, the Purchaser must hold the Shares indefinitely unless
they are registered with the Securities and Exchange Commission and qualified by
state authorities, or an exemption from such registration and qualification
requirements is available. The Purchaser further acknowledges that if an
exemption from registration or qualification is available, it may be conditioned
on various requirements including, but not limited to, the time and manner of
sale, the holding period for the Shares, and on requirements relating to the
Company which are outside of the Purchaser's control, and which the Company is
under no obligation and may not be able to satisfy.
3.5 Legends. The Purchaser understands that the Shares and any
-------
securities issued in respect of or exchange for the Shares may bear one or all
of the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION
-6-
<PAGE>
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933."
(b) Any legend set forth in the other Agreements.
(c) Any legend required by the Blue Sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
3.6 Accredited Investor. The Purchaser is an accredited investor as
-------------------
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
4. Conditions of the Purchaser's Obligations at Closing. The obligations
----------------------------------------------------
of the Purchaser to the Company under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true and correct on
and as of the Closing.
4.2 Qualifications. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Shares pursuant to this Agreement shall be obtained and effective as of the
Closing.
4.3 Warrant. The Company shall have executed and delivered to the
-------
Purchaser the Warrant in substantially the form attached as Exhibit A.
---------
4.4 Strategic Business Relationship Agreement. The Company and the
-----------------------------------------
Purchaser shall have executed and delivered a Strategic Business Relationship
Agreement in a form agreed to by the Company and the Purchaser.
4.5 Escrow Agreement. The Company and the Purchaser shall have
----------------
entered into the Escrow Agreement substantially in the form of Exhibit B hereto.
4.6 Opinion. The Company shall have delivered to the Purchaser an
-------
opinion of Orrick, Herrington & Sutcliffe LLP in a form agreed to by the
Purchaser and its counsel.
5. Conditions of the Company's Obligations at Closing. The obligations
--------------------------------------------------
of the Company to the Purchaser under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Purchaser contained in Section 3 shall be true and correct on
and as of the Closing.
5.2 Qualifications. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in
-7-
<PAGE>
connection with the lawful issuance and sale of the Shares pursuant to this
Agreement shall be obtained and effective as of the Closing.
6. Covenants of the Company.
------------------------
6.1 Nomination of Director.
----------------------
(a) Effective as of the date of this Agreement, the Company will
cause K. Paul Singh to be elected a member of the Board of Directors of the
Company as a "Class II" director.
(b) At the annual meeting of stockholders of the Company to be
held in the year 2000, the Company and the Company's Board of Directors will
nominate and recommend to the Company's stockholders K. Paul Singh to serve on
the Board of Directors of the Company as a "Class II" director. The Company also
shall use its reasonable efforts to solicit from the stockholders of the Company
eligible to vote in the election of directors at such meeting a proxy to vote
for K. Paul Singh.
6.2 Amendment to Existing Investors' Rights Agreement. The Company
-------------------------------------------------
agrees to use its best efforts to obtain by January 31, 2000 the requisite
consent of the holders of registrable stock under the Existing Investors' Rights
Agreement and Grayrock Capital necessary to amend such agreement (a) to grant to
the Purchaser demand registration rights with respect to the Shares and the
shares of Common Stock issuable upon exercise of the Warrant (the "Warrant
-------
Shares") beginning six months after the date hereof and (b) to grant piggyback
- ------
registration rights to the Purchaser with respect to the Shares and the Warrant
Shares on the same terms and conditions as are generally applicable to the other
holders of registrable stock thereunder; provided, however, that the Purchaser
will have the right to demand a registration if the Purchaser proposes to
register at least 50% of the Shares or all of the Warrant Shares. If the Company
is unable to so amend the Existing Investors' Rights Agreement, the Company
shall enter into a registration rights agreement with the Purchaser in a form
reasonably acceptable to the Purchaser.
7. Miscellaneous.
-------------
7.1 Survival of Warranties. Unless otherwise set forth in this
----------------------
Agreement, the warranties, representations and covenants of the Company and the
Purchaser contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing.
7.2 Transfer; Successors and Assigns. The terms and conditions of
--------------------------------
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
-8-
<PAGE>
7.3 Governing Law. 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
Delaware, without giving effect to principles of conflicts of law.
7.4 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original and all of which together shall
constitute one instrument.
7.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.6 Notices. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be deemed sufficient (i) upon delivery, when
delivered personally or sent by facsimile, (ii) on the next business day after
dispatch when delivered by overnight courier or sent by telegram, or (iii) on
the fifth business day after being deposited in the U.S. mail, as certified or
registered mail, with postage prepaid, addressed (a) if to the Company, to 1080
Marina Village Parkway, Alameda, California 94501, Attn: Chief Financial
Officer, facsimile number (510) 433-7811, with a copy to Orrick, Herrington &
Sutcliffe LLP, 400 Sansome Street, San Francisco, California 94111, Attn: Peter
Lillevand, Esq., facsimile number (415) 773-5759 or (b) if to the Purchaser, to
1700 Old Meadow Road, Third Floor, McLean, Virginia 22102, Attn: David P.
Slotkin, Esq., Deputy General Counsel, with a copy to Hogan & Hartson L.L.P.,
Columbia Square, 555 Thirteenth Street, N.W., Washington, D.C. 20004, Attn:
David W. Bonser, Esq., or such other addresses as either party may from time to
time specify in writing.
7.7 Fees and Expenses. Each party shall pay its own fees and
-----------------
expenses incurred with respect to this Agreement and the transactions
contemplated hereby, except for any registration expenses payable by the Company
under the Existing Investors' Rights Agreement, as amended as contemplated
hereby.
7.8 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended or waived only with the written consent of the Company and the
Purchaser.
7.9 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
7.10 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party under this Agreement, upon any breach or
default of any other party under this Agreement, shall impair any such right,
power or remedy of such non-breaching or non-defaulting party nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default
-9-
<PAGE>
theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of any party of any breach or default under
this Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any party, shall be cumulative
and not alternative.
7.11 Entire Agreement. This Agreement and the documents referred to
----------------
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof, and any and all other written or oral agreements
relating to the subject matter hereof existing between the parties hereto are
expressly canceled.
7.12 Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE
------------------------
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE
QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED
UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
7.13 Confidentiality. Each party hereto agrees that, except with the
---------------
prior written permission of the other party, it shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other parties to which such party has been
or shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement, the performance of its obligations hereunder or the
ownership of Shares purchased hereunder. The provisions of this Section 7.13
shall be in addition to, and not in substitution for, the provisions of any
separate nondisclosure agreement executed by the parties hereto with respect to
the transactions contemplated hereby. The provisions of this Section 7.13 shall
not apply to any information that (a) is or becomes a part of the public domain
through no act or omission of the receiving party; (b) was in the receiving
party's lawful possession prior to any disclosure by the other party and had not
been obtained by the receiving party either directly or indirectly from the
disclosing party, as demonstrated by files in existence at the time of
disclosure; (c) is furnished by the disclosing party to a third party without
restrictions similar to those contained in this Agreement; (d) is lawfully
disclosed to the receiving party by a third party without, to the knowledge of
the receiving party, restriction on disclosure; (e) is independently developed
by the receiving party without reference to confidential information received
under this Agreement; or (f) is compelled by law or legal process to be
disclosed, provided that the receiving party has complied with Section 5(a) of
the Mutual Non-Disclosure Agreement dated November 1, 1999 by and between the
Company and the Purchaser.
[Signature Pages Follow]
-10-
<PAGE>
The parties have executed this Agreement as of the date first written
above.
COMPANY:
Pilot Network Services, Inc.
By: /s/ William C. Leetham
----------------------------------------
Name: William C. Leetham
---------------------------------------
(print)
Title: Chief Financial Officer
--------------------------------------
PURCHASER:
Primus Telecommunications Group,
Incorporated
By: /s/ Neil L. Hazard
-----------------------------------------
Name: Neil L. Hazard
---------------------------------------
(print)
Title: Chief Financial Officer
--------------------------------------
<PAGE>
EXHIBIT A
---------
FORM OF WARRANT
<PAGE>
EXHIBIT B
---------
FORM OF ESCROW AGREEMENT
<PAGE>
EXHIBIT 10.3
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL, WHICH MAY BE IN-HOUSE COUNSEL,
IN A FORM REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
___________________________________
WARRANT TO PURCHASE STOCK
Warrant to Purchase 200,000 Shares Issue Date: December 28, 1999
of the Common Stock of Pilot Expiration Date: December 28, 2002
Network Services, Inc. Initial Exercise Price: $25.00 per share
FOR VALUE RECEIVED, PILOT NETWORK SERVICES, INC., a Delaware corporation
(the "Company"), hereby certifies that PRIMUS TELECOMMUNICATIONS GROUP,
-------
INCORPORATED ("Holder") is entitled to purchase the number of fully paid and
------
non-assessable shares of common stock (the "Shares") of the Company at the
------
initial exercise price per Share (the "Warrant Price") all as set forth above
-------------
and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions
and upon the terms and conditions set forth in this Warrant.
ARTICLE 1. EXERCISE.
1.1 Method of Exercise. This Warrant is exercisable, in whole or in part,
at any time and from time to time on or before the Expiration Date set forth
above; provided, however, that this Warrant may not be exercised until all
applicable requirements, if any, of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), have been satisfied. The Company
-------
agrees to file and cooperate with Holder in filing all documents required to
comply with the HSR Act. Holder may exercise this Warrant by delivering a duly
executed Notice of Exercise in substantially the form attached as Appendix 1 to
the principal office of the Company. Holder shall also deliver to the Company a
wire transfer or certified check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Delivery of Certificate and New Warrant. Promptly after Holder
exercises this Warrant, the Company shall deliver at its expense to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised and has not expired, a new Warrant representing the Shares not so
acquired.
1.3 Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, on surrender and cancellation of this
<PAGE>
Warrant, the Company shall execute and deliver, in lieu of this Warrant, a new
warrant of like tenor.
1.4 Fractional Shares. No fractional Shares shall be issuable upon
exercise of the Warrant and the number of Shares to be issued shall be rounded
down to the nearest whole Share. If a fractional share interest arises upon any
exercise of the Warrant, the Company shall eliminate such fractional share
interest by paying Holder an amount computed by multiplying the fractional
interest by the fair market value of a full Share.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
dividend on its common stock payable in common stock or other securities,
combines its outstanding shares of common stock, makes a distribution of capital
stock to holders of its common stock or subdivides the outstanding common stock
into a greater amount of common stock, then the number of shares for which this
Warrant may be exercised shall be proportionately adjusted such that, upon
exercise of this Warrant, Holder shall receive a proportionate number of
securities to which Holder would have been entitled had Holder owned the Shares
of record as of the date the applicable event occurred, and the per share
Warrant Price shall be adjusted so that the aggregate Warrant Price remains the
same.
2.2 Reclassification. Upon any reclassification that results in a change
of the number and/or class of the securities issuable upon exercise of this
Warrant, Holder shall be entitled to receive, upon exercise of this Warrant, the
number and kind of securities and property that Holder would have received for
the Shares if this Warrant had been exercised immediately before such
reclassification. The Company shall promptly issue to Holder a new Warrant for
such new securities or other property. The new Warrant shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.2
shall similarly apply to successive reclassifications.
2.3 Adjustments for Business Combinations, Etc. Upon a merger or
consolidation of the Company with or into, or a transfer of all or substantially
all of the assets of the Company to, another entity (a "Consolidation Event"),
-------------------
then the Holder shall be entitled to receive upon such transfer, merger or
consolidation becoming effective, and upon payment of the Warrant Price, the
number of shares or other securities or property of the Company or of the
successor corporation resulting from such merger or consolidation, which would
have been received by the Holder for the shares of stock subject to this Warrant
had this Warrant been exercised immediately prior to such transfer, merger or
consolidation becoming effective or to the applicable record date thereof, as
the case may be. The Company shall not effect any Consolidation Event unless the
resulting successor or acquiring entity (if not the Company) assumes by written
instrument the obligation to deliver to the Holder such shares of stock and/or
other securities as the Holder is entitled to receive had this Warrant been
exercised in accordance with the foregoing. Such successor shall promptly issue
to Holder a new Warrant for such new securities or other property. The new
Warrant shall provide for adjustments which shall be as nearly equivalent as may
be practicable to the adjustments provided for in this Article 2
2
<PAGE>
including, without limitation, adjustments to the Warrant Price and the number
of securities or property issuable upon exercise of the new Warrant. The
provisions of this Section 2.3 shall similarly apply to successive
reclassifications, exchanges, substitutions, or other events.
2.4 No Impairment. The Company shall not, by amendment of its Certificate
of Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue 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 under this Warrant by the Company, but shall at all times
in good faith assist in carrying out of all the provisions of this Article 2 and
in taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment.
2.5 Certificate as to Adjustments. Upon each adjustment of the Warrant
Price, the Company shall promptly compute such adjustment and furnish Holder
with a certificate of its Chief Financial Officer setting forth such adjustment
and the facts upon which such adjustment is based. The Company shall, upon
written request, furnish Holder a certificate setting forth the Warrant Price in
effect upon the date thereof and the series of adjustments leading to such
Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Validly Issued Shares. The Company hereby represents and warrants to
the Holder that the Shares that may be issued upon the exercise of the purchase
right represented by this Warrant shall, upon issuance, be duly authorized,
validly issued, fully paid and non-assessable, and free of any liens and
encumbrances except for restrictions on transfer provided for herein or under
applicable federal and state securities laws.
3.2 Valid Authorization. The Company hereby represents and warrants to
the Holder that the execution and delivery of this Warrant by the Company have
been duly authorized by all necessary corporate action on the part of the
Company and no additional consent or approval by any third party or governmental
authority is required for the execution and delivery by the Company of this
Warrant, other than those required under the HSR Act under certain
circumstances.
3.3 Notice of Certain Events. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities (other than a regular cash dividend); (b)
to offer for subscription pro rata to the holders of common stock any additional
shares of stock of any class or series or other rights; (c) to effect any
reclassification or recapitalization of common stock; or (d) to merge or
consolidate with or into any other corporation, or sell or convey all or
substantially all of its assets, or to liquidate, dissolve or wind up; then, in
connection with each such event, the Company shall give Holder (1) at least 10
business days prior written notice of the date on which a record will be taken
for such dividend, distribution, or subscription rights (and specifying the date
on which the holders of common stock will be entitled thereto) or for
determining rights to vote, if any, in respect of the matters referred to in (c)
and (d) above; and (2) in the case of the matters referred to in (c) and (d)
above, the same notice that is provided to stockholders of the Company including
when the same will take place (and specifying the date on which the holders of
common stock will be
3
<PAGE>
entitled to exchange their common stock for securities or other property
deliverable upon the occurrence of such event).
3.4 Reservation of Shares. The Company shall at all times reserve for
issuance pursuant to this Warrant such number of shares of Common Stock as are
issuable upon exercise of this Warrant.
3.5 Periodic Reports. The Company shall continue to file with the
Securities and Exchange Commission all periodic reports required under the
Securities Exchange Act of 1934 during the term of this Warrant; provided,
however, that such obligation may terminate in the event of a merger or
consolidation of the Company in which the Company is not the surviving entity,
the acquisition of substantially all of the voting stock of the Company by a
single entity or group of related entities or a sale of all or substantially all
of the assets of the Company.
3.6 NASDAQ Listing. (a) The Company will cause the shares of Common Stock
issuable upon exercise of this Warrant to be listed for trading on the NASDAQ
National Market System.
(b) The Company will use its best efforts to cause its common stock
to remain listed for trading on the NASDAQ National Market System or the New
York Stock Exchange; provided, however, that such obligation may terminate in
the event of or merger or consolidation of the Company in which the Company is
not the surviving entity, the acquisition of substantially all of the voting
stock of the Company by a single entity or group of related entities or a sale
of all or substantially all of the assets of the Company.
3.7 Registration Rights. The Company agrees to use its best efforts to
obtain by January 31, 2000 the requisite consent of the holders of registrable
stock under that certain Amended and Restated Investors' Rights Agreement, dated
as of March 31, 1997, among the Company and the investors listed on Schedule I
thereto, as amended by that certain Amendment to Investors' Rights Agreement
dated as of December 22, 1997 and that certain Second Amendment to Investors'
Rights Agreement dated February 26, 1998, including the obligation of the
Company to amend such agreement to grant registration rights to Greyrock Capital
(the "Existing Investors' Rights Agreement"), necessary to amend such agreement
------------------------------------
(a) to grant to the Holder demand registration rights with respect to the Shares
beginning six months after the date hereof and (b) to grant piggyback
registration rights to the Holder with respect to the Shares on the same terms
and conditions as are generally applicable to the other holders of registrable
stock thereunder; provided, however, that the Holder will have the right to
demand a registration if the Holder proposes to register all of the Shares. If
the Company is unable to so amend the Existing Investors' Rights Agreement, the
Company shall enter into a registration rights agreement with the Holder in a
form reasonably acceptable to the Holder.
ARTICLE 4. MISCELLANEOUS.
4.1 This Warrant and the Shares shall be imprinted with a legend in
substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
4
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TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT
TO RULE 144 OR AN OPINION OF COUNSEL, WHICH MAY BE IN-HOUSE COUNSEL, IN A FORM
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
4.2 Compliance with Securities Laws on Transfer. This Warrant and the
Shares issuable upon exercise of this Warrant may not be transferred or assigned
in whole or in part without compliance with applicable federal and state
securities laws (including, without limitation, the delivery of investment
representation letters and legal opinions satisfactory to the Company, if
requested by the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or if there is
no material question as to the availability of current information as referenced
in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e),
the selling broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of Holder's notice of proposed sale.
4.3 Transfer Procedure. Subject to the provisions of Sections 4.1 and
4.2, Holder may transfer all or part of this Warrant by giving the Company
notice of the portion of the Warrant being transferred setting forth the name,
address and taxpayer identification number of the transferee and surrendering
this Warrant to the Company for reissuance to the transferee (and Holder if
applicable).
4.4 Notices. Any notice required or permitted by this Warrant shall be in
writing and shall be deemed sufficient (i) upon delivery, when delivered
personally or sent by facsimile, (ii) on the next business day after dispatch
when delivered by overnight courier or sent by telegram, or (iii) on the fifth
business day after being deposited in the U.S. mail, as certified or registered
mail, with postage prepaid, addressed (a) if to the Company, to 1080 Marina
Village Parkway, Alameda, California 94501, Attn: Chief Financial Officer,
facsimile number (510) 433-7811, with a copy to Orrick, Herrington & Sutcliffe
LLP, 400 Sansome Street, San Francisco, California 94111, Attn: Peter
Lillevand, Esq., facsimile number (415) 773-5759 or (b) if to the Holder, to
1700 Old Meadow Road, Third Floor, McLean, Virginia 22102, Attn: David P.
Slotkin, Esq., Deputy General Counsel, with a copy to Hogan & Hartson L.L.P.,
Columbia Square, 555 Thirteenth Street, N.W., Washington, D.C. 20004, Attn:
David W. Bonser, Esq., or such other addresses as either party may from time to
time specify in writing.
4.5 Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.6 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to its
principles regarding conflicts of law.
PILOT NETWORK SERVICES, INC.
By /s/ William C. Leetham
--------------------------------------
Name: William C. Leetham
Title: Chief Financial Officer
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APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase _________________ shares of
the Common Stock of Pilot Network Services, Inc. pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
___________________________
(NAME)
___________________________
___________________________
___________________________
(ADDRESS)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
___________________________
(Signature)
___________________________
(Date)
6
<PAGE>
EXHIBIT 10.4
Loan and Security Agreement
Borrower: Pilot Network Services, Inc.
Address: 1080 Marina Village Parkway
Alameda, California 94501
Date: November 9, 1999
This Loan and Security Agreement is entered into on the above date between
Greyrock Capital, a Division of Banc of America Commercial Financial Corporation
(Greyrock), whose address is 10880 Wilshire Blvd. Suite 1850, Los Angeles, CA
90024 and the borrower named above (Borrower), whose chief executive office is
located at the above address (Borrower's Address). The Schedule to this
Agreement (the Schedule) being signed concurrently is an integral part of this
Agreement. (Definitions of certain terms used in this Agreement are set forth in
Section 8 below.)
1. LOANS.
1.1 Loans. (a) Revolving Credit Loans. Greyrock will make loans to Borrower
(the Revolving Credit Loans), in amounts determined by Greyrock in its sole
discretion, up to the amounts (the Revolving Credit Limit) shown on the
Schedule, provided no Default or Event of Default has occurred and is
continuing.
(b) Term Loan. Greyrock will make a term loan to Borrower (the Term Loan),
in the amount (the Term Loan Limit) shown on the Schedule, provided no Default
or Event of Default has occurred and is continuing.
(c) If at any time or for any reason the outstanding aggregate amount of
all outstanding Revolving Credit Loans, the Term Loan and all other Obligations
exceeds the amount shown on the Schedule as the Total Credit Limit (the Total
Credit Limit), Borrower shall immediately pay the amount of the excess to
Greyrock, without notice or demand. The Revolving Credit Loans and the Term Loan
are sometimes collectively referred to herein as the "Loans."
1.2 Interest. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement or in another written agreement signed by
Greyrock and Borrower. Interest shall be payable monthly, on the last day of the
month. Interest may, in Greyrock's discretion, be charged to Borrower's loan
account, and the same shall thereafter bear interest at the same rate as the
other Loans.
1.3 Fees. Borrower shall pay Greyrock the fee(s) shown on the Schedule,
which are in addition to all interest and other sums payable to Greyrock and are
not refundable.
1.4 Manner of Payments. All payments by Borrower hereunder (including
principal and interest payments) shall be made in lawful money of the United
States of America, on the date on which such payment shall be due. If a payment
hereunder becomes due and payable on a Saturday, Sunday or legal holiday, the
due date thereof shall be extended to the next succeeding business day, and
interest shall be payable thereon during such extension.
2. SECURITY INTEREST.
2.1 Security Interest. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Greyrock a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the Collateral): All Receivables,
Inventory, Equipment, Investment Property and General Intangibles, including,
without limitation, all of Borrower's Deposit Accounts, all money, all
collateral in which Greyrock is granted a security interest pursuant to any
other present or future agreement, all property now or at any time in the future
in Greyrock's possession, and all proceeds (including proceeds of any insurance
policies, proceeds of proceeds and claims against third parties), all products
of the foregoing, and all books and records related to any of the foregoing.
<PAGE>
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Greyrock to enter into this Agreement and to make Loans,
Borrower represents and warrants to Greyrock as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
3.1 Corporate Existence and Authority. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will continue
to be qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a material adverse effect on Borrower. The
execution, delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (i) have been duly and validly authorized, (ii)
are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), (iii) do not violate Borrower's articles or certificate of
incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 Name; Trade Names and Styles. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Greyrock 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will in
the future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 Place of Business; Location of Collateral. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Greyrock at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 Title to Collateral; Permitted Liens. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens. Greyrock now has, and will
continue to have, a first-priority perfected and enforceable security interest
in all of the Collateral, subject only to the Permitted Liens, and Borrower will
at all times defend Greyrock and the Collateral against all claims of others. So
long as any Loan is outstanding which is a term loan, none of the Collateral now
is or will be affixed to any real property in such a manner, or with such
intent, as to become a fixture. Borrower is not and will not become a lessee
under any real property lease pursuant to which the lessor may obtain any rights
in any of the Collateral and no such lease now prohibits, restrains, impairs or
will prohibit, restrain or impair Borrower's right to remove any Collateral from
the leased premises. Whenever any Collateral having an aggregate value in excess
of $50,000 is located upon premises in which any third party has an interest
(whether as owner, mortgagee, beneficiary under a deed of trust, lien or
otherwise), Borrower shall, whenever requested by Greyrock, use its best efforts
to cause such third party to execute and deliver to Greyrock, in form reasonably
acceptable to Greyrock, such waivers and subordinations as Greyrock shall
specify, so as to ensure that Greyrock's rights in the Collateral are, and will
continue to be, superior to the rights of any such third party and that Greyrock
will have access to such premises to exercise remedies against the Collateral.
Borrower will keep in full force and effect, and will comply with all the terms
of, any lease of real property where any of the Collateral now or in the future
may be located.
3.5 Maintenance of Collateral. Borrower will maintain the Collateral in
good working condition, ordinary wear and tear excepted, and Borrower will not
use the Collateral for any unlawful purpose. Borrower will immediately advise
Greyrock in writing of any material loss or damage to the Collateral.
3.6 Books and Records. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 Financial Condition, Statements and Reports. All financial statements
now or in the future delivered to Greyrock have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and fairly reflect the financial condition of Borrower,
at the times and for the periods therein stated. Between the last date covered
by any such statement provided to Greyrock and the date hereof, there has been
no material adverse change in the financial condition or business of Borrower.
Borrower is now and will continue to be solvent.
3.8 Tax Returns and Payments; Pension Contributions. Borrower has timely
filed, and will timely file, all tax returns and reports required by applicable
law, and Borrower has timely paid, and will timely pay, all applicable taxes,
assessments, deposits and contributions now or in the future owed by Borrower.
Borrower may, however, defer payment of any contested taxes, provided
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that Borrower (i) in good faith contests Borrower's obligation to pay the
taxes by appropriate proceedings promptly and diligently instituted and
conducted, (ii) notifies Greyrock in writing of the commencement of, and any
material development in, the proceedings, and (iii) posts bonds or takes any
other steps required to keep the contested taxes from becoming a lien upon any
of the Collateral. Borrower is unaware of any claims or adjustments proposed
for any of Borrower's prior tax years which could result in additional taxes
becoming due and payable by Borrower. Borrower has paid, and shall continue to
pay all amounts necessary to fund all present and future pension, profit
sharing and deferred compensation plans in accordance with their terms, and
Borrower has not and will not withdraw from participation in, permit partial
or complete termination of, or permit the occurrence of any other event with
respect to, any such plan which could result in any liability of Borrower,
including any liability to the Pension Benefit Guarantee Corporation or any
other governmental agency. Borrower shall, at all times, maintain a separate
payroll account which shall be used exclusively for payment of payroll and
payroll taxes and other items related directly to payroll.
3.9 Compliance with Law. Borrower has complied, and will comply, in all
material respects, with all provisions of all applicable laws and regulations,
including, but not limited to, those relating to Borrower's ownership of real or
personal property, the conduct and licensing of Borrower's business, and all
environmental matters.
3.10 Litigation. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Greyrock in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for
lawful business purposes.
3.12 Year 2000 Compliance. The Borrower has (i) initiated a review and
assessment of all areas within its and each of its subsidiaries' business and
operations (including those affected by suppliers and vendors) that could be
adversely affected by the "Year 2000 Problem" (that is, the risk that computer
applications used by the Borrower or any of its subsidiaries (or its suppliers
and vendors) may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date after December 31,
1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem
on a timely basis, and (iii) to date, implemented that plan in accordance with
that timetable. The Borrower reasonably believes that all computer applications
(including those of its suppliers and vendors) that are material to its or any
of its subsidiaries' business and operations will on a timely basis be able to
perform properly date-sensitive functions for all dates before and after January
1, 2000 (that is, be "Year 2000 compliant"), except to the extent that a failure
to do so could not reasonably be expected to have material adverse effect. The
Borrower will promptly notify Greyrock in the event the Borrower discovers or
determines that any computer application (including those of its suppliers and
vendors) that is material to its or any of its subsidiaries' business and
operations will not be Year 2000 compliant on a timely basis, except to the
extent that such failure could not reasonably be expected to have a material
adverse effect.
4. Receivables.
4.1 Representations Relating to Receivables. Borrower represents and
warrants to Greyrock as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed, bona fide, existing, unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services, in the ordinary course of Borrower's business.
4.2 Representations Relating to Documents and Legal Compliance. Borrower
represents and warrants to Greyrock as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and (to the best of Borrower's knowledge) all signatories and endorsers have the
capacity to contract. All sales and other transactions underlying or giving rise
to each Receivable shall comply in all material respects with all applicable
laws and governmental rules and regulations. To the best of Borrower's
knowledge, all signatures and indorsements on all documents, instruments, and
agreements relating to all Receivables are and shall be genuine, and all such
documents, instruments and agreements are and shall be legally enforceable in
accordance with their terms.
4.3 Schedules and Documents relating to Receivables. Borrower shall deliver
to Greyrock transaction reports and loan requests, schedules and assignments of
all Receivables, and schedules of collections, all on Greyrock's standard forms;
provided, however, that Borrower's failure to execute and deliver the same shall
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<PAGE>
not affect or limit Greyrock's security interest and other rights in all of
Borrower's Receivables, nor shall Greyrock's failure to advance or lend against
a specific Receivable affect or limit Greyrock's security interest and other
rights therein. Together with each such schedule and assignment, or later if
requested by Greyrock, Borrower shall furnish Greyrock with copies (or, at
Greyrock's request, originals) of all contracts, orders, invoices, and other
similar documents, and all original shipping instructions, delivery receipts,
bills of lading, and other evidence of delivery, for any goods the sale or
disposition of which gave rise to such Receivables, and Borrower warrants the
genuineness of all of the foregoing. Borrower shall also furnish to Greyrock an
aged accounts receivable trial balance in such form and at such intervals as
Greyrock shall request. In addition, Borrower shall deliver to Greyrock, at
Greyrock's request, the originals of all instruments, chattel paper, security
agreements, guarantees and other documents and property evidencing or securing
any Receivables, immediately upon receipt thereof and in the same form as
received, with all necessary indorsements.
4.4 Collection of Receivables. Borrower shall have the right to collect all
Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
Greyrock, and Borrower shall deliver all such payments and proceeds to Greyrock,
within one business day after receipt of the same, in their original form, duly
endorsed, to be applied to the Obligations in such order as Greyrock shall
determine.
4.5 Disputes. Borrower shall notify Greyrock promptly of all disputes or
claims relating to Receivables on the regular reports to Greyrock. Borrower
shall not forgive, or settle any Receivable for less than payment in full, or
agree to do any of the foregoing, except that Borrower may do so, provided that:
(i) Borrower does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, and in arm's length transactions, which are
reported to Greyrock on the regular reports provided to Greyrock; (ii) no
Default or Event of Default has occurred and is continuing; and (iii) taking
into account all such settlements and forgiveness, the total outstanding Loans
and other Obligations will not exceed the Total Credit Limit.
4.6 Returns. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary course
of its business, Borrower shall promptly determine the reason for such return
and promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Greyrock). In the event any attempted return occurs
after the occurrence of any Event of Default, Borrower shall (i) not accept any
return without Greyrock's prior written consent, (ii) hold the returned
Inventory in trust for Greyrock, (iii) segregate all returned Inventory from all
of Borrower's other property, (iv) conspicuously label the returned Inventory as
Greyrock's property, and (v) immediately notify Greyrock of the return of any
Inventory, specifying the reason for such return, the location and condition of
the returned Inventory, and on Greyrock's request deliver such returned
Inventory to Greyrock.
4.7 Verification. Greyrock may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Greyrock or such other name as Greyrock may choose, and Greyrock or
its designee may, at any time, notify Account Debtors that it has a security
interest in the Receivables.
4.8 No Liability. Greyrock shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Greyrock be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Greyrock from liability for
its own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 Insurance. Borrower shall, at all times, insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Greyrock, in such form and amounts as Greyrock
may reasonably require, and Borrower shall provide evidence of such insurance to
Greyrock, so that Greyrock is satisfied that such insurance is, at all times, in
full force and effect. All such insurance policies shall name Greyrock as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Greyrock. Upon receipt of the proceeds of any such
insurance, Greyrock shall apply such proceeds in reduction of the Obligations as
Greyrock shall determine in its sole discretion, except that, provided no
Default or Event of Default has occurred and is continuing, Greyrock shall
release to Borrower insurance proceeds with respect to Equipment totaling less
than $100,000, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Greyrock may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Greyrock may, but
is not obligated to, obtain the same at Borrower's expense. Borrower shall
promptly deliver to Greyrock copies of all reports made to insurance companies.
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5.2 Reports. Borrower, at its expense, shall provide Greyrock with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Greyrock shall from time to time reasonably
specify.
5.3 Access to Collateral, Books and Records. At reasonable times, and on
one business day's notice, Greyrock, or its agents, shall have the right to
inspect the Collateral, and the right to audit and copy Borrower's books and
records. Greyrock shall take reasonable steps to keep confidential all
information obtained in any such inspection or audit, but Greyrock shall have
the right to disclose any such information to its auditors, regulatory agencies,
and attorneys, and pursuant to any subpoena or other legal process. The
foregoing inspections and audits shall be at Borrower's expense and the charge
therefor shall be $600 per person per day (or such higher amount as shall
represent Greyrock's then current standard charge for the same), plus reasonable
out-of-pockets expenses. Borrower shall not be charged more than $3,000 per
audit (plus reasonable out-of-pockets expenses), nor shall audits be done more
frequently than four times per calendar year, provided that the foregoing limits
shall not apply after the occurrence of a Default or Event of Default, nor shall
they restrict Greyrock's right to conduct audits at its own expense (whether or
not a Default or Event of Default has occurred). Borrower will not enter into
any agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
without first obtaining Greyrock's written consent, which may be conditioned
upon such accounting firm, service bureau or other third party agreeing to give
Greyrock the same rights with respect to access to books and records and related
rights as Greyrock has under this Agreement.
5.4 Remittance of Proceeds. All proceeds arising from the sale or other
disposition of any Collateral shall be delivered, in kind, by Borrower to
Greyrock in the original form in which received by Borrower not later than the
following business day after receipt by Borrower, to be applied to the
Obligations in such order as Greyrock shall determine; provided that, if no
Default or Event of Default has occurred and is continuing, and if no term loan
is outstanding hereunder, then Borrower shall not be obligated to remit to
Greyrock the proceeds of the sale of Equipment which is sold in the ordinary
course of business, in a good-faith arm's length transaction. Except for the
proceeds of the sale of Equipment as set forth above, Borrower shall not
commingle proceeds of Collateral with any of Borrower's other funds or property,
and shall hold such proceeds separate and apart from such other funds and
property and in an express trust for Greyrock. Nothing in this Section limits
the restrictions on disposition of Collateral set forth elsewhere in this
Agreement.
5.5 Negative Covenants. Except as may be permitted in the Schedule,
Borrower shall not, without Greyrock's prior written consent, do any of the
following: (i) merge or consolidate with another corporation or entity; (ii)
acquire any assets, except in the ordinary course of business; (iii) enter into
any other transaction outside the ordinary course of business; (iv) sell or
transfer any Collateral, except that, provided no Default or Event of Default
has occurred and is continuing, Borrower may (a) sell finished Inventory in the
ordinary course of Borrower's business, (b) if no term loan is outstanding
hereunder, sell Equipment in the ordinary course of business, in good-faith
arm's length transactions, and (c) sell or otherwise transfer items of
Collateral valued at no more than $200,000 in the aggregate; (v) store any
Inventory or other Collateral with any warehouseman or other third party; (vi)
sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other
contingent basis; (vii) make any loans of any money or other assets other than
loans to Borrower's officers and employees not exceeding at any one time an
aggregate amount in excess of $5,000; (viii) incur any debts, outside the
ordinary course of business, which would have a material, adverse effect on
Borrower or on the prospect of repayment of the Obligations; (ix) guarantee or
otherwise become liable with respect to the obligations of another party or
entity; (x) pay or declare any dividends on Borrower's stock (except for
dividends payable solely in stock of Borrower); (xi) redeem, retire, purchase or
otherwise acquire, directly or indirectly, any of Borrower's stock; (xii) make
any change in Borrower's capital structure which would have a material adverse
effect on Borrower or on the prospect of repayment of the Obligations; or (xiii)
dissolve or elect to dissolve; or (xiv) agree to do any of the foregoing.
5.6 Litigation Cooperation. Should any third-party suit or proceeding be
instituted by or against Greyrock with respect to any Collateral or in any
manner relating to Borrower, Borrower shall, without expense to Greyrock, make
available Borrower and its officers, employees and agents, and Borrower's books
and records, without charge, to the extent that Greyrock may deem them
reasonably necessary in order to prosecute or defend any such suit or
proceeding.
5.7 Notification of Changes. Borrower will promptly notify Greyrock in
writing of any change in its officers or directors, the opening of any new bank
account or other deposit account, and any material adverse change in the
business or financial affairs of Borrower.
5.8 Investment Property. Upon the request of Greyrock, Borrower shall
deliver to Greyrock all certificated securities included in Investment Property,
with all necessary indorsements, and obtain such account control agreements with
securities intermediaries and take such other action with respect to any
Investment Property, as Greyrock shall request, in form and substance
satisfactory to Greyrock. Borrower shall have the right to
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retain all Investment Property payments and distributions, unless and until a
Default or an Event of Default has occurred. If a Default or an Event of
Default exists, Borrower shall hold all payments on, and proceeds of, and
distributions with respect to, Investment Property in trust for Greyrock, and
Borrower shall deliver all such payments, proceeds and distributions to
Greyrock, immediately upon receipt, in their original form, duly endorsed, to
be applied to the Obligations in such order as Greyrock shall determine. Upon
the request of Greyrock, any such distributions and payments with respect to
any Investment Property held in any securities account shall be held and
retained in such securities account as part of the Collateral.
5.9 Further Assurances. Borrower agrees, at its expense, on request by
Greyrock, to execute all documents and take all actions, as Greyrock may deem
reasonably necessary or useful in order to perfect and maintain Greyrock's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
5.10 Indemnity. Borrower hereby agrees to indemnify Greyrock and hold
Greyrock harmless from and against any and all claims, debts, liabilities,
demands, obligations, actions, causes of action, penalties, costs and expenses
(including attorneys' fees), of every nature, character and description, which
Greyrock may sustain or incur based upon or arising out of any of the
Obligations, any actual or alleged failure to collect and pay over any
withholding or other tax relating to Borrower or its employees, any relationship
or agreement between Greyrock and Borrower, any actual or alleged failure of
Greyrock to comply with any writ of attachment or other legal process relating
to Borrower or any of its property, or any other matter, cause or thing
whatsoever occurred, done, omitted or suffered to be done by Greyrock relating
to Borrower or the Obligations (except any such amounts sustained or incurred as
the result of the gross negligence or willful misconduct of Greyrock or any of
its directors, officers, employees, agents, attorneys, or any other person
affiliated with or representing Greyrock). Notwithstanding any provision in this
Agreement to the contrary, the indemnity agreement set forth in this Section
shall survive any termination of this Agreement and shall for all purposes
continue in full force and effect.
6. TERM.
6.1 Maturity Date. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the Maturity Date); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
6.2 Early Termination. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three business days after
written notice of termination is given to Greyrock; or (ii) by Greyrock at any
time after the occurrence of an Event of Default, without notice, effective
immediately. In addition to the foregoing, the Term Loan shall be due and
payable in full upon the occurrence of any Fundamental Change, Change of
Control, or Liquidity Event with respect to Borrower.
6.3 Payment of Obligations. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Without limiting the generality of the foregoing, if on the Maturity Date, or on
any earlier effective date of termination, there are any outstanding letters of
credit issued based upon an application, guarantee, indemnity or similar
agreement on the part of Greyrock, then on such date Borrower shall provide to
Greyrock cash collateral in an amount equal to 110% of the face amount of all
such letters of credit plus all interest, fees and costs due or (in Greyrock's
estimation) likely to become due in connection therewith, to secure all of the
Obligations relating to said letters of credit, pursuant to Greyrock's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Greyrock's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Greyrock, Greyrock may, in its sole discretion, refuse to make any further Loans
after termination. No termination shall in any way affect or impair any right or
remedy of Greyrock, nor shall any such termination relieve Borrower of any
Obligation to Greyrock, until all of the Obligations have been paid and
performed in full. Upon payment and performance in full of all the Obligations
and termination of this Agreement, Greyrock shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be reasonably required to terminate Greyrock's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 Events of Default. The occurrence of any of the following events shall
constitute an Event of Default under this Agreement, and Borrower shall give
Greyrock immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Greyrock by Borrower or
any of Borrower's officers, employees or agents, now or in the future, shall be
untrue or misleading in a material respect; or (b) Borrower shall fail to pay
when due any Loan or any interest thereon or fail to pay any other monetary
Obligation within 5 business days after demand thereof; or
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(c) the total Loans and other Obligations outstanding at any time shall
the Total Credit Limit; or (d) Borrower shall fail to perform any non-
monetary Obligation which by its nature cannot be cured; or (e) Borrower shall
fail to perform any other non-monetary Obligation, which failure is not cured
within 5 business days after the date performance is due; or (f) any levy,
assessment, attachment, seizure, lien or encumbrance (other than a Permitted
Lien) is made on all or any part of the Collateral which is not cured within
10 days after the occurrence of the same; or (g) any default or event of
default occurs under any obligation secured by a Permitted Lien, which is not
cured within any applicable cure period or waived in writing by the holder of
the Permitted Lien; or (h) Borrower breaches any material contract or
obligation, which has or may reasonably be expected to have a material adverse
effect on Borrower's business or financial condition; or (i) dissolution,
termination of existence, insolvency or business failure of Borrower or any
Guarantor; or appointment of a receiver, trustee or custodian, for all or any
part of the property of, assignment for the benefit of creditors by, or the
commencement of any proceeding by Borrower or any Guarantor under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or (j) the commencement of any proceeding against Borrower
or any Guarantor under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute
of any jurisdiction, now or in the future in effect, which is not cured by the
dismissal thereof within 45 days after the date commenced; or (k) revocation
or termination of, or limitation or denial of liability upon, any guaranty of
the Obligations or any attempt to do any of the foregoing; or (l) revocation
or termination of, or limitation or denial of liability upon, any pledge of
any certificate of deposit, securities or other property or asset pledged by
any third party to secure any or all of the Obligations, or any attempt to do
any of the foregoing, or commencement of proceedings by or against any such
third party under any bankruptcy or insolvency law; or (m) Borrower makes any
payment on account of any indebtedness or obligation which has been
subordinated to the Obligations other than as permitted in the applicable
subordination agreement, or if any Person who has subordinated such
indebtedness or obligations terminates or in any way limits or terminates its
subordination agreement; or (n) there shall be a Change of Control, without
the prior written consent of Greyrock; or (o) Borrower shall generally not pay
its debts as they become due, or Borrower shall conceal, remove or transfer
any part of its property, with intent to hinder, delay or defraud its
creditors, or make or suffer any transfer of any of its property which may be
fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (p)
there shall be a material adverse change in Borrower's business or financial
condition. Greyrock may cease making any Loans hereunder during any of the
above cure periods, and thereafter if an Event of Default has occurred.
7.2 Remedies. Upon the occurrence and during the continuance of any Event
of Default, and at any time thereafter, Greyrock, at its option, and without
notice or demand of any kind (all of which are hereby expressly waived by
Borrower), may do any one or more of the following: (a) Cease making Loans or
otherwise extending credit to Borrower under this Agreement or any other
document or agreement; (b) Accelerate and declare all or any part of the
Obligations to be immediately due, payable, and performable, notwithstanding any
deferred or installment payments allowed by any instrument evidencing or
relating to any Obligation; (c) Take possession of any or all of the Collateral
wherever it may be found, and for that purpose Borrower hereby authorizes
Greyrock without judicial process to enter onto any of Borrower's premises
without interference to search for, take possession of, keep, store, or remove
any of the Collateral, and remain on the premises or cause a custodian to remain
on the premises in exclusive control thereof, without charge for so long as
Greyrock deems it reasonably necessary in order to complete the enforcement of
its rights under this Agreement or any other agreement; provided, however, that
should Greyrock seek to take possession of any of the Collateral by Court
process, Borrower hereby irrevocably waives: (i) any bond and any surety or
security relating thereto required by any statute, court rule or otherwise as an
incident to such possession; (ii) any demand for possession prior to the
commencement of any suit or action to recover possession thereof; and (iii) any
requirement that Greyrock retain possession of, and not dispose of, any such
Collateral until after trial or final judgment; (d) Require Borrower to assemble
any or all of the Collateral and make it available to Greyrock at places
designated by Greyrock which are reasonably convenient to Greyrock and Borrower
within the state where such Collateral is located, and to remove the Collateral
to such locations as Greyrock may deem advisable; (e) Complete the processing,
manufacturing or repair of any Collateral prior to a disposition thereof and,
for such purpose and for the purpose of removal, Greyrock shall have the right
to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all
other property without charge; (f) Collect, receive, dispose of and realize upon
any Investment Property, including withdrawal of any and all funds from any
securities accounts; (g) Sell, lease or otherwise dispose of any of the
Collateral, in its condition at the time Greyrock obtains possession of it or
after further manufacturing, processing or repair, at one or more public and/or
private sales, in lots or in bulk, for cash, exchange or other property, or on
credit, and to adjourn any such sale from time to time without notice other than
oral announcement at the time scheduled for sale. Greyrock shall have the right
to conduct such disposition on Borrower's premises without charge, for such time
or times as Greyrock deems reasonable, or on Greyrock's
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premises, or elsewhere and the Collateral need not be located at the place of
disposition. Greyrock may directly or through any affiliated company purchase
or lease any Collateral at any such public disposition, and if permissible
under applicable law, at any private disposition. Any sale or other
disposition of Collateral shall not relieve Borrower of any liability Borrower
may have if any Collateral is defective as to title or physical condition or
otherwise at the time of sale; (h) Demand payment of, and collect any
Receivables and General Intangibles comprising Collateral and, in connection
therewith, Borrower irrevocably authorizes Greyrock to endorse or sign
Borrower's name on all collections, receipts, instruments and other documents,
to take possession of and open mail addressed to Borrower and remove therefrom
payments made with respect to any item of the Collateral or proceeds thereof,
and, in Greyrock's sole discretion, to grant extensions of time to pay,
compromise claims and settle Receivables, General Intangibles and the like for
less than face value; and (i) Demand and receive possession of any of
Borrower's federal and state income tax returns and the books and records
utilized in the preparation thereof or referring thereto. Borrower recognizes
that Greyrock may be unable to make a public sale of any or all of the
Investment Property, by reasons of prohibitions contained in applicable
securities laws or otherwise, and expressly agrees that a private sale to a
restricted group of purchasers for investment and not with a view to any
distribution thereof shall be considered a commercially reasonable sale. All
reasonable attorneys' fees, expenses, costs, liabilities and obligations
incurred by Greyrock with respect to the foregoing shall be added to and
become part of the Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of the
Obligations.
7.3 Standards for Determining Commercial Reasonableness. Borrower and
Greyrock agree that a sale or other disposition (collectively, sale) of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general,
non-specific terms; (iii) The sale is conducted at a place designated by
Greyrock, with or without the Collateral being present; (iv) The sale commences
at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in
cash or by cashier's check or wire transfer is required; (vi) With respect to
any sale of any of the Collateral, Greyrock may (but is not obligated to) direct
any prospective purchaser to ascertain directly from Borrower any and all
information concerning the same. Greyrock shall be free to employ other methods
of noticing and selling the Collateral, in its discretion, if they are
commercially reasonable.
7.4 Power of Attorney. Upon the occurrence and during the continuance of
any Event of Default, without limiting Greyrock's other rights and remedies,
Borrower grants to Greyrock an irrevocable power of attorney coupled with an
interest, authorizing and permitting Greyrock (acting through any of its
employees, attorneys or agents) at any time, at its option, but without
obligation, with or without notice to Borrower, and at Borrower's expense, to do
any or all of the following, in Borrower's name or otherwise, but Greyrock
agrees to exercise the following powers in a commercially reasonable manner: (a)
Execute on behalf of Borrower any documents that Greyrock may, in its sole
discretion, deem advisable in order to perfect and maintain Greyrock's security
interest in the Collateral, or in order to exercise a right of Borrower or
Greyrock, or in order to fully consummate all the transactions contemplated
under this Agreement, and all other present and future agreements; (b) Execute
on behalf of Borrower any document exercising, transferring or assigning any
option to purchase, sell or otherwise dispose of or to lease (as lessor or
lessee) any real or personal property which is part of Greyrock's Collateral or
in which Greyrock has an interest; (c) Execute on behalf of Borrower, any
invoices relating to any Receivable, any draft against any Account Debtor and
any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice
of Lien, claim of mechanic's, materialman's or other lien, or assignment or
satisfaction of mechanic's, materialman's or other lien; (d) Take control in any
manner of any cash or non-cash items of payment or proceeds of Collateral;
endorse the name of Borrower upon any instruments, or documents, evidence of
payment or Collateral that may come into Greyrock's possession; (e) Endorse all
checks and other forms of remittances received by Greyrock; (f) Pay, contest or
settle any lien, charge, encumbrance, security interest and adverse claim in or
to any of the Collateral, or any judgment based thereon, or otherwise take any
action to terminate or discharge the same; (g) Grant extensions of time to pay,
compromise claims and settle Receivables and General Intangibles for less than
face value and execute all releases and other documents in connection therewith;
(h) Pay any sums required on account of Borrower's taxes or to secure the
release of any liens therefor, or both; (i) Settle and adjust, and give releases
of, any insurance claim that relates to any of the Collateral and obtain payment
therefor; (j) Instruct any third party having custody or control of any books or
records belonging to, or relating to, Borrower to give Greyrock the same rights
of access and other rights with respect thereto as Greyrock has under this
Agreement; (k) Execute and deliver to any securities intermediary or other
Person any entitlement order, account control agreement or other notice,
document or instrument with respect to any Investment Property, and (l) Take any
action or pay any sum required of Borrower pursuant to this Agreement and any
other present or future agreements. Any and all reasonable sums paid and any and
all reasonable costs,
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expenses, liabilities, obligations and reasonable attorneys' fees incurred by
Greyrock with respect to the foregoing shall be added to and become part of
the Obligations, shall be payable on demand, and shall bear interest at a rate
equal to the highest interest rate applicable to any of the Obligations. In no
event shall Greyrock's rights under the foregoing power of attorney or any of
Greyrock's other rights under this Agreement be deemed to indicate that
Greyrock is in control of the business, management or properties of Borrower.
7.5 Application of Proceeds. All proceeds realized as the result of any
sale or other disposition of the Collateral shall be applied by Greyrock first
to the reasonable costs, expenses, liabilities, obligations and attorneys' fees
incurred by Greyrock in the exercise of its rights under this Agreement, second
to the interest due upon any of the Obligations, and third to the principal of
the Obligations, in such order as Greyrock shall determine in its sole
discretion. Any surplus shall be paid to Borrower or other persons legally
entitled thereto; Borrower shall remain liable to Greyrock for any deficiency.
If Greyrock, in its sole discretion, directly or indirectly enters into a
deferred payment or other credit transaction with any purchaser at any sale of
Collateral, Greyrock shall have the option, exercisable at any time, in its sole
discretion, of either reducing the Obligations by the principal amount of
purchase price or deferring the reduction of the Obligations until the actual
receipt by Greyrock of the cash therefor.
7.6 Remedies Cumulative. In addition to the rights and remedies set forth
in this Agreement, Greyrock shall have all the other rights and remedies
accorded a secured party under the California Uniform Commercial Code and under
all other applicable laws, and under any other instrument or agreement now or in
the future entered into between Greyrock and Borrower, and all of such rights
and remedies are cumulative and none is exclusive. Exercise or partial exercise
by Greyrock of one or more of its rights or remedies shall not be deemed an
election, nor bar Greyrock from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Greyrock to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been fully paid and performed.
8. Definitions. As used in this Agreement, the following terms have the
following meanings:
Account Debtor means the obligor on a Receivable.
Affiliate means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
Agreement and this Agreement means this Loan and Security Agreement and all
modifications and amendments thereto, extensions thereof, and replacements
therefor.
Business Day means a day on which Greyrock is open for business.
Change of Control shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly,
of more than 49% of the total voting power of all classes of stock then
outstanding of Borrower normally entitled to vote in the election of directors.
Code means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
Collateral has the meaning set forth in Section 2.1 above.
Default means any event which with notice or passage of time or both, would
constitute an Event of Default.
Deposit Account has the meaning set forth in Section 9105 of the Code.
Eligible Receivables means unconditional Receivables arising in the
ordinary course of Borrower's business from the completed sale of goods or
rendition of services, which Greyrock, in its sole judgment, shall deem eligible
for borrowing, based on such considerations as Greyrock may from time to time
deem appropriate; provided, however, that the manner in which Greyrock
determines what constitutes Eligible Receivables shall be consistent with how
Greyrock determines what constitutes eligible receivables with respect to its
other customers holding similar types of receivables.
Equipment means all of Borrower's present and hereafter acquired machinery,
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
Event of Default means any of the events set forth in Section 7.1 of this
Agreement.
Fundamental Change means any acquisition, merger, consolidation,
reorganization, or recapitalization, or reclassification of a Person's capital
stock, or liquidation, winding up, or dissolution of such Person, or conveyance,
sale, assignment, lease, transfer, or otherwise disposition of, in one
transaction or a series of transactions, all or any substantial part of such
Person's business, property, or assets, whether now owned or hereafter acquired,
or the acquisition by purchase or otherwise of all or substantially
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all of the properties, assets, stock, or other evidence of beneficial
ownership of any other Person.
General Intangibles means all general intangibles of Borrower, whether now
owned or hereafter created or acquired by Borrower, including, without
limitation, all chooses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Greyrock, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including life insurance, key man insurance,
credit insurance, liability insurance, property insurance and other insurance),
tax refunds and claims, computer programs, discs, tapes and tape files, claims
under guaranties, security interests or other security held by or granted to
Borrower, all rights to indemnification and all other intangible property of
every kind and nature (other than Receivables).
Guarantor means any Person who has guaranteed any of the Obligations.
Inventory means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including all raw materials,
work in process, finished goods and goods in transit), and all materials and
supplies of every kind, nature and description which are or might be used or
consumed in Borrower's business or used in connection with the manufacture,
packing, shipping, advertising, selling or finishing of such goods, merchandise
or other personal property, and all warehouse receipts, documents of title and
other documents representing any of the foregoing.
Investment Property means any and all investment property of Borrower,
including 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, and whether now existing or hereafter acquired or arising.
Liquidity Event means any offering of a debt or equity security by Borrower
in an aggregate amount in excess of $15,000,000, or any capital contribution or
additional paid in capital is received by Borrower in an aggregate amount in
excess of $15,000,000.
Obligations means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Greyrock, whether evidenced by this Agreement or any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Greyrock in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, loan fees,
termination fees, minimum interest charges and any other sums chargeable to
Borrower under this Agreement or under any other present or future document,
instrument or agreement between Borrower and Greyrock relating to this Agreement
or the Loans.
Permitted Liens means the following: (i) purchase money security interests
in specific items of Equipment; (ii) leases of specific items of Equipment;
(iii) liens for taxes not yet payable; (iv) additional security interests and
liens which are subordinate to the security interest in favor of Greyrock and
are consented to in writing by Greyrock (which consent shall not be unreasonably
withheld); (v) security interests being terminated substantially concurrently
with this Agreement; (vi) liens of materialmen, mechanics, warehousemen,
carriers, or other similar liens arising in the ordinary course of business and
securing obligations which are not delinquent; (vii) liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. Greyrock will have
the right to require, as a condition to its consent under subparagraph (iv)
above, that the holder of the additional security interest or lien sign an
intercreditor agreement on Greyrock's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of Greyrock,
and agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
Person means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
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Prime Rate means the variable rate of interest, per annum, most recently
announced by Bank of America, N.A., as its "prime rate" or "reference rate," as
the case may be, irrespective of whether such announced rate is the best rate
available from such financial institution. If the Prime Rate, as defined, is
unavailable, "Prime Rate" shall mean the highest of the prime rates published in
the Wall Street Journal, as the base rate on corporate loans at large U.S. money
center commercial banks.
Receivables means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, documents and all other forms of obligations
at any time owing to Borrower, all guaranties and other security therefor, all
merchandise returned to or repossessed by Borrower, and all rights of stoppage
in transit and all other rights or remedies of an unpaid vendor, lienor or
secured party.
Trailing Recurring Revenue means the sum of the gross revenue generated by
Borrower in the ordinary course of business (and pursuant to service or
subscription agreements acceptable to Greyrock in Greyrock's discretion) during
the most recent three (3) calendar month period prior to the date of
determination, as determined by Greyrock in Greyrock's reasonable discretion.
Other Terms. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 Interest Computation. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Greyrock
(including proceeds of Receivables and payment of the Obligations in full) shall
be deemed applied by Greyrock on account of the Obligations three Business Days
after receipt by Greyrock of immediately available funds. Greyrock shall not,
however, be required to credit Borrower's account for the amount of any item of
payment which is unsatisfactory to Greyrock in its discretion, and Greyrock may
charge Borrower's Loan account for the amount of any item of payment which is
returned to Greyrock unpaid.
9.2 Application of Payments. All payments with respect to the Obligations
may be applied, and in Greyrock's sole discretion reversed and re-applied, to
the Obligations, in such order and manner as Greyrock shall determine in its
sole discretion.
9.3 Charges to Account. Greyrock may, in its discretion, require that
Borrower pay monetary Obligations in cash to Greyrock, or charge them to
Borrower's Loan account, in which event they will bear interest at the same rate
applicable to the Loans.
9.4 Monthly Accountings. Greyrock shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Greyrock), unless Borrower
notifies Greyrock in writing to the contrary within sixty days after each
account is rendered, describing the nature of any alleged errors or admissions.
9.5 Notices. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Greyrock or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. All notices shall be deemed to have been given upon
delivery in the case of notices personally delivered, or at the expiration of
one business day following delivery to the private delivery service, or two
business days following the deposit thereof in the United States mail, with
postage prepaid.
9.6 Severability. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 Integration. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Greyrock and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
no oral understandings, representations or agreements between the parties which
are not set forth in this Agreement or in other written agreements signed by the
parties in connection herewith.
9.8 Waivers. The failure of Greyrock at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between Borrower and Greyrock shall not waive
or diminish any right of Greyrock later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Greyrock shall be deemed to have been
waived by any act or knowledge of Greyrock or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Greyrock and
delivered to Borrower. Borrower waives demand, protest,
-11-
<PAGE>
notice of protest and notice of default or dishonor, notice of payment and
nonpayment, release, compromise, settlement, extension or renewal of any
commercial paper, instrument, account, General Intangible, document or
guaranty at any time held by Greyrock on which Borrower is or may in any way
be liable, and notice of any action taken by Greyrock, unless expressly
required by this Agreement.
9.9 Amendment. The terms and provisions of this Agreement may not be waived
or amended, except in a writing executed by Borrower and a duly authorized
officer of Greyrock.
9.10 Time of Essence. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.
9.11 Attorneys Fees and Costs. Borrower shall reimburse Greyrock for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Greyrock, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Greyrock incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; enforce, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Greyrock's security interest in, the Collateral; and otherwise represent
Greyrock in any litigation relating to Borrower. If either Greyrock or Borrower
files any lawsuit against the other predicated on a breach of this Agreement,
the prevailing party in such action shall be entitled to recover its reasonable
costs and attorneys' fees, including (but not limited to) reasonable attorneys'
fees and costs incurred in the enforcement of, execution upon or defense of any
order, decree, award or judgment. All attorneys' fees and costs to which
Greyrock may be entitled pursuant to this Paragraph shall immediately become
part of Borrower's Obligations, shall be due on demand, and shall bear interest
at a rate equal to the highest interest rate applicable to any of the
Obligations.
9.12 Benefit of Agreement. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Greyrock; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Greyrock, and any prohibited
assignment shall be void. No consent by Greyrock to any assignment shall release
Borrower from its liability for the Obligations.
9.13 Joint and Several Liability. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.14 Limitation of Actions. Any claim or cause of action by Borrower
against Greyrock, its directors, officers, employees, agents, accountants or
attorneys, based upon, arising from, or relating to this Loan Agreement, or any
other present or future document or agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, occurred, done, omitted or suffered to be
done by Greyrock, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of an
action or proceeding in a court of competent jurisdiction by the filing of a
complaint within one year after the first act, occurrence or omission upon which
such claim or cause of action, or any part thereof, is based, and the service of
a summons and complaint on an officer of Greyrock, or on any other person
authorized to accept service on behalf of Greyrock, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Greyrock in its sole discretion. This
provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.15 Paragraph Headings; Construction. Paragraph headings are only used in
this Agreement for convenience. Borrower and Greyrock acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Greyrock or Borrower under any
rule of construction or otherwise.
9.16 Governing Law; Jurisdiction; Venue. This Agreement and all acts and
transactions hereunder and all rights and obligations of Greyrock and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Greyrock to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Greyrock's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Los Angeles County;
(ii) consents
-12-
<PAGE>
to the jurisdiction and venue of any such court and consents to service of
process in any such action or proceeding by personal delivery or any other
method permitted by law; and (iii) waives any and all rights Borrower may have
to object to the jurisdiction of any such court, or to transfer or change the
venue of any such action or proceeding.
9.17 Mutual Waiver of Jury Trial. Borrower and Greyrock each hereby waive
the right to trial by jury in any action or proceeding based upon, arising out
of, or in any way relating to, this Agreement or any other present or future
instrument or agreement between Greyrock and Borrower, or any conduct, acts or
omissions of Greyrock or Borrower or any of their directors, officers,
employees, agents, attorneys or any other persons affiliated with Greyrock or
Borrower, in all of the foregoing cases, whether sounding in contract or tort or
otherwise.
Borrower:
PILOT NETWORK SERVICES, INC.
By /s/ M. Marketta Silvera
-----------------------------------
President or Vice President
By /s/ William C. Leetham
-----------------------------------
Secretary or Ass't Secretary
Greyrock:
Greyrock Capital,
a Division of Banc of America Commercial Finance Corporation
By /s/ Lisa Nagano
-----------------------------------
Title Senior Vice President
--------------------------------
-13-
<PAGE>
Schedule to
Loan and Security Agreement
Borrower: Pilot Network Services, Inc.
Address: 1080 Marina Village Parkway
Alameda, California 94501
Date: November 9, 1999
This Schedule is an integral part of the Loan and Security Agreement between
Greyrock Capital, a Division of Banc of America Commercial Finance Corporation
(Greyrock) and the above-borrower (Borrower) of even date.
================================================================================
1. Credit Limit
(Section 1.1): Total Credit Limit: $8,000,000
Revolving Credit Limit: An amount not to exceed the
lesser of (1) or (2) below:
(1) $5,000,000 at any one time outstanding; or
(2) an amount equal to the sum of (a) 80% of the
amount of Borrower's Eligible Receivables (as
defined in Section 8 above) consisting of
"installation" Eligible Receivables, plus
(without----duplication of clause (a)) (b) 100% of
Trailing Recurring Revenue (and defined in Section
8 above).
Term Loan Limit: $3,000,000
================================================================================
2. Interest.
Interest Rate (Section 1.2):
The interest rate in effect throughout each calendar
month during the term of this Agreement shall be the
highest Prime Rate in effect during such month, plus
2% per annum, provided that the interest rate in
effect in each month shall not be less than 8% per
annum, and provided that the interest charged for each
month shall be a minimum of $15,000.00, regardless of
the amount of the Obligations
<PAGE>
outstanding. Interest shall be calculated on the basis
of a 360-day year for the actual number of days
elapsed. Prime Rate has the meaning set forth in
Section 8 above.
================================================================================
3. Fees (Section 1.3/Section 6.2):
Loan Fee: $80,000.00, payable concurrently herewith.
Termination Fee: None
NSF Check Charge: $15.00 per item.
Wire Transfers: $15.00 per transfer.
================================================================================
4. Maturity Date
(Section 6.1): October 31, 2000, subject to automatic renewal
as provided in Section 6.1 above, and early
termination as provided in Section 6.2 above.
================================================================================
5. Reporting.
(Section 5.2):
Borrower shall provide Greyrock with the
following:
1. Annual financial statements, as soon as
available, and in any event within 90 days
following the end of Borrower's fiscal year,
certified by independent certified public
accountants acceptable to Greyrock.
2. Quarterly unaudited financial statements, as
soon as available, and in any event within
30 days after the end of each fiscal quarter
of Borrower.
3. Monthly unaudited financial statements, as
soon as available, and in any event within
30 days after the end of each month.
4. Monthly Receivable agings, aged by invoice
date, within 10 days after the end of each
month.
5. Monthly accounts payable agings, aged by
invoice date, and outstanding or held check
registers within 10 days after the end of
each month.
6. Monthly perpetual inventory reports for the
Inventory valued on a first-in, first-out
basis at the lower of cost or market (in
accordance with generally accepted
accounting principles) or such other
inventory reports as are reasonably
requested by Greyrock, all within 30 days
after the end of each month.
<PAGE>
================================================================================
6. Borrower Information:
Prior Names of
Borrower
(Section 3.2): None
Prior Trade
Names of Borrower
(Section 3.2): None
Existing Trade
Names of Borrower
(Section 3.2): None
Other Locations and
Addresses (Section 3.3): (1) 2450 Mariner Square Loop,
Alameda, CA 94501
(2) 222 N. Sepulveda Blvd.,
Suite 450, El Segundo, CA 90245
(3) 111 Pavonia Avenue, Suite 320,
Jersey City , NJ 07310-1755
(4) 2100 Golf Road,
Suites 410 and 480,
Rolling Meadows, IL 60008-4232
(5) One South Street, Suite 840,
Baltimore, MD 21202
(6) 300 Bent Street, Cambridge MA
(7) 60 Lombard Street, London,
United Kingdom EC3V9EA
(8) 6 Harbour Exchange, London,
United Kingdom E149GE
Material Adverse
Litigation (Section 3.10): None
================================================================================
7. Other Covenants: Borrower shall at all times comply
with all of the following additional
covenants:
(1) Pledge. Borrower shall concurrently execute and deliver to Greyrock a
Pledge Agreement, on Greyrock's standard form, whereby Borrower shall
grant to Greyrock a security interest in 65% of its interest in the issued
outstanding capital stock directly or indirectly owned or controlled by
Borrower as additional collateral for the Obligations. Such Pledge
Agreement shall continue in full force and effect throughout the term of
this Loan Agreement and so long as any portion of the Obligations remains
outstanding.
(2) Patent and Trademark Security Agreement. Borrower shall concurrently
execute and deliver to Greyrock a Patent and Trademark Security Agreement,
on Greyrock's standard form, whereby Borrower shall grant to Greyrock a
security interest in all of its trademarks, patents, and such rights
<PAGE>
and interests capable of being protected as trademarks or patents, as
additional collateral for the Obligations. Such Patent and Trademark
Security Agreement shall continue in full force and effect throughout the
term of this Loan Agreement and so long as any portion of the Obligations
remains outstanding.
(3) Security Agreement in Copyrighted Works. Borrower shall concurrently
execute and deliver to Greyrock a Security Agreement in Copyrighted Works,
on Greyrock's standard form, whereby Borrower shall grant to Greyrock a
security interest in all of its copyrights and such rights and interests
capable of being protected as copyrights, as additional collateral for the
Obligations. Such Security Agreement in Copyrighted Works shall continue
in full force and effect throughout the term of this Loan Agreement and so
long as any portion of the Obligations remains outstanding.
(4) Warrants. Borrower shall concurrently execute and deliver to Greyrock a
Warrant for the purchase up to 121,212 shares of Borrower at a price of
$8.25 per share for a five-year period ending on the fifth anniversary of
this Agreement, and within 60 days after the closing date, an amendment to
that certain Amended and Restated Investors' Rights Agreement dated as of
March 31, 1997 (the "Investors' Rights Agreement") whereby Greyrock is
added as a party to the Investors' Rights Agreement with respect to the
Warrant, all in form and substance reasonably satisfactory to Greyrock.
Borrower: Greyrock:
PILOT NETWORK SERVICES, INC. GREYROCK CAPITAL,
a Division of Banc of America Commercial
Finance Corporation
By /s/ M. Marketta Silvera
----------------------------------- By Lisa Nagano
President or Vice President -------------------------------------
Title Senior Vice President
By /s/ William C. Leetham ----------------------------------
------------------------------------
Secretary or Ass't Secretary
<PAGE>
EXHIBIT 10.5
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
--------------------
WARRANT to purchase stock
Warrant to Purchase 121,212 Shares of Issue Date: November 9, 1999
the Common Stock of Pilot Network Expiration Date: November 9, 2004
Services, Inc. Initial Exercise Price: $8.25 per share
THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other
good and valuable consideration, GREYROCK CAPITAL, a Division of Banc of America
Commercial Finance Corporation ("Holder") is entitled to purchase the number of
fully paid and non-assessable shares of common stock (the "Shares") of Pilot
Network Services, Inc., a Delaware corporation (the "Company") at the initial
exercise price per Share (the "Warrant Price") all as set forth above and as
adjusted pursuant to Article 2 of this Warrant, subject to the provisions and
upon the terms and conditions set forth in this Warrant.
ARTICLE 1. EXERCISE.
1.1 Method of Exercise. This Warrant is exercisable, in whole or in part,
at any time and from time to time on or before the Expiration Date set forth
above. Holder may exercise this Warrant by delivering a duly executed Notice of
Exercise in substantially the form attached as Appendix 1 to the principal
office of the Company. Unless Holder is exercising the conversion right set
forth in Section 1.2, Holder shall also deliver to the Company a check for the
aggregate Warrant Price for the Shares being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be the
closing price of the Shares (or the closing price of the Company's stock into
which the Shares are convertible) reported for the business day immediately
before Holder delivers its Notice of Exercise to the Company.
1.3 Delivery of Certificate and New Warrant. Promptly after Holder exercises
or converts this Warrant, the Company shall deliver to Holder certificates for
the Shares acquired and, if this Warrant has not been fully exercised or
converted and has not expired, a new Warrant representing the Shares not so
acquired.
1.4 Replacement of Warrants. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, on delivery of an indemnity
agreement reasonably satisfactory in form and amount to the Company or, in the
case of mutilation, on surrender and cancellation of this Warrant, the Company
at its expense shall execute and deliver, in lieu of this Warrant, a new warrant
of like tenor.
1.5 Repurchase on Sale, Merger or Consolidation of the Company.
1.5.1 "Acquisition". For the purpose of this Warrant, "Acquisition" means
any sale, license, or other disposition of all or substantially all of the
assets of the Company, or any reorganization, consolidation, or merger of the
Company where the holders of the Company's securities before the transaction
beneficially own less than 50% of the outstanding voting securities of the
surviving entity after the transaction.
1.5.2 Assumption of Warrant. If upon the closing of any Acquisition the
successor entity assumes the obligations of this Warrant, then this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly.
1.5.3 Nonassumption. If upon the closing of any Acquisition the successor
entity does not assume the obligations of this Warrant and Holder has not
otherwise exercised this Warrant in full, then the unexercised portion of this
Warrant shall be deemed to have been automatically converted pursuant to Section
1.2 and thereafter Holder shall participate in the acquisition on the same terms
as other holders of the same class of securities of the Company.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common
-1-
<PAGE>
Greyrock Capital Appendix 1
- --------------------------------------------------------------------------------
stock into a greater amount of common stock, or, if the Shares are securities
other than common stock, subdivides the Shares in a transaction that increases
the amount of common stock into which the Shares are convertible, then upon
exercise of this Warrant, for each Share acquired, Holder shall receive,
without cost to Holder, the total number and kind of securities to which
Holder would have been entitled had Holder owned the Shares of record as of
the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any reclassification,
exchange, substitution, or other event that results in a change of the number
and/or class of the securities issuable upon exercise or conversion of this
Warrant, Holder shall be entitled to receive, upon exercise or conversion of
this Warrant, the number and kind of securities and property that Holder would
have received for the Shares if this Warrant had been exercised immediately
before such reclassification, exchange, substitution, or other event. Such an
event shall include any automatic conversion of the outstanding or issuable
securities of the Company of the same class or series as the Shares to common
stock pursuant to the terms of the Company's Certificate of Incorporation upon
the closing of a registered public offering of the Company's common stock. The
Company or its successor shall promptly issue to Holder a new Warrant for such
new securities or other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Article 2 including, without limitation, adjustments to the
Warrant Price and to the number of securities or property issuable upon exercise
of the new Warrant. The provisions of this Section 2.2 shall similarly apply to
successive reclassifications, exchanges, substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 No Impairment. The Company shall not, by amendment of its Certificate of
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, 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 under this Warrant by the Company, but shall at all times
in good faith assist in carrying out of all the provisions of this Article 2 and
in taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of Shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
2.5 Fractional Shares. No fractional Shares shall be issuable upon exercise
or conversion of the Warrant and the number of Shares to be issued shall be
rounded down to the nearest whole Share. If a fractional share interest arises
upon any exercise or conversion of the Warrant, the Company shall eliminate such
fractional share interest by paying Holder an amount computed by multiplying the
fractional interest by the fair market value of a full Share.
2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant Price,
the Company at its expense shall promptly compute such adjustment, and furnish
Holder with a certificate of its Chief Financial Officer setting forth such
adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company hereby represents and
warrants to the Holder as follows:
(a) Shares which may be issued upon the exercise of the purchase
right represented by this Warrant shall, upon issuance, be duly authorized,
validly issued, fully paid and non-assessable, and free of any liens and
encumbrances except for restrictions on transfer provided for herein or under
applicable federal and state securities laws.
(b) The capitalization of the Company at September 30, 1999 was as
set forth on Schedule 3.1(b) attached hereto, and on the issue date hereof the
Shares shall represent no less than 0.74% of the Company's common stock on a
fully diluted basis.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (1) at least 10 business days prior written notice of the date on which a
record will be taken for such dividend, distribution, or subscription rights
(and specifying the date on which the holders of common stock will be entitled
thereto) or for
-2-
<PAGE>
Greyrock Capital Appendix 1
- --------------------------------------------------------------------------------
determining rights to vote, if any, in respect of the matters referred to in
(c) and (d) above; (2) in the case of the matters referred to in (c) and (d)
above, the same notice that is provided to stockholders of the Company
including when the same will take place (and specifying the date on which the
holders of common stock will be entitled to exchange their common stock for
securities or other property deliverable upon the occurrence of such event);
and (3) in the case of the matter referred to in (e) above, the same notice as
is given to the holders of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant and/or any
of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all notices or other written communications to the
shareholders of the Company, (b) unless the Company is subject to and in
compliance with the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), within ninety (90) days after the end of
each fiscal year of the Company, the annual audited financial statements of the
Company certified by independent public accountants of recognized standing and
(c) unless the Company is subject to and in compliance with the reporting
requirements of the Exchange Act, within forty-five (45) days after the end of
each of the first three quarters of each fiscal year, the Company's quarterly,
unaudited financial statements.
3.4 Registration Rights. The Company agrees to use its best efforts to
obtain within sixty days after the date hereof the requisite consent of the
holders of registrable stock under the Company's Existing Rights Agreement (as
defined below) necessary to amend such agreement to grant piggyback registration
rights to Holder with respect to the Shares on the same terms and conditions as
are generally applicable to the other holders of registrable stock thereunder.
For purposes of this Section 3.4, the "Company's Existing Rights Agreement"
shall mean that certain Amended and Restated Investors' Rights Agreement, dated
as of March 31, 1997, among the Company and the investors listed on Schedule I
thereto, as amended by that certain Amendment to Investors' Rights Agreement
dated as of December 22, 1997.
ARTICLE 4. MISCELLANEOUS.
-------------
4.1 This Warrant and the Shares (and the securities issuable, directly or
indirectly, upon conversion of the Shares, if any) shall be imprinted with a
legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL
THAT SUCH REGISTRATION IS NOT REQUIRED.
4.2 Compliance with Securities Laws on Transfer. This Warrant and the Shares
issuable upon exercise of this Warrant (and the securities issuable, directly or
indirectly, upon conversion of the Shares, if any) may not be transferred or
assigned in whole or in part without compliance with applicable federal and
state securities laws by the transferor and the transferee (including, without
limitation, the delivery of investment representation letters and legal opinions
reasonably satisfactory to the Company, if reasonably requested by the Company).
The Company shall not require Holder to provide an opinion of counsel if the
transfer is to an affiliate of Holder or if there is no material question as to
the availability of current information as referenced in Rule 144(c), Holder
represents that it has complied with Rule 144(d) and (e) the selling broker
represents that it has complied with Rule 144(f), and the Company is provided
with a copy of Holders notice of proposed sale.
4.3 Transfer Procedure. Subject to the provisions of Section 4.1 and 4.2,
Holder may transfer all or part of this Warrant or the Shares issuable upon
exercise of this Warrant (or the securities issuable, directly or indirectly,
upon conversion of the Shares, if any) by giving the Company notice of the
portion of the Warrant being transferred setting forth the name, address and
taxpayer identification number of the transferee and surrendering this Warrant
to the Company for reissuance to the transferee(s) (and Holder if applicable).
Unless the Company is filing financial information with the SEC pursuant to the
Exchange Act, the Company shall have the right to refuse to transfer any portion
of this Warrant to any person who directly competes with the Company.
4.4 Notices. All notices and other communications from the Company to the
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
4.5 Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.6 Attorneys' Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.7 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
-3-
<PAGE>
Greyrock Capital Appendix 1
- --------------------------------------------------------------------------------
PILOT NETWORK SERVICES, INC.
By /s/ M. Marketta Silvera
-----------------------
Name: M. Marketta Silvera
Title: C.E.O.
-4-
<PAGE>
Greyrock Capital Appendix 1
- --------------------------------------------------------------------------------
Appendix 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase ____________ shares of the
Common Stock of Pilot Network Services, Inc. pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to _______ of the Shares covered by the
Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in the
name of the undersigned or in such other name as is specified below:
__________________________
(NAME)
__________________________
__________________________
(ADDRESS)
3. The undersigned represents it is acquiring the shares solely for its own
account and not as a nominee for any other party and not with a view toward the
resale or distribution thereof except in compliance with applicable securities
laws.
_____________________________________
(Signature)
_____________________________________
(Date)
-5-
<PAGE>
EXHIBIT 10.6
PATENT AND TRADEMARK SECURITY AGREEMENT
This PATENT AND TRADEMARK SECURITY AGREEMENT ("Agreement"), dated as of November
9, 1999, is entered into between PILOT NETWORK SERVICES, INC., a Delaware
corporation ("Grantor"), which has a mailing address at 1080 Marina Village
Parkway, Alameda, California 94501, and GREYROCK CAPITAL, a Division of Banc of
America Commerical Finance Corporation ("Greyrock"), which has a mailing address
at 10880 Wilshire Blvd., Suite 1850, Los Angeles, CA 90024.
RECITALS
A. Grantor and Greyrock are, contemporaneously herewith, entering into
that certain Loan and Security Agreement ("Loan Agreement") and other
instruments, documents and agreements contemplated thereby or related thereto
(collectively, together with the Loan Agreement, the "Loan Documents"); and
B. Grantor is the owner of certain intellectual property, identified
below, in which Grantor is granting a security interest to Greyrock.
NOW THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth and for other
good and valuable consideration, the parties hereto mutually agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. The following terms, as used in this Agreement, have the
following meanings:
"Code" means the California Uniform Commercial Code, as amended and
----
supplemented from time to time, and any successor statute.
"Collateral" means all of the following, whether now owned or
----------
hereafter acquired:
(i) Each of the trademarks and rights and interest which are
capable of being protected as trademarks (including trademarks, service
marks, designs, logos, indicia, tradenames, corporate names, company names,
business names, fictitious business names, trade styles, and other source
or business identifiers, and applications pertaining thereto), which are
presently, or in the future may be, owned, created, acquired, or used
(whether pursuant to a license or otherwise) by Grantor, in whole or in
part, and all trademark rights with respect thereto throughout the world,
including all proceeds thereof (including license royalties and proceeds of
infringement suits), and rights to renew and extend such trademarks and
trademark rights;
(ii) Each of the patents and patent applications which are
presently, or
in the future may be, owned, issued, acquired, or used (whether
pursuant to a license or otherwise) by Grantor, in whole or in part, and
all patent rights with respect thereto throughout the world, including all
proceeds thereof (including license royalties and proceeds of infringement
suits), foreign filing rights, and rights to extend such patents and patent
rights;
1
<PAGE>
(iii) All of Grantor's right to the trademarks and trademark
registrations listed on Exhibit A attached hereto, as the same may be
---------
updated hereafter from time to time;
(iv) All of Grantor's right, title, and interest, in and to
the patents and patent applications listed on Exhibit B attached hereto, as
---------
the same may be updated hereafter from time to time;
(v) All of Grantor's right, title and interest to register
trademark claims under any state or federal trademark law or regulation of
any foreign country and to apply for, renew, and extend the trademark
registrations and trademark rights, the right (without obligation) to sue
or bring opposition or cancellation proceedings in the name of Grantor or
in the name of Greyrock for past, present, and future infringements of the
trademarks, registrations, or trademark rights and all rights (but not
obligations) corresponding thereto in the United States and any foreign
country;
(vi) All of Grantor's right, title, and interest in all
patentable inventions, and to file applications for patent under federal
patent law or regulation of any foreign country, and to request
reexamination and/or reissue of the patents, the right (without obligation)
to sue or bring interference proceedings in the name of Grantor or in the
name of Greyrock for past, present, and future infringements of the
patents, and all rights (but not obligations) corresponding thereto in the
United States and any foreign country;
(vii) the entire goodwill of or associated with the businesses
now or hereafter conducted by Grantor connected with and symbolized by any
of the aforementioned properties and assets;
(viii) All general intangibles relating to the foregoing and
all other intangible intellectual or other similar property of the Grantor
of any kind or nature, associated with or arising out of any of the
aforementioned properties and assets and not otherwise described above; and
(ix) All products and proceeds of any and all of the
foregoing (including, without limitation, license royalties and proceeds of
infringement suits) and, to the extent not otherwise included, all payments
under insurance, or any indemnity, warranty, or guaranty payable by reason
of loss or damage to or otherwise with respect to the Collateral.
"Obligations" means all obligations, liabilities, and indebtedness of
-----------
Grantor to Greyrock, whether direct, indirect, liquidated, or contingent, and
whether arising under this Agreement, the Loan Agreement, any other of the Loan
Documents, or otherwise, including all costs and expenses described in Section
9.8 hereof.
1.2 Construction. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, and the term "including" is not limiting. The words
"hereof," "herein," "hereby," "hereunder," and other similar terms refer to this
Agreement as a whole and not to any particular provision of this Agreement. Any
initially capitalized terms used but not defined herein shall have the meaning
set forth in the Loan Agreement. Any reference herein to any of the Loan
Documents includes any and all alterations, amendments, extensions,
modifications, renewals, or supplements thereto or thereof, as applicable.
Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against Greyrock or Grantor, whether under any rule of
construction or otherwise. On the contrary, this Agreement has been reviewed by
Grantor, Greyrock, and their respective counsel, and shall be construed and
interpreted according to the ordinary meaning of
2
<PAGE>
the words used so as to fairly accomplish the purposes and intentions of
Greyrock and Grantor. Headings have been set forth herein for convenience only,
and shall not be used in the construction of this Agreement.
2. GRANT OF SECURITY INTEREST.
To secure the complete and timely payment and performance of all
Obligations, and without limiting any other security interest Grantor has
granted to Greyrock, Grantor hereby grants, assigns, and conveys to Greyrock a
security interest in Grantor's entire right, title, an interest in and to the
Collateral.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS.
Grantor hereby represents, warrants, and covenants that:
3.1 Trademarks; Patents. A true and complete schedule setting forth all
federal and state trademark registrations owned or controlled by Grantor or
licensed to Grantor, together with a summary description and full information in
respect of the filing or issuance thereof and expiration dates is set forth on
Exhibit A; and a true and complete schedule setting forth all patent and patent
- ---------
applications owned or controlled by Grantor or licensed to Grantor, together
with a summary description and full information in respect of the filing or
issuance thereof and expiration dates is set forth Exhibit B.
---------
3.2 Validity; Enforceability. Each of the patents and trademarks is valid
and enforceable, and, except as disclosed to Greyrock, Grantor is not presently
aware of any past, present, or prospective claim by and third party that any of
the patents or trademarks are invalid or unenforceable, or to the best of
Grantor's knowledge that the use of any patents or trademarks violates the
rights of any third person, or of any basis for any such claims.
3.3 Title. Grantor is the sole and exclusive owner of the entire and
unencumbered right, title, and interest in and to each of the patents, patent
applications, trademarks, and trademark registrations, free and clear of any
liens, charges, and encumbrances, including pledges, assignments, licenses, shop
rights, and covenants by Grantor not to sue third persons, other than Permitted
Liens.
3.4 Notice. Grantor has used and will continue to use proper statutory
notice in connection with its use of each of the patents and trademarks.
3.5 Quality. Grantor has used and will continue to use consistent
standards of high quality (which may be consistent with Grantor's past practices
or industry standard) in the manufacture, sale, and delivery of products and
services sold or delivered under or in connection with the trademarks,
including, to the extent applicable, in the operation and maintenance of its
merchandising operations, and will continue to maintain the validity of all
trademarks that are in Grantor's reasonable business judgement necessary for the
continuance of its business as then conducted.
3.6 Perfection of Security Interest. Except for the filing of financing
statements in the appropriate governmental offices and filings with the United
States Patent and Trademark Office necessary to perfect the security interests
created hereunder, no authorization, approval, or other action by, and no notice
to or filing with, any governmental authority or regulatory body is required
either for the grant by Grantor of the security interest hereunder or for the
execution, delivery, or performance of this Agreement by Grantor or for the
perfection of or the exercise by Greyrock of its rights hereunder to the
Collateral in the United States.
3
<PAGE>
4. AFTER-ACQUIRED PATENT OR TRADEMARK RIGHTS.
If Grantor shall obtain rights to any new trademarks, any new patentable
inventions or become entitled to the benefit of any patent application or patent
for any reissue, division, or continuation, of any patent, the provisions of
this Agreement shall automatically apply thereto. Grantor shall give prompt
notice in writing to Greyrock with respect to any such new trademarks or
patents, or renewal or extension of any trademark registration. Grantor shall
bear any expenses incurred in connection with future patent applications or
trademark registrations. Without limiting Grantor's obligation under this
Section 4, Grantor authorizes Greyrock to modify this Agreement by amending
Exhibits A or B to include any such new patent or trademark rights.
- ---------------
Notwithstanding the foregoing, no failure to so modify this Agreement or amend
Exhibits A or B shall in any way affect, invalidate or detract from Greyrock's
- ---------------
continuing security interest in all Collateral, whether or not listed on Exhibit
-------
A or B.
- ------
5. LITIGATION AND PROCEEDINGS.
Grantor shall commence and diligently prosecute in its own name, as the
real party in interest, for its own benefit, and its own expense, such suits,
administrative proceedings, or other action for infringement or other damages as
are in its reasonable business judgment necessary to protect the Collateral.
Grantor shall provide to Greyrock any information with respect thereto requested
by Greyrock. Greyrock shall provide at Grantor's expense all necessary
cooperation in connection with any such suits, proceedings, or action,
including, without limitation, joining as a necessary party. Following Grantor's
becoming aware thereof, Grantor shall notify Greyrock of the institution of, or
any adverse determination in, any proceeding in the United States Patent and
Trademark Office, or any United States, state, or foreign court regarding
Grantor's claim of ownership in any of the patents or trademarks, its right to
apply for the same, or its right to keep and maintain such patent or trademark
rights.
6. POWER OF ATTORNEY
Grantor hereby appoints Greyrock as Grantor's true and lawful attorney,
with full power of substitution, to do any or all of the following, in the name,
place and stead of Grantor: (a) file this Agreement (or an abstract hereof) or
any other document describing Greyrock's interest in the Collateral with the
United States Patent and Trademark Office; (b) execute any modification of this
Agreement pursuant to Section 4 of this Agreement; (c) take any action and
execute any instrument which Greyrock may, in its reasonable discretion, deem
necessary or advisable to accomplish the purposes of this Agreement; and (d)
following an Event of Default (as defined in the Loan Agreement) that results in
the acceleration of the Obligations, (i) endorse Grantor's name on all
applications, documents, papers and instruments necessary for Greyrock to use or
maintain the Collateral; (ii) ask, demand, collect, sue for, recover, impound,
receive, and give acquittance and receipts for money due or to become due under
or in respect of any of the Collateral; (iii) file any claims or take any action
or institute any proceedings that Greyrock may deem necessary or desirable for
the collection of any of the Collateral or otherwise enforce Greyrock's rights
with respect to any of the Collateral, and (iv) assign, pledge, convey, or
otherwise transfer title in or dispose of the Collateral to any person.
7. RIGHT TO INSPECT.
Grantor grants to Greyrock and its employees and agents the right to visit
Grantor's plants and facilities which manufacture, inspect, or store products
sold under any of the patents or trademarks, and to inspect the products and
quality control records relating thereto at reasonable times during regular
business hours in accordance with the Loan Agreement.
8. SPECIFIC REMEDIES.
4
<PAGE>
Upon the occurrence of any Event of Default (as defined in the Loan
Agreement) that results in the acceleration of the Obligations, Greyrock shall
have, in addition to, other rights given by law or in this Agreement, the Loan
Agreement, or in any other Loan Document, all of the rights and remedies with
respect to the Collateral of a secured party under the Code, including the
following:
8.1 Notification. Greyrock may notify licensees to make royalty
payments on license agreements directly to Greyrock;
8.2 Sale. Greyrock may sell or assign the Collateral and associated
goodwill at public or private sale for such amounts, and at such time or times
as Greyrock deems advisable. Any requirement of reasonable notice of any
disposition of the Collateral shall be satisfied if such notice is sent to
Grantor seven (7) days prior to such disposition. Grantor shall be credited with
the net proceeds of such sale only when they are actually received by Greyrock,
and Grantor shall continue to be liable for any deficiency remaining after the
Collateral is sold or collected. If the sale is to be a public sale, Greyrock
shall also give notice of the time and place by publishing a notice one time at
least seven (7) days before the date of the sale in a newspaper of general
circulation in the county in which the sale is to be held. To the maximum extent
permitted by applicable law, Greyrock may be the purchaser of any or all of the
Collateral and associated goodwill at any public sale and shall be entitled, for
the purpose of bidding and making settlement or payment of the purchase price
for all or any portion of the Collateral sold at any public sale, to use and
apply all or any part of the Obligations as a credit on account of the purchase
price of any Collateral payable by Greyrock at such sale.
9. GENERAL PROVISIONS.
9.1 Effectiveness. This Agreement shall be binding and deemed
effective when executed by Grantor and Greyrock.
9.2 Notices. Except to the extent otherwise provided herein, all
notices, demands, and requests that either party is required or elects to give
to the other shall be in writing and shall be governed by the notice provisions
of the Loan Agreement.
9.3 No Waiver. No course of dealing between Grantor and Greyrock, nor
any failure to exercise nor any delay in exercising, on the part of Greyrock,
any right, power, or privilege under this Agreement or under the Loan Agreement
or any other agreement, shall operate as a waiver. No single or partial exercise
of any right, power, or privilege under this Agreement or under the Loan
Agreement or any other agreement by Greyrock shall preclude any other or further
exercise of such right, power, or privilege or the exercise of any other right,
power, or privilege by Greyrock.
9.4 Rights Are Cumulative. All of Greyrock's rights and remedies with
respect to the Collateral whether established by this Agreement, the Loan
Agreement, or any other documents or agreements, or by law shall be cumulative
and may be exercised concurrently or in any other.
9.5 Successors. The benefits and burdens of this Agreement shall
inure to the benefit of and be binding upon the respective successors and
permitted assigns of the parties; provided that Grantor may not transfer any of
the Collateral or any rights hereunder, without the prior written consent of
Greyrock, except as specifically permitted hereby.
9.6 Severability. The provisions of this Agreement are severable. If
any provision of this Agreement is held invalid or unenforceable in whole or in
part in any jurisdiction, then such invalidity or unenforceability shall affect
only such provision, or part thereof, in such
5
<PAGE>
jurisdiction, and shall not in any manner affect such provision or part thereof
in any other jurisdiction, or any other provision of this Agreement in any
jurisdiction.
9.7 Entire Agreement. This Agreement is subject to modification only
by a writing signed by the parties, except as provided in Section 4 of this
Agreement. To the extent that any provision of this Agreement conflicts with any
provision of the Loan Agreement, the provision giving Greyrock greater rights or
remedies shall govern, it being understood that the purpose of this Agreement is
to add to, and not detract from, the rights granted to Greyrock under the Loan
Agreement. This Agreement, the Loan Agreement, and the documents relating
thereto comprise the entire agreement of the parties with respect to the matters
addressed in this Agreement.
9.8 Fees and Expenses. Grantor shall pay to Greyrock on demand all
reasonable costs and expenses that Greyrock pays or incurs in connection with
the negotiation, preparation, consummation, administration, enforcement, and
termination of this Agreement, including: (a) reasonable attorneys' and
paralegals' fees and disbursements of counsel to Greyrock; (b) reasonable costs
and expenses (including reasonable attorneys' and paralegals' fees and
disbursements) for any amendment, supplement, waiver, consent, or subsequent
closing in connection with this Agreement and the transactions contemplated
hereby; (c) reasonable costs and expenses of lien and title searches; (d) taxes,
fees, and other charges for filing this Agreement at the United States Patent
and Trademark Office, or for filing financing statements, and continuations, and
other actions to perfect, protect, and continue the security interest created
hereunder; (e) reasonable sums paid or incurred to pay any amount or take any
action required of Grantor under this Agreement that Grantor fails to pay or
take; (f) reasonable costs and expenses of preserving and protecting the
Collateral; and (g) reasonable costs and expenses (including reasonable
attorneys' and paralegals' fees and disbursements) paid or incurred to enforce
the security interest created hereunder, sell or otherwise realize upon the
Collateral, and otherwise enforce the provisions of this Agreement, or to defend
any claims made or threatened against the Greyrock arising out of the
transactions contemplated hereby (including preparations for the consultations
concerning any such matters). The foregoing shall not be construed to limit any
other provisions of this Agreement or the Loan Documents regarding costs and
expenses to be paid by Grantor. The parties agree that reasonable attorneys' and
paralegals' fees and costs incurred in enforcing any judgment are recoverable as
a separate item in addition to fees and costs incurred in obtaining the judgment
and that the recovery of such attorneys' and paralegals' fees and costs is
intended to survive any judgment, and is not to be deemed merged into any
judgment.
9.9 Indemnity. Grantor shall protect, defend, indemnify, and hold
harmless Greyrock and Greyrock's assigns from all liabilities, losses, and costs
(including without limitation reasonable attorneys' fees) incurred or imposed on
Greyrock relating to the matters in this Agreement.
9.10 Further Assurances. At Greyrock's reasonable request, Grantor
shall execute and deliver to Greyrock any further instruments or documentation,
and perform any acts, that may be reasonably necessary or appropriate to
implement this Agreement, the Loan Agreement or any other agreement, and the
documents relating thereto, including without limitation any instrument or
documentation reasonably necessary or appropriate to create, maintain, perfect,
or effectuate Greyrock's security interests in the Collateral.
9.11 Release. At such time as Grantor shall completely satisfy all of
the Obligations and the Loan Agreement shall be terminated, Greyrock shall
promptly execute and deliver to Grantor all assignments and other instruments as
may be reasonably necessary or proper to terminate Greyrock's security interest
in the Collateral, subject to any disposition of the Collateral which may have
been made by Greyrock pursuant to this Agreement. For the purpose of this
Agreement, the Obligations shall be deemed to continue if Grantor enters into
any
6
<PAGE>
bankruptcy or similar proceeding at a time when any amount paid to Greyrock
could be ordered to be repaid as a preference or pursuant to a similar theory,
and shall continue until it is finally determined that no such repayment can be
ordered.
9.12 Governing Law. The validity and interpretation of this Agreement
and the rights and obligations of the parties shall be governed by the laws of
the State of California, excluding its conflict of law rules to the extent such
rules would apply the law of another jurisdiction, and the United States. The
parties agree that all actions or proceedings arising in connection with this
Agreement shall be tried and litigated only in the state and federal courts
located in the County of Los Angeles, State of California or, at the sole option
of Greyrock, in any other court in which Greyrock shall initiate legal or
equitable proceedings and which has subject matter jurisdiction over the matter
in controversy. Each of Grantor and Greyrock waives, to the extent permitted
under applicable law, any right they may have to assert the doctrine of forum
non conveniens or to object to venue to the extent any proceeding is brought in
accordance with this Section.
9.13 Waiver of Right to Jury Trial. GREYROCK AND GRANTOR EACH HEREBY
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING
OUT OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER PRESENT
OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN GREYROCK AND GRANTOR; OR (III) ANY
CONDUCT, ACTS OR OMISSIONS OF GREYROCK OR GRANTOR OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
GREYROCK OR GRANTOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first written above.
GREYROCK CAPITAL, a Division of Banc PILOT NETWORK SERVICES, INC.
of America Commercial Finance Corporation
By /s/ Lisa Nagano
--------------------------------------
Title Senior Vice President By /s/ William C. Leetham
----------------------------------- -------------------------------
Title Chief Financial Officer
----------------------------
7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,759
<SECURITIES> 1,097
<RECEIVABLES> 7,056
<ALLOWANCES> 302
<INVENTORY> 0
<CURRENT-ASSETS> 26,036
<PP&E> 33,926
<DEPRECIATION> 13,366
<TOTAL-ASSETS> 48,000
<CURRENT-LIABILITIES> 18,334
<BONDS> 4,061
0
0
<COMMON> 15
<OTHER-SE> 10,840
<TOTAL-LIABILITY-AND-EQUITY> 48,000
<SALES> 8,465
<TOTAL-REVENUES> 8,465
<CGS> 8,188
<TOTAL-COSTS> 8,188
<OTHER-EXPENSES> 5,459
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (412)
<INCOME-PRETAX> (5,594)
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<NET-INCOME> (5,594)
<EPS-BASIC> (0.40)
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