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EXHIBIT 4.1
Marshall Capital Management, Inc.
11 Madison Avenue
New York, New York 10010
October 31, 2000
Pilot Network Services, Inc.
1080 Marina Village Parkway
Alameda, California 94501
Attn: Marketta Silvera
Re: Series A Convertible Preferred Stock (the "Preferred Stock")
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Dear Sirs:
This letter confirms the agreement between Pilot Network Services, Inc.
(the "Company") and Marshall Capital Management, Inc. ("MCM"), as follows:
1. MCM agrees to waive the Company's failure to hold its annual
meeting of stockholders not later than October 1, 2000 pursuant to paragraph
4.12 of the Securities Purchase Agreement, dated as of June 28, 2000, between
the Company and MCM (the "Purchase Agreement"); provided, that, as a condition
to such waiver, the Company will use its best efforts to hold such meeting no
later than December 31, 2000. The foregoing waiver shall not operate as a
waiver of any other right or remedy available to MCM with respect to any other
breach by the Company of the Purchase Agreement, the related Certificate of
Designation or any document executed by the Company in connection therewith.
2. In consideration of the waiver described in paragraph 1 above,
the Company and MCM agree to amend the Registration Rights Agreement (as defined
in the Purchase Agreement) to add the following paragraph at the end of
paragraph 2(e) thereof:
"(f) In the event that the Registration Statement is not declared
effective by October 31, 2000, the Purchaser shall have the right (the "Exchange
Right"), from time to time beginning on the date hereof until the Maturity Date,
to exchange Preferred Shares for shares of Common Stock (the "Exchange Shares")
at an exchange rate of 637.958 Exchange Shares for each Preferred Share tendered
for exchange (the "Exchange Rate"), such rate having been determined by
reference to an assumed Conversion Price of $1.5675; provided, however, that in
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no event shall the Company issue pursuant to the Exchange Right a number of
Exchange Shares which is, in the aggregate, greater than the lesser of (x)
1,512,579 shares of Common Stock (representing 9.99% of the total number of
shares of Common Stock outstanding on the date of this letter) and (y) that
number of shares of Common Stock which, when added to the number of shares, if
any, that have been issued to MCM and that are included in determining the Cap
Amount (as defined in the Certificate of Designation), would exceed the Cap
Amount, except that this clause (y)
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shall not apply on the Maturity Date if the Company obtains the approval of the
holders of a majority of the Company's outstanding Common Stock for the issuance
of Common Stock in excess of the Cap Amount and elects a Conversion at Maturity
pursuant to Section 4(g)(ii) of the Certificate of Designation. Upon delivery of
a written notice to the Company by the Purchaser stating that the Purchaser
wishes to exercise the Exchange Right (an "Exchange Notice"), the Purchaser and
the Company shall follow the procedures set forth in the Certificate of
Designation that apply to the conversion of Preferred Shares, with such changes
as may be appropriate in order to reflect the intent of this paragraph (f), and
delivery of an Exchange Notice shall be deemed to constitute delivery of a
Conversion Notice for purposes of compliance with such procedures. The Company
represents and warrants to, and agrees with, the Purchaser that: (i) its
obligation to exchange Exchange Shares for Preferred Shares on the terms and
subject to the conditions set forth herein is enforceable against it in
accordance with the terms of this paragraph (f), such obligation does not
conflict with any other obligation of the Company, and such obligation is
absolute and unconditional, regardless of any resulting dilution of the
outstanding shares of Common Stock, or otherwise, (ii) all Exchange Shares shall
be deemed to be included within the definition of Registrable Securities for all
purposes under this Agreement, (iii) the failure by the Company to issue
Exchange Shares within three (3) business days following the tender of Preferred
Shares for exchange by the Purchaser to the Company shall be deemed to
constitute a failure to deliver Conversion Shares in accordance with the
Certificate of Designation, and in such event the Purchaser shall have all of
the rights and remedies available to it under the Certificate of Designation and
otherwise as though a Conversion Default had occurred, except that references to
the "Conversion Price" shall be deemed to refer to the Conversion Price used to
determine the Exchange Rate, and (iv) there are 15,138,072 shares of Common
Stock outstanding on the date of this letter. The Company and the Purchaser
acknowledge and agree that, for the purpose of calculating the Cap Amount under
the Certificate of Designation, any Exchange Shares issued pursuant to the
Exchange Right shall be included in such calculation. All prices per share or
share amounts set forth herein shall be subject to adjustment in the event of
stock splits, reverse stock splits, stock dividends and similar events."
Except as specifically amended hereby, the Registration Rights Agreement
shall continue in full force and effect in accordance with its terms.
3. The Company will indemnify and hold harmless MCM from and against
any claims, liabilities, damages and expenses (including reasonable legal fees
and expenses) arising out of the transactions contemplated by this letter.
4. The terms of this letter shall be binding on the parties and
their respective successors and assigns. Accordingly (i) MCM agrees that, as a
precondition to any sale or other transfer by it of Preferred Shares, it will
obtain from the transferee thereof its written agreement to be bound by the
terms of this letter agreement and (ii) the Company agrees that as a
precondition to any merger, consolidation, business combination, tender offer,
sale or exchange of shares or assets, recapitalization, reorganization,
redemption or other similar event as a result of which shares of Common Stock
shall be changed into or exchanged for securities of another entity, the Company
will obtain the written agreement
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of the resulting successor or acquiring entity to assume the obligations of the
Company hereunder. The Company may, upon its request, place a legend on the
Preferred Shares which refers to this Agreement.
If this letter correctly sets forth the understanding between the Company
and MCM, please sign below in the space indicated whereupon this letter will
constitute a legally-binding agreement between the parties.
Sincerely,
Marshall Capital Management, Inc.
By: /s/ Allan D. Weine
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Allan D. Weine
President
Acknowledged and Agreed:
Pilot Network Services, Inc.
By: /s/ Marketta Silvera
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Name: Marketta Silvera
Title: Chief Executive Officer
