UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended December 31, 1995
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 0-12194
ZITEL CORPORATION
(Exact name of Registrant as specified in its charter)
California 94-2566313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
47211 Bayside Parkway 94538-6517
Fremont, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 440-9600
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 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 _____
The number of shares of the Registrant's Common Stock outstanding as of December
31, 1995 was 7,297,187.
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ZITEL CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1995 (unaudited) and September 30, 1995 3
Condensed Consolidated Statements of
Operations (unaudited) - Three Months
Ended December 31, 1995 and 1994 .................. 4
Condensed Consolidated Statements of
Cash Flows (unaudited) - Three Months Ended
December 31, 1995 and 1994 ......................... 5
Notes to Condensed Consolidated
Financial Statements ............................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations ............................... 8
Exhibits to Part I.
Exhibit 11.1 - Computation of Net Income
per Common and Common Equivalent Share .............. 11
PART II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders ............................. 12
Item 6. Exhibits and Reports on Form 8-K ............... 12
Page 2
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($000's)
December 31, September 30,
1995 1995
ASSETS
Current assets:
Cash and cash equivalents $ 5,103 $11,265
Accounts receivable, net 7,863 4,200
Inventories 3,563 2,987
Deferred and refundable taxes 3,367 4,348
Other current assets 1,987 418
------- -------
Total current assets 21,883 23,218
Fixed assets, net 1,463 1,419
Other assets, net 3,860 1,569
------- -------
Total assets $27,206 $26,206
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5 $ 13
Accounts payable 1,188 1,725
Accrued liabilities 1,249 1,511
------- -------
Total current liabilities 2,442 3,249
Shareholders' equity:
Common stock 20,080 19,916
Retained earnings 4,684 3,041
------- -------
Total shareholders' equity 24,764 22,957
------- -------
Total liabilities and
shareholders' equity $27,206 $26,206
======= =======
The accompanying notes are an integral part of these financial statements.
Page 3
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
Three Months Ended
December 31,
------------------
1995 1994
------ ------
Net sales $ 2,844 $ 2,710
Royalty revenue 4,469 4,145
------- -------
Total revenue 7,313 6,855
Cost of goods sold 1,920 2,213
Research and development expenses 1,569 1,397
Selling, general & administrative expenses 1,980 1,691
------- -------
Operating income 1,844 1,554
Other income (785) (16)
------- -------
Income before income taxes 2,629 1,570
Provision for income taxes 986 94
------- -------
Net income $ 1,643 $ 1,476
======= =======
Net income per share $ .21 $ .21
======= =======
Number of shares used in per share calculations 7,722 7,189
======= =======
The accompanying notes are an integral part of these financial statements.
Page 4
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's) (UNAUDITED)
Three Months Ended
December 31,
1995 1994
Cash flows provided by (used in) ------- -------
operating activities:
Net income $ 1,643 $ 1,476
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 243 385
Provision for doubtful accounts 168 54
Provision for inventory allowances 117 57
Unrealized gains on trading security (641) -
Increase in accounts receivable (3,831) (3,187)
Decrease (increase) in inventories (693) 734
Decrease in deferred and refundable taxes 981 31
Decrease (increase) in other current assets 72 (174)
Decrease in accounts payable (537) (288)
Decrease in accrued liabilities (262) (258)
------- -------
Net cash used in operating activities (2,740) (1,170)
------- -------
Cash flows used in investing activities:
Purchase of fixed assets (264) (184)
Purchase of other assets (3,314) (171)
------- -------
Net cash used in investing activities (3,578) (355)
------- -------
Cash flows provided by (used in) financing activities:
Issuance of common stock 164 3,509
Proceeds from borrowings 0 1,956
Repayments of borrowings (8) (1,045)
------- -------
Net cash provided by financing activities 156 4,420
------- -------
Net increase (decrease) in cash (6,162) 2,895
Cash and cash equivalents,
beginning of period 11,265 1,010
------- -------
Cash and cash equivalents,
end of period $ 5,103 $ 3,905
======= =======
The accompanying notes are an integral part of these financial statements.
Page 5
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ZITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts in thousands except per share data)
1. The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and should be read in conjunction with
the audited financial statements of the Company. Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted although the Company believes the disclosures which are made are
adequate to make the information presented not misleading. Further, the
condensed consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to present fairly the financial position
and results of operations as of and for the periods indicated. The results of
operations for the three months ended December 31, 1995 are not necessarily
indicative of the results expected for the full year.
2. Inventories:
December 31, September 30,
1995 1995
------------ -------------
Raw materials $ 670 $ 734
Work in process 976 733
Finished goods 1,917 1,520
------ ------
$3,563 $2,987
====== ======
3. Other current assets:
At the beginning of fiscal 1996, an investment in an unconsolidated company
in the amount of $1,000,000 was revalued due to a public offering by the
investee, which took place in October 1995. This investment, which was
previously classified in other long-term assets, was reclassified to other
current
Page 6
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assets. In accordance with S.F.A.S. No. 115, this investment will be revalued to
the current market value at the end of each reporting period and a gain or loss
recognized for such period. For the quarter ended December 31, 1995, unrealized
gains of $641,000 were recognized in other income and included in other current
assets.
4. Other assets:
On November 17, 1995, the Company finalized an agreement to acquire 37.5% of
MatriDigm Corporation, a privately held company. The investment, which consisted
of preferred stock, totaled $3,350,000. Under the agreement, the Company
obtained an exclusive license from MatriDigm to incorporate its technology in
the development of new products. The Company does not expect development of any
new products that incorporate the technology in the current fiscal year.
5. Effective October 1995, the Company negotiated a $3,000,000 revolving
accounts receivable line of credit with a commercial bank. The line is
collateralized by accounts receivable, inventory, equipment and tangible assets.
Interest is at the prime rate (8.5% at December 31, 1995) and is payable
monthly. The line of credit expires on September 30, 1996. At December 31, 1995,
the Company had no borrowings against the line.
6. Revenue recognition:
Revenue is recognized at the time products are shipped to customers and at
the time services are rendered. Royalty revenue is recognized when earned and
receipt is assured.
7. Income per share amounts are computed using the weighted average number of
common and common equivalent (dilutive stock options) shares outstanding during
each period presented, when dilutive.
Page 7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Result of Operations
The Company recorded net income of $1,643,000 ($0.21 per share) for the first
quarter of fiscal 1996 compared to $1,476,000 ($0.21 per share) for the same
period of the prior year. Results for the quarter ended December 31, 1995
reflected a tax provision of $986,000 (37.5% of income before income taxes)
versus $94,000 (6% of income before income taxes) for the same period a year
earlier and a gain of $641,000 on investments held for resale. Weighted average
shares outstanding in the first quarter of fiscal 1996 were 7,722,000 compared
to 7,189,000 for the first quarter of fiscal 1995.
Total revenue for the quarter ended December 31, 1995 was $7,313,000 versus
total revenue of $6,855,000 for the same period of the prior year. The increase
in total revenue is attributable to increases in both net sales ($134,000) and
royalties ($324,000). The increase in net sales is due to initial shipments of
the Company's second generation of CASD products (CASD-II) which began shipping
in November 1995. Royalty revenue was strong this quarter as the third party
that sells royalty-bearing products began shipping their second generation of
products utilizing the Company's technology. The Company expects that royalty
revenue will remain strong for the near future; however, should the third
party's sales decline or should royalty-bearing products be replaced by
non-royalty-bearing products, the Company's total revenue could be materially
and adversely affected.
In mid-December, the Company announced the general availability of SCP-II for
the open systems market. SCP-II is the open systems version of CASD-II. SCP-II
now connects to Sun, HP, NT, Digital, and Unisys open systems platforms. Though
the Company's announcement was 60 to 90 days behind its internal plan, early
reception of SCP-II has been encouraging. The Company believes the
price/performance characteristics of SCP-II for certain applications should make
it an attractive alternative for vendors and users of open systems platforms.
Commercial success of SCP-II is subject to risks and uncertainties including
unanticipated technical problems, the need to achieve Company credibility in the
open systems market, and introduction of more cost effective competitive
products.
Page 8
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Gross margin as a percent of net sales was 32% for the quarter ended December
31, 1995 compared to 18% of net sales for the same period of the prior year. The
improvement in gross margin percentage is primarily attributable to the impact
of lower indirect sales cost in the current year period.
Research and development expenses for the quarter ended December 31, 1995 were
21% of total revenue compared to 20% of total revenue for the same period of the
prior year. Research and development expenses increased $172,000, primarily as a
result of continued expenditures on development of future CASD and software
products.
Selling, general and administrative expenses were 27% of total revenue for the
quarter compared to 25% of total revenue for the same period a year earlier.
Selling, general and administrative expenses increased $289,000.
Other income was $785,000 for the quarter just ended versus other income of
$16,000 for the comparable period of the prior year. For the quarter, other
income included an unrealized gain of $641,000 on an investment held for resale.
Interest income for the quarter was $139,000 versus $96,000 for the same period
a year earlier. The increase in interest income is primarily related to larger
cash balances invested and higher interest rates on cash invested during the
current quarter.
Liquidity and Capital Resources
For the quarter ended December 31, 1995, working capital decreased $528,000 and
cash flows used in operating activities was $2,740,000. The utilization of cash
flows resulted primarily from an increase in accounts receivable of $3,831,000,
an increase in inventory of $693,000, a decrease in accounts payable of $537,000
offset by net income of $1,643,000, and utilization of deferred tax assets of
$981,000. During the quarter, $3,578,000 was used in investing activities. On
November 17, 1995, the Company completed a $3,350,000 investment in MatriDigm
Corporation. The Company acquired 37.5% of MatriDigm and also obtained a license
under MatriDigm's proprietary technology. Net cash provided by financing
activities during the quarter was $156,000. In October 1995, the Company
negotiated a $3,000,000 revolving accounts receivable line of credit which
expires on September 30, 1996. At December 31, 1995, the Company had no
borrowings outstanding on the line of credit.
Page 9
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Management believes that the Company will meet its cash requirements from
current cash on hand, other existing working capital, cash flows from
operations, and the utilization of the line of credit.
- ------------------------------------------------------------
Zitel and CASD are registered trademarks of Zitel Corporation. SCP is a
trademark of Zitel Corporation. Digital is a trademark of Digital Equipment
Corporation. HP is a registered trademark of Hewlett-Packard Company. MatriDigm
is a trademark of MatriDigm Corporation. Sun Microsystems is a trademark of Sun
Microsystems, Inc. Unisys is a registered trademark of Unisys Corporation. All
other product names and brand names are trademarks or registered trademarks of
their respective holders.
Page 10
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EXHIBIT 11.1
ZITEL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE
(In thousands except per share amounts)
Three Months Ended
December 31,
------------------
1995 1994
------ ------
Weighted average common shares outstanding 7,286 6,660
Computation of incremental outstanding shares :
Net effect of dilutive stock options
based on treasury stock method 436 529
------ ------
7,722 7,189
====== ======
Net income $1,643 $1,476
====== ======
Net income per share $ .21 $ .21
====== ======
Primary and fully diluted income per share differ by less than one cent in all
periods presented.
Page 11
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of shareholders of the Company was held on January 25,
1996. A total of 6,964,134 shares of the Company's Common Stock out of a total
7,297,187 shares outstanding on the record date for the meeting were represented
and voted in person or by proxy.
The Company has a five-person Board of Directors. At the annual meeting,
all five directors were nominated and re-elected to the Board of Directors by a
vote of at least 6,910,678 shares in favor and 53,456 shares instructing or
withholding authority to vote.
The shareholders approved the adoption of the 1995 Non-Employee Directors'
Stock Option Plan including the reservation of 100,000 shares of Common Stock
for issuance thereunder. The results of the vote were 6,505,215 shares voting
for, 267,569 dissenting votes, 57,381 abstaining votes, and 133,969 with no
voting instruction indicated.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.28 - Series A Preferred Stock Purchase Agreement
between the Company and MatriDigm Corporation dated November 17, 1995.
(Confidential treatment has been requested for a portion of the exhibit.)
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
Page 12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ZITEL CORPORATION
Date: February 13, 1996 Henry C. Harris
Henry C. Harris
Vice President, Finance &
Administration
(Chief Financial and
Accounting Officer)
Page 13
MATRIDIGM CORPORATION
------------------------------
SERIES A PREFERRED STOCK
PURCHASE AGREEMENT
------------------------------
NOVEMBER 17, 1995
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
TABLE OF CONTENTS
PAGE
1. AGREEMENT TO SELL AND PURCHASE.................................. 1
1.1 Authorization of Shares................................ 1
1.2 Sale and Purchase...................................... 1
2. CLOSING, DELIVERY AND PAYMENT................................... 1
2.1 Closing................................................ 1
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................... 2
3.1 Organization and Standing.............................. 2
3.2 Corporate Power........................................ 2
3.3 Capitalization......................................... 2
3.4 Authorization.......................................... 2
3.5 Compliance with Other Instruments...................... 2
3.6 Litigation, etc........................................ 3
3.7 Governmental Consent, etc.............................. 3
3.8 Offering............................................... 3
3.9 Subsidiaries........................................... 3
3.10 Employees.............................................. 3
3.11 Proprietary Rights..................................... 3
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER................. 3
4.1 Authorization.......................................... 3
4.2 Investment............................................. 4
4.3 Rule 144 and Rule 144A................................. 4
4.4 No Public Market....................................... 4
4.5 Access to Data......................................... 4
4.6 Experience............................................. 4
5. CONDITIONS TO PURCHASER'S OBLIGATIONS AT CLOSING................ 4
5.1 Representations and Warranties Correct................. 4
5.2 Covenants.............................................. 5
5.3 Proceedings and Documents.............................. 5
5.4 License Agreement...................................... 5
5.5 Restricted Stock Repurchase Agreements................. 5
5.6 Employment Agreements.................................. 5
6. CONDITIONS TO COMPANY'S OBLIGATIONS AT CLOSING.................. 5
6.1 Representations Correct................................ 5
6.2 Qualifications, Legal Investment....................... 5
6.3 Covenants.............................................. 5
i
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
6.4 Sublease............................................... 5
6.5 Administrative Services................................ 6
6.6 License Agreement...................................... 6
7. COVENANTS OF THE COMPANY........................................ 6
7.1 Basic Financial Information and Reporting.............. 6
7.2 Inspection Rights...................................... 6
7.3 Confidentiality of Records............................. 6
7.4 Reservation of Common Stock............................ 6
7.5 Termination of Covenants............................... 7
7.6 Confidentiality Of [REDACTED] License.................. 7
8. REGISTRATION RIGHTS............................................. 7
8.1 Piggyback Registration Rights.......................... 7
(a) Notice Of Registration........................ 7
(b) Underwriting Requirements..................... 7
8.2 "Market Stand-Off" Agreement........................... 8
8.3 Transfer............................................... 8
9. RIGHT OF FIRST REFUSAL.......................................... 8
9.1 Initiation of Right of First Refusal................... 8
9.2 Mechanics.............................................. 9
10. DEATH AND DISABILITY BENEFITS................................... 10
11. MISCELLANEOUS................................................... 11
11.1 Governing Law.......................................... 11
11.2 Successors and Assigns................................. 11
11.3 Entire Agreement; Amendment............................ 11
11.4 Notices, etc........................................... 11
11.5 Delays or Omissions.................................... 11
11.6 California Corporate Securities Law.................... 12
11.7 Expenses............................................... 12
11.8 Severability........................................... 12
ii
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
INDEX OF EXHIBITS
Restated Articles Exhibit A
Employment Contract of Franklin Chiang Exhibit B-1
Employment Contract of James T. Brady Exhibit B-2
iii
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
MATRIDIGM CORPORATION
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is
entered into as of November 17, 1995, by and among MATRIDIGM CORPORATION, a
California corporation (the "Company"), FRANKLIN CHIANG ("Chiang") and ZITEL
CORPORATION, a California corporation ("Purchaser").
RECITALS
A. The Company has authorized the sale and issuance to Purchaser of
up to 9,600,000 shares of its Series A Preferred Stock (the "Shares").
B. Purchaser desires to purchase the Shares in the amounts and on the
terms and conditions set forth herein, and the Company desires to issue and sell
the Shares to Purchaser on the terms and conditions set forth herein.
In consideration of the foregoing recitals and the mutual promises
hereinafter set forth, the parties hereto agree as follows:
1. AGREEMENT TO SELL AND PURCHASE.
1.1 AUTHORIZATION OF SHARES. On or prior to the Closing (as defined in
Section 2 below), the Company shall have authorized the sale and issuance of the
Shares having the rights, preferences, privileges and restrictions set forth in
the Amended and Restated Articles of Incorporation of the Company, as amended,
in the form attached hereto as Exhibit A (the "Restated Articles"). The Company
has, or prior to the Closing will have, adopted and filed the Restated Articles
with the Secretary of State of the State of California.
1.2 SALE AND PURCHASE. Subject to the terms and conditions hereof, the
Company hereby agrees to issue and sell to Purchaser and each Purchaser agrees
to purchase from the Company, the Shares, at a purchase price of $.34896 per
Share.
2. CLOSING, DELIVERY AND PAYMENT.
2.1 CLOSING. The closing of the sale and purchase of Shares under this
Agreement (the "Closing") shall take place at such time or place as the Company
and Purchaser mutually agree. At the Closing, subject to the terms and
conditions hereof, the Company will deliver to Purchaser a certificate
representing the Shares against payment by or on behalf of Purchaser of the
purchase price therefor, by wire transfer or check made payable to the order of
the Company, cancellation of indebtedness or by such other means as shall be
mutually agreeable to Purchaser and the Company.
1
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company and Chiang individually as to Section 3.11 only hereby
jointly and generally represent to Purchaser as follows:
3.1 ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
California. The Company has all requisite corporate power to own and operate its
properties and assets, and to carry on its business as presently conducted and
as proposed to be conducted. The Company is qualified to do business as a
foreign corporation in each jurisdiction in which such qualification is required
and where the failure to be so qualified would have a material adverse effect on
the Company's business.
3.2 CORPORATE POWER. The Company has all requisite legal and corporate
power to execute and deliver this Agreement and any other agreement contemplated
hereby, to sell and issue the Shares hereunder and to carry out and perform its
obligations under the terms of this Agreement and any other agreement
contemplated hereby.
3.3 CAPITALIZATION. The authorized capital stock of the Company
consists of 32,000,000 shares of Common Stock (the "Common Stock"), of which
16,000,000 shares are issued and outstanding and 6,400,000 have been reserved
for employee incentive plans, and 9,6000,000 shares of Preferred Stock, all of
which have been designated "Series A Preferred Stock", none of which shares are
issued and outstanding. All such issued and outstanding shares have been duly
authorized and validly issued, and are fully paid and nonassessable. The rights,
restrictions, privileges and preferences of the Series A Preferred Stock are as
stated in the Restated Articles. The Company by appropriate action by the Board
of Directors has reserved (or shall have reserved prior to the Closing)
9,6000,000 shares of Common Stock for issuance upon conversion of the Series A
Preferred Stock.
3.4 AUTHORIZATION. All corporate action on the part of the Company, its
directors and stockholders necessary for the sale and issuance of the Shares,
and the Common Stock issuable upon conversion of the Shares (the "Underlying
Stock") and the performance of the Company's obligations hereunder and under
each of the other agreements contemplated hereby and the reservation of the
Underlying Stock have been taken or will be taken prior to the Closing. This
Agreement and the other agreements contemplated hereby are valid and binding
obligations of the Company, enforceable in accordance with their respective
terms, subject to laws of general application relating to bankruptcy, insolvency
and the relief of debtors. The Shares (and the Underlying Stock), when issued in
compliance with the provisions of this Agreement, will be validly issued and
will be fully paid and nonassessable, and will be free of any liens or
encumbrances; provided, however, that the Shares (and the Underlying Stock) may
be subject to restrictions on transfer under state and/or federal securities
laws.
3.5 COMPLIANCE WITH OTHER INSTRUMENTS The Company is not in violation
of any term of its Restated Articles of Incorporation, Bylaws, any agreement to
which the Company
2
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
or Franklin Chiang is a party, or any order, statute, rule or regulation
applicable to the Company where such violation would materially and adversely
affect the Company. The execution, delivery and performance of and compliance
with this Agreement and the issuance of the Shares and the Underlying Stock,
have not resulted and will not result in any material violation of, or conflict
with, or constitute a material default under, the Company's Restated Articles of
Incorporation or Bylaws.
3.6 LITIGATION, ETC. There is no action, suit, proceeding or
investigation pending against the Company or its properties.
3.7 GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization
of, or designation, declaration or filing with, any governmental authority on
the part of the Company is required in connection with the valid execution,
delivery and performance of this Agreement and any other agreement contemplated
hereby, or the offer, sale or issuance of the Shares (or of the Underlying
Stock) except the filing of a Notice with the California Commissioner of
Corporations pursuant to Section 25102(f) of the California Corporations Code
which filing shall be made within 15 days of the Closing.
3.8 OFFERING. Based in part on the representations of the Purchasers
set forth in Section 4 hereof, the offer, sale and issuance of the Shares (and
the Underlying Stock) in conformity with the terms of this Agreement constitute
transactions exempt from the registration requirements of Section 5 of the
Securities Act of 1933, as amended (the "Securities Act").
3.9 SUBSIDIARIES. The Company does not presently own or control,
directly or indirectly, and has no stock or other interest as owner or principal
in, any other corporation or partnership, joint venture, association or other
business venture or entity.
3.10 EMPLOYEES. Each employee of the Company with access to
confidential or proprietary information has executed a proprietary information
agreement with the Company.
3.11 PROPRIETARY RIGHTS. The Company owns the entire right, title and
interest in all of the technology licensed by Company to Purchaser under that
certain License Agreement of even date (the "License Agreement") free and clear
of all liens, claims, encumbrances and licenses except the rights of [REDACTED]
under that certain Option and License Agreement between [REDACTED] and Chiang
dated as of October 1, 1995 [REDACTED]; [REDACTED] has not exercised any option
under the [REDACTED] License. To the best knowledge of the offices of the
Company, [REDACTED] has not undertaken any development effort utilizing its
rights under the [REDACTED] License.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. Purchaser hereby
represents and warrants to the Company as follows:
4.1 AUTHORIZATION. Purchaser has all the requisite power and is duly
authorized to execute and deliver this Agreement and each other agreement
contemplated hereby and has taken
3
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
all necessary action to consummate the transactions contemplated hereby and
thereby. This Agreement and each other agreement contemplated hereby have been
duly executed and delivered by Purchaser and constitute valid and binding
obligations of Purchaser, enforceable in accordance with their respective terms
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors.
4.2 INVESTMENT. Purchaser is acquiring the Shares for investment for
its own account and not with a view to, or for resale in connection with, any
distribution thereof, and it has no present intention of selling or distributing
the Shares or the Underlying Stock. Purchaser understands that the Shares (and
the Underlying Stock) to be purchased by it have not been registered under 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 as expressed herein.
4.3 RULE 144 AND RULE 144A. Purchaser acknowledges that, because they
have not been registered under the Securities Act, the Shares (and the
Underlying Stock) it is purchasing must be held indefinitely unless subsequently
registered under the Securities Act or an exemption from such registration is
available. Purchaser is aware of the provisions of Rule 144 and Rule 144A
promulgated under the Securities Act, which rules permit limited resale of
securities purchased in a private placement subject to the satisfaction of
certain conditions.
4.4 NO PUBLIC MARKET. Purchaser understands that no public market now
exists for any of the securities issued by the Company and that it is uncertain
whether a public market will ever exist for the Shares or the Underlying Stock.
4.5 ACCESS TO DATA. Purchaser has received and reviewed such
information that such Purchaser deemed necessary to make an informed decision
concerning the purchase of the Shares and has had an opportunity to discuss the
Company's business, management and financial affairs with its management and to
obtain any additional information necessary to verify the accuracy of the
information given to such Purchaser.
4.6 EXPERIENCE. Purchaser is experienced in evaluating and investing in
start up companies with little or no operating history such as the Company.
Purchaser by reason of its business or financial experience has the capacity to
protect its own interests in connection with the transaction contemplated by
this Agreement.
5. CONDITIONS TO PURCHASER'S OBLIGATIONS AT CLOSING. Purchaser's
obligations to purchase the Shares at the Closing are subject to the
satisfaction, at or prior to the Closing, of the following conditions:
5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties made in Section 3 hereof shall be true and correct when made, and
shall be true and correct as of the Closing.
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
5.2 COVENANTS. All covenants, agreements and conditions contained in
this Agreement to be performed by the Company on or prior to the Closing shall
have been performed or complied with in all respects.
5.3 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in
connection with the transactions contemplated at the Closing hereby and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Purchasers, and the Purchasers shall
have received all such counterpart originals or certified or other copies of
such documents as they may reasonably request.
5.4 LICENSE AGREEMENT. The License Agreement in the agreed form shall
have been duly authorized and executed by the Company and delivered to
Purchaser.
5.5 RESTRICTED STOCK REPURCHASE AGREEMENTS. The shares of common stock
purchased by Chiang, James T. Brady ("Brady") and Larry Thoman ("Thoman") shall
be subject to restrictive covenants and repurchase rights satisfactory in form
and substance to Purchaser.
5.6 EMPLOYMENT AGREEMENTS. Chiang, Brady and Thoman shall have entered
into employment agreements with the Company on terms and conditions satisfactory
to Purchaser.
6. CONDITIONS TO COMPANY'S OBLIGATIONS AT CLOSING. The Company's
obligation to issue and sell the Shares at the Closing is subject to the
satisfaction, on or prior to Closing, of the following conditions:
6.1 REPRESENTATIONS CORRECT. The representations made by the Purchaser
in Section 4 hereof shall be true and correct when made, and shall be true and
correct as of the Closing.
6.2 QUALIFICATIONS, LEGAL INVESTMENT. 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 sale and
issuance of the Shares pursuant to this Agreement shall have been duly obtained
and shall be effective prior to or as of the Closing. At the time of the
Closing, the sale and issuance of the Shares and the proposed issuance of the
Underlying Stock shall be legally permitted by all laws and regulations to which
the Purchasers and the Company are subject.
6.3 COVENANTS. All covenants, agreements and conditions contained in
this Agreement to be performed by Purchaser on or prior to the Closing shall
have been performed or complied with in all respects.
6.4 SUBLEASE. Purchaser shall have duly authorized and executed and
shall have delivered to the Company a Sublease of a portion of Purchaser's
premise in the agreed form.
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
6.5 ADMINISTRATIVE SERVICES. Purchaser shall have duly authorized and
shall have executed and shall have delivered to the Company an Administrative
Services Agreement in the agreed form.
6.6 LICENSE AGREEMENT. The License Agreement in the agreed form shall
have been duly authorized, executed and delivered to the Company by the
Purchaser.
7. COVENANTS OF THE COMPANY.
7.1 BASIC FINANCIAL INFORMATION AND REPORTING.
(A) The Company will maintain true books and records of
account in which full and correct entries will be made of all its business
transactions pursuant to a system of accounting established and administered in
accordance with generally accepted accounting principles consistently applied,
and will set aside on its books all such proper accruals and reserves as shall
be required under generally accepted accounting principles consistently applied.
(B) As soon as practicable after the end of each fiscal year
of the Company, and in any event within 45 days thereafter, the Company will
furnish Purchaser a consolidated balance sheet of the Company, as at the end of
such fiscal year, and a consolidated statement of income and a consolidated
statement of cash flows of the Company, for such year, all prepared in
accordance with generally accepted accounting principles.
(C) The Company will furnish Purchaser, as soon as practicable
after the end of the first, second and third quarterly accounting periods in
each fiscal year of the Company, and in any event within 30 days thereafter, a
consolidated balance sheet of the Company as of the end of each such quarterly
period, and a consolidated statement of income and a consolidated statement of
cash flows of the Company for such period and for the current fiscal year to
date, prepared in accordance with generally accepted accounting principles.
7.2 INSPECTION RIGHTS. Purchaser shall have the right to visit and
inspect any of the properties of the Company or any of its subsidiaries, and to
discuss the affairs, finances and accounts of the Company or any of its
subsidiaries with its officers, all at such reasonable times and as often as may
be reasonably requested.
7.3 CONFIDENTIALITY OF RECORDS. Purchaser agrees to use, and to use its
best efforts to insure that its authorized representatives use, the same degree
of care as Purchaser uses to protect its own confidential information to keep
confidential any information furnished to it which the Company identifies as
being confidential or proprietary (so long as such information is not in the
public domain).
7.4 RESERVATION OF COMMON STOCK. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the conversion of the
Preferred Stock, all Common Stock issuable from time to time upon such
conversion.
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
7.5 TERMINATION OF COVENANTS. All covenants of the Company contained in
Sections 7.1-7.3 of this Agreement shall expire and terminate as to each
Purchaser upon the date that the Company first becomes subject to the reporting
obligations of the Securities Exchange Act of 1934, as amended.
7.6 CONFIDENTIALITY OF [REDACTED] LICENSE. Purchaser and the Company
each acknowledges that it has received disclosure of the [REDACTED] License
under conditions of confidentiality and agrees not to disclose the existence or
terms thereof without the express written consent of [REDACTED].
8. REGISTRATION RIGHTS.
8.1 PIGGYBACK REGISTRATION RIGHTS.
(A) NOTICE OF REGISTRATION. If (but without any obligation to
do so) the Company proposes to register any of its stock or other securities
under the federal Securities Act of 1993 ("Act") in connection with the public
offering of such securities solely for cash (other than (i) a registration
relating solely to the sale of securities to employees of the Company pursuant
to a stock option, stock purchase or similar plan, (ii) a registration on any
form which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of the
common shares into which the shares are convertible, or (iii) a registration
relating solely to Securities and Exchange Commission Rule 145), the Company
shall, each such time,
(1) promptly give the Purchaser written notice of
such registration; and
(2) include in such registration and in any
underwriting involved therein any of the shares
of common stock specified in a written request
or requests of Purchaser made within thirty (30)
days after such written notice was given by the
Company to the Purchaser.
(B) UNDERWRITING REQUIREMENTS. If the registration of which
the Company gives notice pursuant to Subsection 8.1(a) above is for a registered
public offering involving an underwriting, the Company shall so advise the
Purchaser as part of the written notice. In connection with any offering
involving an underwriting of shares initiated by the Company or by other
shareholders of the Company having registration rights, the Company shall not be
required under Subsection 8.1(a) to include any of Purchaser's common shares in
such underwriting unless the Purchaser accepts the terms of the underwriting as
agreed upon between the Company and the underwriters selected by it, and then
only in such quantity as will not, in the opinion of the underwriters,
jeopardize the success of the offering by the Company or the Company's
shareholders demanding such registration. If the total amount of securities that
all shareholders of the company request to be included in such offering exceeds
(when combined with the securities being offered by the Company or its
shareholders demanding such
7
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
registration) the amount of securities that the underwriters reasonably believe
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of securities pursuant to piggyback
registration rights which the underwriters believe will not jeopardize the
success of the offering (the securities so included pursuant to piggyback
registration rights to be apportioned among the selling shareholders, including
the Purchaser, according to the total number of securities which each selling
shareholder elected to include in the registration or in such other proportions
as shall mutually be agreed to by the selling shareholders.
8.2 "MARKET STAND-OFF" AGREEMENT. The Purchaser shall not, to the
extent requested by the Company, sell or otherwise transfer or dispose of any
Shares during the one hundred eighty (180) day period following the effective
date of a registration statement of the Company filed under the Act; provided,
however, that such agreement shall only be applicable to the Company's initial
registration statement (the "First Registration Statement") and registration
statements filed within three (3) years after the effective date of the First
Registration Statement, and if all officers and directors of the Company and
other holders of registration rights enter into similar agreements. In order to
enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to the Shares until the end of the one hundred eighty
(180) day period.
8.3 TRANSFER. The rights granted under Section 8.1(a) may be
transferred to a transferee of not less than 1,000,000 shares who agrees to be
bound by the restrictions in Section 8.2 or to a third party approved by the
Company in its sole discretion who likewise agrees.
9. RIGHT OF FIRST REFUSAL.
9.1 INITIATION OF RIGHT OF FIRST REFUSAL. Until the consummation of a
firm commitment or best efforts underwritten public offering of the Company's
equity registered with the Securities and Exchange Commission with gross
proceeds to the Company of five million dollars or more, the Purchaser and the
Purchaser's successors and assigns (each a "Shareholder"), shall not sell,
pledge, assign, or otherwise transfer any of the Shareholder's interest in any
of the Shares (or in any of the Shares of common stock of the Company into which
any of the shares may be converted) to any person without first offering to the
Company or its designees the right and option to purchase said shares as
provided hereinafter in this Article 9 (the "Right of First Refusal").
Notwithstanding the above, the Purchaser may sell or transfer any interest in
any of said shares to any purchaser of all or substantially all of the assets of
Purchaser or to any corporation controlled by or under common control with the
Purchaser without first offering said shares to the Company or its designees,
provided any such transferees agree in writing to be bound by the restrictions
set forth in this Article 9. In the event of a pledge or other hypothecation of
said shares, or the granting of an option or other right to purchase said
shares, then the Right of First Refusal shall come into existence at the time of
any sale or transfer of ownership of said shares pursuant to foreclosure under
such pledge or hypothecation or exercise of such option or right, as the case
may be; provided, however, that
8
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
the Shareholder may not pledge or hypothecate said shares or grant an option or
right to purchase the shares unless the pledge holder or option or right holder,
as the case may be, agrees in writing at the time of the pledge or grant of the
option or right to be bound by the Right of First Refusal as contained in this
Article 9, and to cause any proposed assignee or transferee of such pledge or
right of option to execute and deliver to the Company a similar writing prior to
such assignment or transfer.
9.2 MECHANICS. Any Shareholder desiring to sell any or all of the
Shares during the term of the Right of First Refusal shall give written notice
to the Secretary of the Company of the Shareholder's bona fide intention to sell
the Shares pursuant to a bona fide written offer of a third party other than the
Company (the "Proposed Purchaser"). The notice shall include a photocopy of the
written offer which shall specify the identity of the Proposed Purchaser, the
number of Shares proposed to be sold (the "Offered Shares"), and the price and
payment terms of the proposed offer to buy the Offered Shares. The payment terms
of the contemplated sale to the Proposed Purchaser from the Shareholder (and of
the Shareholder to the Company) must be expressed in terms of cash, cash
equivalents (such as certificates of deposit, shares of stock in publicly traded
companies, and the like), or a promissory note of the Proposed Purchaser payable
on date(s) specified or ascertained by passage of time. The Company or its
designees shall have the right and option to purchase all of the Offered Shares,
at the price and on the payment terms specified in the Shareholder's notice, for
a period of sixty (60) days from receipt of said notice from the Shareholder;
that is, the Shareholder's notice shall constitute an irrevocable offer by the
Shareholder to sell all of the Offered Shares to the Company or its designees at
the price and on the payment terms specified in the notice for sixty (60) days
from the date of the Company's receipt of the notice.
The Company shall exercise its option by giving written notice of its
election to do so (the "Exercise Notice") to the Shareholder. The Company may
exercise its option as to any or all of the Offered Shares.
The Shareholder shall deliver to the Company a share certificate
representing those Offered Shares being purchased by the Company within sixty
(60) days of the Exercise Notice against payment by the Company for the account
of Shareholder of the purchase price specified in the Exercise Notice.
Any Offered Shares for which the Company and its designees fail to
exercise their option as provided in this section, may be sold by the
Shareholder to the Proposed Purchaser within a period of ninety (90) days
following the end of the Company's sixty (60)-day option period, provided that:
(1) the sale is made at the price and on the payment terms specified in the
original notice from Shareholder to the Company or not more favorable to the
Proposed Purchaser; (2) the Proposed Purchaser delivers a written undertaking to
the Secretary of the Company to be bound by the restrictions on the Shares set
forth in this Article 9; and (3) the Company receives an opinion of counsel
reasonably satisfactory to it that the sale to the Proposed Purchaser complies
with applicable federal and state corporate securities laws.
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Upon receipt of the appropriate undertaking from Shareholder and
Proposed Purchaser as specified in the previous paragraph, the Company shall
transfer the ownership of record to the Proposed Purchaser (and reissue the
applicable certificate).
If within this ninety (90)-day period the Shareholder does not enter
into an agreement for such a sale of Offered Shares to the Proposed Purchaser
which is consummated within thirty (30) days of the execution thereof, the Right
of First Refusal shall be revived as to the Offered Shares, which thereupon
shall not be sold or transferred unless the Shareholder first offers the Company
the right and option to repurchase any and all such Shares in accordance with
this Article 9.
Any transfer or purposed transfer of the Shares or any interest therein
shall be null and void unless the terms and conditions of this Article 9 are
observed or are waived by the Company's Board of Directors.
10. DEATH AND DISABILITY BENEFITS.
10.1 Reference is made to the Amendments to Employment Agreement
between the Company and each of Franklin C. Chiang and James T. Brady (the
"Employees") in substantially the forms attached hereto as Exhibits B-1 and B-2
(the "Amendments"), providing for distributions to be made to the Employees or
to their respective heir(s), beneficiary(ies), personal representative(s) or
successor(s) in interest as disability or death benefits, in consideration of
the Company's repurchase of up to an aggregate maximum of 15,000,000 shares of
Common Stock of the Company.
10.2 Purchaser hereby consents, for purposes of Sections 502, 503 and
506 of the California Corporations Code and Paragraphs 2(a), 3(a), 4(j), 6(5)
and 6(6) of Article IV of the Company's Articles of Incorporation (as in effect
on the date hereof and in any similar successor provisions in any amendment
thereto), to the distributions provided for in the Amendments. Purchaser agrees
that payments of such distributions out of funds of the Company legally
available therefor shall take precedence over any liquidation distribution or
redemption obligation of the Company relative to Shares held by Purchaser
pursuant to the Company's Articles of Incorporation. Purchaser specifically
waives notice of any such distribution, all rights to any preferential dividend
or distribution with respect thereto, and the priority of any preferential
liquidation distribution or redemption payment over any such distribution
pursuant to the Company's Articles of Incorporation. Purchaser hereby consents
and agrees to provide its consent to an amendment and/or restatement of the
Company's Articles of Incorporation to reflect and effectuate the foregoing
consent, agreement and waiver, if the company shall deem such amendment and/or
restatement necessary upon advice of counsel.
10.3 Purchaser shall instruct and use its best efforts to cause any
directors of the Company elected by it or subject to its control to consent to
and approve such distributions as provided pursuant to the terms of the
applicable Amendment.
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
10.4 It shall be a condition of any transfer of Shares by Purchaser
that the transferee shall agree in writing to be likewise bound by the consent,
waiver and agreement set forth in this section. The certificate(s) representing
any Shares shall bear a legend adverting to the provisions of this section.
11. MISCELLANEOUS.
11.1 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California applicable to contracts
between California residents entered into and to be performed entirely within
the State of California.
11.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
11.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement between the parties with regard to the subjects hereof and
thereof. Any term of this Agreement may be amended and the observance of any
term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), with the written consent of
the Company and the holders of a majority of the outstanding Shares (including,
for such purposes, on a proportional basis, any shares of Underlying Stock that
have not been sold to the public). Any amendment or waiver effected in
accordance with this section shall be binding upon each holder of any securities
purchased under this Agreement at the time outstanding (including securities
into which such securities have been converted), each future holder of all such
securities, and the Company.
11.4 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be effective five days after
mailed by first-class, registered, or certified mail, postage prepaid, or upon
delivery if delivered by hand, facsimile, telecopy, messenger or a courier
delivery service, addressed (a) if to Purchaser, at the address set forth below
or at such other address as Purchaser shall have furnished to the Company in
writing, or (b) if to the Company, at the address set forth below the Company's
name on the signature page to this Agreement or at such other address as the
Company shall have furnished to Purchaser and each such other holder in writing.
11.5 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any holder of any Shares upon any breach or default
of the Company under this Agreement shall impair any such right, power or remedy
of such holder 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
thereunder occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any holder of any breach or default under this Agreement, or any
waiver on the part of any holder of any
11
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
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
holder, shall be cumulative and not alternative.
11.6 CALIFORNIA 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 SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH
QUALIFICATION IS UNLAWFUL. PRIOR TO ACCEPTANCE OF SUCH CONSIDERATION BY THE
COMPANY, THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED
UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION
BEING AVAILABLE.
11.7 EXPENSES. The Company and Purchaser shall bear its own expenses
and legal fees incurred on its behalf with respect to this Agreement and the
transactions contemplated hereby.
11.8 SEVERABILITY. In the case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Series A
Preferred Stock Purchase Agreement as of the date set forth in the first
paragraph hereof.
COMPANY:
MATRIDIGM CORPORATION
47211 Bayside Drive
Fremont, CA 94538
By: /s/ Franklin C. Chiang
--------------------------------
Franklin C. Chiang
President
CHIANG:
/s/ Franklin C. Chiang
- -----------------------------------
Franklin C. Chiang
PURCHASER:
ZITEL CORPORATION
47211 Bayside Drive
Fremont, CA 94538
By: /s/ Henry C. Harris
---------------------------------
Henry C. Harris
Chief Financial Officer
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT A
RESTATED ARTICLES
<PAGE>
EXHIBIT A
AMENDED AND
RESTATED ARTICLES
OF INCORPORATION OF
MATRIDIGM CORPORATION
FRANKLIN C. CHIANG and ARTHUR K. LUND certify that:
FIRST: They are President and Secretary, respectively, of MatriDigm
Corporation, a California corporation (the "Corporation").
SECOND: The Articles of Incorporation of this Corporation are amended
and restated to read in their entirety as follows:
I.
The name of this Corporation is MatriDigm Corporation.
II.
The purpose of this Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is forty-one million six
hundred thousand (41,600,000) shares. Thirty two million (32,000,000) shares
shall be Common Stock with no par value (the "Common Stock"), and nine million
six hundred thousand (9,600,000) shares shall be Preferred Stock with no par
value.
IV.
The relative rights, preferences, privileges, and restrictions granted
to or imposed upon the Corporation's Series A Preferred and Common Stock or the
holders thereof are as follows:
1.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
1. DESIGNATION OF SERIES A STOCK.
Nine million six hundred thousand (9,600,000) shares of Preferred Stock
are designated Series A Preferred Stock (the "Series A Preferred"), such series
having the rights, preferences, privileges and restrictions specified herein.
2. DIVIDENDS AND DISTRIBUTIONS.
(a) Dividends and Distributions. Dividends shall accrue on the Series A
Preferred at the rate of $.05234 per share per annum from the date of issuance
appropriately adjusted for any stock splits, combinations, consolidations or
stock distributions or dividends with respect to such shares, payable out of
funds legally available therefor upon declaration by the Board of Directors of
this Corporation. Dividends on the Series A Preferred shall be cumulative. No
dividend, other than a stock dividend, shall be paid on any share of Common
Stock nor shall any distribution be made on the Common Stock, nor shall any
share of Common Stock be acquired by the Corporation, other than as provided in
Paragraph 2(b) below, unless (1) all accumulated but unpaid dividends on the
Series A Preferred plus (2) a dividend per share equal to the per share dividend
to be paid on the Common Stock, have first been paid on the Series A Stock.
(b) Deemed Consent. Each holder of shares of Series A Preferred shall
be deemed to have consented, for purposes of Sections 502, 503, and 506 of the
California Corporations Code and Paragraph 2(a) above, to distributions approved
by the Board of Directors of this Corporation and made by this Corporation in
connection with the repurchase of shares of Common Stock issued to or held by
officers, directors, employees or consultants of this Corporation upon
termination of their employment or services pursuant to agreements providing for
such repurchase.
3. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution, or winding up of this
Corporation, either voluntary or involuntary (hereinafter referred to as a
"liquidation"), the holders of shares of Series A Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets of
this Corporation to the holders of the Common Stock by reason of their ownership
thereof, an amount per share of Series A Preferred held equal to $.34896 as
appropriately adjusted for any stock splits, combinations, consolidations or
stock distributions or dividends with respect to such shares (the "Series A
Original Issue Price"), plus (i) the Series A Contributed Capital (as defined in
Paragraph 3( )) of all outstanding shares of Series A Preferred and (ii) all
accumulated but unpaid dividends per share on the Series A Preferred.
(b) If, upon the occurrence of a liquidation, the assets of the
Corporation legally available for distribution shall be insufficient to permit
the payment to the holders of the Series A Preferred of the full preferential
amount provided for in paragraph 3(a), then the entire assets of this
Corporation legally available for distribution shall be distributed ratably
among the
2.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
holders of the Series A Preferred in proportion to the preferential amount each
such holder is otherwise would be entitled to receive thereunder.
(c) Upon completion of the distribution provided for in paragraph 3(b),
all of the assets remaining in this Corporation, if any, shall be distributed
pro rata to the holders of the Common Stock.
(d) (i) A consolidation or merger of this Corporation with or into any
other corporation (other than a merger to reincorporate this Corporation in
another state or a merger with another corporation owned by the same
stockholders, in the same proportions, as this Corporation prior to such merger)
or corporations or a sale, conveyance, or other disposition of all or
substantially all of this Corporation's property, assets or business, shall be
deemed to be a liquidation within the meaning of this paragraph 3.
(ii) In any of such events, if the consideration received by this
Corporation is other than cash, its value shall be deemed to be its fair market
value. In the case of publicly traded securities, fair market value shall mean
the closing market price for such securities on the date such consolidation,
merger, or sale is consummated. If the consideration is in a form other than
publicly traded securities, its fair market value shall be determined in good
faith by the Board of Directors of this Corporation; provided, however, that
such value shall be determined by an independent appraiser reasonably acceptable
to the Corporation if reasonably requested by the holders of a majority of the
Series A Preferred.
(iii) From and after the date of any event giving rise to a
distribution pursuant to clause (i) of this subparagraph (e) in the course of
which the Series A Preferred is not converted into shares of a surviving
corporation other than this Corporation or otherwise canceled, all rights of the
holders of shares of Series A Preferred as holders thereof, except the right to
receive such distribution, shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever. Such shares shall be
canceled and shall not resume the status of authorized but unissued shares of
Preferred Stock.
(e) The aggregate amount of all contributions to the capital of this
Corporation made by any and all holders of shares of Series A Preferred during a
time when the contributing holder holds any such shares shall be termed the
"Total Series A Contributions". Subject to adjustment as provided below, the
Total Series A Contributions, divided by all of the shares of Series A Preferred
outstanding at any given time, shall be the "Series A Contributed Capital."
Effective upon the conversion, redemption or cancellation of any shares of
Series A Preferred, the Total Series A Contributions as in effect immediately
prior to that transaction shall be adjusted by subtracting therefrom the
aggregate Series A Contributed Capital of all such converted, redeemed or
canceled shares; and the Series A Contributed Capital shall thereupon be
recomputed to reflect the adjusted Total Series A Contributions as divided among
all shares of Series A Preferred that remain outstanding immediately
thereafter."
3.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
4. CONVERSION.
The holders of the Series A Preferred shall have the following
conversion rights (the "Conversion Rights"):
(a) CONVERSION.
(i) RIGHT TO CONVERT. Subject to subparagraphs (c), (d), (e) and
(g) of this paragraph 4, each share of Series A Preferred shall initially be
convertible into one (1) fully paid and nonassessable share of Common Stock at
the option of the holder thereof, at any time after the date of issuance of such
share at the office of the Corporation or any transfer agent for such stock. The
applicable number of shares of Common Stock into which one share of Series A
Preferred may be converted is hereinafter referred to as the "Series A
Conversion Rate."
(ii) AUTOMATIC CONVERSION. Each share of Series A Preferred shall
automatically be converted into shares of Common Stock at the then effective
Series A Conversion Rate upon the first to occur of: (A) in the event of the
closing with the underwriter of a firm commitment underwritten public offering
pursuant to an effective registration statement (other than a registration
statement with respect to any securities offered pursuant to any employee
purchase, savings, option, bonus, appreciation, profit sharing, thrift,
incentive, or similar plan of the Corporation) under the Securities Act of 1933,
as amended, covering the offer and sale of the Corporation's Common Stock,
whether for the account of the Corporation or for the account of one or more
shareholders of the Corporation, in which the aggregate price to the public
equals or exceeds $15,000,000 and in which the public offering price per share
of Common Stock offered equals or exceeds $1.00, subject to appropriate
adjustments for stock splits, stock dividends, combinations of shares or other
similar events occurring subsequent to the Series A Original Issue Date as
defined below (an "Initial Public Offering"); such automatic conversion shall be
deemed to have occurred at the closing with the Underwriter of such Initial
Public Offering; or (B) upon the vote or written consent of the holders of a
majority of the shares of Series A Preferred outstanding; or (C) such time as
there remain outstanding less than 1,000,000 shares of Series A Preferred.
(b) MECHANICS OF CONVERSION. Before any holder of Series A Preferred
shall be entitled to convert the same into shares of Common Stock, such holder
shall surrender the certificate or certificates for such shares, duly endorsed,
at the office of the Corporation or of any transfer agent for such stock, and
shall give written notice to the Corporation at such office that such holder
elects to convert the same and shall state in the notice the name or names in
which such holder wishes the certificate or certificates for shares of Common
Stock to be issued. The Corporation shall then, as soon as is practicable, issue
and deliver at such office to such holder, or to such holder's nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of surrender of
the shares to be converted, and the person or persons entitled to receive the
shares of
4.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on such date.
(c) ADJUSTMENT FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the
event the Corporation at any time or from time to time after the effective date
of a written agreement by the Corporation for the initial sale of Series A
Preferred (hereinafter referred to as the "Series A Original Issue Date")
effects a subdivision or combination of its outstanding Common Stock into a
greater or lesser number of shares, then and in each such event the Series A
Conversion Rate shall be increased or decreased proportionately.
(d) ADJUSTMENT FOR CERTAIN DIVIDENDS, DISTRIBUTIONS, AND COMMON STOCK
EQUIVALENTS. In the event the Corporation at any time or from time to time after
the Series A Original Issue Date, as applicable, shall make, issue, or fix a
record date for the determination of holders of Common Stock entitled to receive
a dividend or other distribution payable in additional shares of Common Stock or
other securities or rights (hereinafter referred to as "Common Stock
Equivalents") convertible into or entitling the holder to receive additional
shares of Common Stock, without payment of any consideration by such holder for
the additional shares of Common Stock or the Common Stock Equivalents (including
the additional shares of Common Stock issuable upon conversion or exercise),
then, and in each such event, the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
for subsequent adjustment of such number) of Common Stock issuable in payment of
such dividend or distribution or upon conversion or exercise of such Common
Stock Equivalents shall be deemed to be issued and outstanding as of the time of
such issuance or, in the event such record date shall have been fixed, as of the
close of business on such record date, subject to subparagraph 4(d)(ii)(A). In
each such event the Series A Conversion Rate shall be increased as of the time
of such issuance or, in the event such a record date shall have been fixed, as
of the close of business on such record date, by multiplying the Series A
Conversion Rate by a fraction,
(i) the numerator of which shall be the total number of shares of
Common Stock issued and outstanding, plus the number of shares of Common Stock
subject to outstanding and vested stock options immediately prior to the time of
such issuance or the close of business on such record date, plus the number of
shares of Common Stock issuable in payment of such dividend or distribution or
upon conversion or exercise of such Common Stock Equivalents; and
(ii) the denominator of which shall be the total number of shares
of Common Stock issued and outstanding, plus the number of shares of Common
Stock subject to outstanding and vested stock options immediately prior to the
time of such issuance or the close of business on such record date;
provided, however,
(A) if such record date shall have been fixed and such dividend is not fully
paid or if such distribution is not fully made on the date fixed for such
dividend or distribution, then the
5.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Series A Conversion Rate shall be recomputed retroactively as if such record
date had not been fixed and the Series A Conversion Rate shall be adjusted
pursuant to this subparagraph 4(d) as of the time of actual payment of such
dividends or distributions;
(B) if such Common Stock Equivalents provide, with the passage of time or
otherwise, for any decrease in the number of shares of Common Stock issuable
upon conversion or exercise (or upon the occurrence of a record date with
respect thereto), and any subsequent adjustments based thereon, the Series A
Conversion Rate shall, upon any such decrease becoming effective, be recomputed
to reflect such decrease insofar as it affects the rights of conversion or
exercise of the Common Stock Equivalents then outstanding;
(C) upon the expiration of any rights of conversion or exercise under any
unexercised Common Stock Equivalents, the Series A Conversion Rate computed upon
the original issue (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if the only additional shares of Common Stock
issued were the shares of such stock, if any, actually issued upon the
conversion or exercise of such Common Stock Equivalents; and
(D) in the case of Common Stock Equivalents that expire by their terms not more
than sixty (60) days after the date of issuance, no adjustment of the Series A
Conversion Rate shall be made until the expiration or exercise of all such
Common Stock Equivalents, whereupon such adjustment shall be made in the manner
provided in clause (C).
(e) Adjustment of Series A Conversion Rate for Diluting Issues. For
purposes of this paragraph 4, the amount obtained by dividing $0.34896 by the
Series A Conversion Rate shall, unless adjusted pursuant to this paragraph 4(e),
be the "Series A Conversion Price." Except as otherwise provided in this
subparagraph 4(e), in the event the Corporation sells or issues any Common Stock
or Common Stock Equivalents subsequent to the Series A Original Issue Date at a
per share consideration (as defined below) less than the Series A Conversion
Price then the Series A Conversion Price and Series A Conversion Rate then in
effect shall be adjusted by (i) reducing the Series A Conversion Price to the
per share price received for such Common Stock or Common Stock Equivalents and
(ii) increasing the Series A Conversion Rate by multiplying the Series A
Conversion Rate in effect immediately prior to such sale or issuance by a
fraction, the numerator of which is the Series A Conversion Price in effect
immediately prior to such sale or issuance and the denominator of which is the
adjusted Series A Conversion Price, as adjusted pursuant to clause (i). For the
purposes of the foregoing, the per share consideration with respect to the sale
or issuance of Common Stock shall be the price per share received by the
Corporation (or if such shares are offered by the Corporation for subscription,
the subscription price, or if such shares are sold to underwriters or dealers
for public offering, without a subscription offering, the initial public
offering price), prior to the payment of any expenses, commissions, discounts,
and other applicable costs. With respect to the sale or issuance of Common Stock
Equivalents that are convertible into or exchangeable for Common Stock without
further consideration, the per share consideration shall be the quotient
obtained by dividing (w) the aggregate consideration received by the Corporation
upon the sale or
6.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
issuance of such Common Stock Equivalents by (x) the maximum number of shares of
Common Stock issuable with respect to such Common Stock Equivalents (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for subsequent adjustment of such number). With respect to the
issuance of other Common Stock Equivalents, the per share consideration shall be
the quotient obtained by dividing (y) the total aggregate consideration received
by the Corporation upon the sale or issuance of such Common Stock Equivalents
plus the minimum aggregate amount of additional consideration receivable by the
Corporation upon the conversion or exercise of such Common Stock Equivalents by
(z) the maximum number of shares of Common Stock issuable with respect to such
Common Stock Equivalents. The issuance of Common Stock or Common Stock
Equivalents for no consideration (other than in connection with a dividend or
other distribution treated under paragraph 4(d) shall be deemed to be an
issuance at a per share consideration of $.01. In connection with the sale or
issuance of Common Stock and/or Common Stock Equivalents for noncash
consideration, the amount of consideration shall be determined in good faith by
the Board of Directors of this Corporation.
As used herein, "Additional Shares of Common Stock" shall mean either
shares of Common Stock issued subsequent to the Series A Original Issue Date, as
applicable, or, with respect to the issuance of Common Stock Equivalents, the
maximum number of shares of Common Stock issuable in exchange for, upon
conversion of, or upon exercise of such Common Stock Equivalents subsequent to
the Series A Original Issue Date, as applicable.
Once any Additional Shares of Common Stock have been treated as having
been issued for the purpose of this subparagraph 4(e), they shall be treated as
issued and outstanding shares of Common Stock whenever any subsequent
calculations must be made pursuant hereto; provided, that on the expiration of
any options, warrants, or rights to purchase Additional Shares of Common Stock,
the termination of any rights to convert or exchange for Additional Shares of
Common Stock, or the expiration of any options or rights related to such
convertible or exchangeable securities on account of which an adjustment in the
Series A Conversion Rate has been made previously pursuant to this subparagraph
4(e), the Series A Conversion Rate, as applicable, shall forthwith be readjusted
to such conversion rate as would have obtained had the adjustment made upon the
issuance of such options, rights, or securities or options or rights related to
such securities been made upon the basis of the issuance of only the number of
shares of Common Stock actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities, or upon the exercise
of the options or rights related to such securities.
The foregoing notwithstanding, no adjustment of the Series A Conversion
Rate and Series A Conversion Price shall be made pursuant to this subparagraph
4(e) as a result of the issuance of:
(i) any shares of Common Stock pursuant to which the Series A
Conversion Rate or Series A Conversion Price are adjusted under subparagraphs
(c), (d), or (g) of this paragraph 4;
7.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(ii) any shares of Common Stock pursuant to the exchange,
conversion, or exercise of any Common Stock Equivalents that have previously
been incorporated into computations hereunder on the date when such Common Stock
Equivalents were issued;
(iii) Common Stock issued or issuable upon conversion of the Series
A Preferred; or
(iv) Not more than 6,400,000 shares of Additional Shares of Common
Stock issued to officers, directors, employees or consultants of the Corporation
pursuant to a stock option or restricted stock purchase plan or plans or
agreement or agreements approved by the Board of Directors of this Corporation.
(f) DE MINIMIS CHANGES; WAIVER. No adjustment in the respective Series
A Conversion Rate and Series A Conversion Price shall be made if such adjustment
would result in a change in such conversion price per share of less than $.01.
Any adjustment of less than $.01 that is not made shall be carried forward and
shall be made at the time of and together with any subsequent adjustment that,
on a cumulative basis, amounts to an adjustment of $.01 or more in such
conversion prices. No adjustment in the Series A Conversion Rate or the Series A
Conversion Price shall be made with respect to any sale or issuance pursuant to
subparagraph (e) of this paragraph 4 to the extent such adjustment is expressly
waived in writing by the holders of a majority of the then outstanding shares of
Series A Preferred.
(g) ADJUSTMENTS FOR OTHER RECLASSIFICATIONS, DIVIDENDS AND
DISTRIBUTIONS. If there occurs any capital reorganization or any
reclassification of the capital stock of the Corporation, each share of Series A
Preferred shall thereafter be convertible into the same kind and amounts of
securities or other assets, or both, that were issuable or distributable to the
holders of shares of outstanding Common Stock of the Corporation upon such
reorganization or reclassification, in respect of that number of shares of
Common Stock into which such shares of Series A Preferred might have been
converted immediately prior to such reorganization or reclassification; and in
any such case, appropriate adjustments (as determined by the Board of Directors
of this Corporation) shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the holders of
Series A Preferred to the end that the provisions of these Articles shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
securities or other assets thereafter deliverable upon the conversion of the
Series A Preferred.
(h) NO IMPAIRMENT. The Corporation will not, through any
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 Article by the Corporation, but will at all times in good faith assist in
the carrying out of all the provisions of this paragraph 4 and in the taking of
all such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred.
8.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(i) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Series A Conversion Rate pursuant to this
paragraph 4, the Corporation shall promptly compute such adjustment or
readjustment in accordance with the terms of this Article and prepare and
furnish to each holder of Series A Preferred, a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series A Preferred, furnish or cause to be
furnished to such holder a like certificate setting forth (i) such adjustments
and readjustments, (ii) the Series A Conversion Rate in effect at the time, and
(iii) the number of shares of Common Stock and the amount, if any, of other
property that at the time would be received upon the conversion of the Series A
Preferred.
(j) NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders of such securities who are entitled to
receive any distribution (other than a dividend in which the Series A Preferred
shares pursuant to Paragraph 2(a) above), any Common Stock Equivalents or any
right to subscribe for, purchase, or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other right,
the Corporation shall mail to each holder of Series A Preferred at least twenty
(20) days prior to the date specified in such notice, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution, or rights, and the amount and character of such dividend,
distribution, or right.
(k) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Series A Preferred such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Series A Preferred the
Corporation will use its best efforts to take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
(l) FRACTIONAL SHARES. No fractional share shall be issued upon the
conversion of any share or shares of Series A Preferred. All shares of Common
Stock (including fractions) issuable upon conversion of more than one share of
Series A Preferred by a holder of such stock shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after aggregation, the conversion would result in the
issuance of a fractional share of Common Stock, the Corporation shall, in lieu
of issuing any fractional share but only to the extent legally permissible, pay
the holder otherwise entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of conversion (as determined in good
faith by the Board of Directors of this Corporation).
9.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(m) NOTICES. Any notice required by the provisions of this paragraph 4
to be given to the holders of shares of Series A Preferred shall be deemed given
if deposited in the United States mail, postage prepaid, and addressed to each
holder of record at the address of such holder appearing on the books of the
Corporation.
5. VOTING RIGHTS.
Except as otherwise required by law, respectively, each share of Common
Stock issued and outstanding shall have one vote, and each share of Series A
Preferred issued and outstanding shall have the number of votes equal to the
number of shares of Common Stock into which the Series A Preferred is
convertible as adjusted from time to time pursuant to paragraph 4 hereof, and
the holders of the Series A Preferred shall vote together with the holders of
the Common Stock and not as a separate class; provided, however, that the
holders of the Series A Preferred voting together as a class shall be entitled
to elect two (2) directors, the holders of the Common Stock voting together as a
class shall be entitled to elect two (2) directors and the fifth director shall
be elected by vote or written consent of both (a) the holders of a majority of
the outstanding shares of Common Stock (b) the holders of a majority of the
outstanding Series A Preferred.
6. PROTECTIVE PROVISIONS.
So long as 2,000,000 shares of Series A Preferred are outstanding, this
Corporation shall not, without first obtaining the approval of the holders of a
majority of the outstanding Series A Preferred, take any action that:
(1) materially and adversely alters or changes the rights, preferences
and privileges of the Series A Preferred;
(2) increases the authorized number of shares of Series A Preferred;
(3) creates any new class or series of shares having rights,
preferences and privileges senior to or on a parity with the Series A Preferred;
(4) results in any merger or consolidation of the Corporation, any
acquisition of all or substantially all of the assets of any other company, or
any transaction in which all or any material part of the assets of the
Corporation are sold or any reorganization of the Corporation's capital
structure;
(5) redeems or otherwise repurchases any of the outstanding shares of
Common Stock or Preferred Stock (other than shares of such stock redeemed or
repurchased (1) from any officer, director, employee or consultant of the
Corporation at a price per share not greater than that paid for such shares by
such officer, director, employee or consultant, and which shares are subject to
vesting requirements and have not vested as of the date of such redemption or
10.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
repurchase or (2) pursuant to paragraph 7 or (3) upon exercise of a contractual
right of first refusal approved by one or two directors elected by the Series A
Preferred);
(6) consists of a loan of money to any officer, director, holder of
more than 10% of the Corporation's outstanding capital stock, or any affiliate
of any such person or entity, or permit any such person or entity to become
indebted to the Corporation, other than in the ordinary course of business,
which loan has not been approved by a disinterested majority of the Board of
Directors;
(7) would result in taxation of the holders of the Series A Preferred
under section 305 of the Internal Revenue Code of 1986, as amended (the "Code")
or any comparable provision of the Code; or
(8) increases the number of directors of the Corporation to more than
five (5).
7. REDEMPTION OF SERIES A PREFERRED.
Subject to the provisions of this paragraph 7, the Series A Preferred
shall be redeemable as follows:
(a) REDEMPTION AT THE OPTION OF THE CORPORATION. The Corporation may,
at its option at any time prior to November 1, 1999 and upon written notice (the
"Call Notice"), redeem all but not less than all of the outstanding shares of
Series A Preferred at the then applicable Call Price (defined below). The Call
Notice shall be given to each holder of record (at such holder's address
appearing on the stock transfer books of the Corporation) of Series A Preferred
whose shares are to be redeemed and shall state the number of shares to be
redeemed, the effective date (the "Call Effective Date") of the redemption
(which shall not be less than forty-five (45) days from the date of delivery of
such notice) and the Call Price to be paid. The Call Price shall be payable in
cash by the Corporation on the Call Effective Date and shall be equal to the
Series A Initial Issue Price plus the Series A Contributed Capital
(appropriately adjusted for stock dividends, splits or similar events occurring
subsequent to the Series A Original Issue Date), but not including any
accumulated but unpaid dividends.
(b) REDEMPTION AT THE OPTION OF THE SERIES A HOLDERS. Each holder of
Series A Preferred may, at the option of such holder upon written notice (a "Put
Notice") given to the Corporation at any time during the twelve (12) month
period commencing November 1, 1999 and ending October 31, 2000, require the
Corporation to redeem up to a maximum or one third (1/3) of the shares of Series
A Preferred held by the holder as of November 1, 1999. Each such holder may, at
its option upon a Put Notice given to the Corporation at any time during the
twelve (12) month period commencing November 1, 2000, and ending October 31,
2001, require the Corporation to redeem up to a maximum of the lesser of one
third (1/3) of the shares of Series A Preferred held by the holder as of
November 1, 1999 or one half (1/2) of such shares held by the holder as of
November 1, 2000. Each such holder may, at its option upon a Put Notice given to
the Corporation at any time during the twelve (12) month period commencing
11.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
November 1, 2001, and ending October 31, 2002, require the Corporation to redeem
up to a maximum of the lesser of one third (1/3) of the shares of Series A
Preferred held by the holder as of November 1, 1999 or all of such shares held
by the holder as of November 1, 2001. In each case the Put Notice shall state
the number of shares to be redeemed and the effective date (the "Put Effective
Date") of the redemption (which shall not be less than 90 days from the date
such notice is received by the Corporation). The Put Price shall mean the price
per share (appropriately adjusted for stock dividends, splits or similar events
occurring subsequent to the Series A Original Issue Date) equal to the sum of
(i) the Series A Original Issue Price, (ii) the Series A Contributed Capital and
(iii) accrued but unpaid dividends. The Put Price shall be payable in cash out
of funds legally available therefor as follows: one fourth (1/4) shall be
payable on the Put Effective Date and one fourth (1/4) shall be payable at the
end of the third, sixth and ninth months after the Put Effective Date (with
interest at 10% per annum from such date).
(c) SURRENDER OF STOCK. Subject to the last sentence of this paragraph
7(c), on or before each Put Effective Date or Call Effective Date, as applicable
("Redemption Date"), each holder of shares of Series A Preferred to be redeemed,
unless the holder has exercised its rights to convert the shares as provided in
paragraph 4 hereof, shall surrender the certificate or certificates representing
such shares to the Secretary of the Corporation, and thereupon the Call Price or
the Put Price per share, as applicable, (the "Redemption Price") for such shares
shall be payable in the manner set forth above to the order of the person whose
name appears on such certificate or certificates as the owner thereof, and each
certificate to be redeemed shall be canceled and retired. If less than all the
shares represented by a certificate are to be redeemed, the Corporation shall
issue a new certificate for the unredeemed shares to the holder of such shares.
Subject to the last sentence of this paragraph 7(c), from and after each
Redemption Date, unless there shall have been a default in payment of the
Redemption Price, all rights of the holders of shares of Series A Preferred
designated for redemption in the Call Notice or Put Notice, as applicable (the
"Redemption Notice"), as holders of Series A Preferred (except the right to
receive the Redemption Price upon surrender of its certificate or certificates)
shall cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever. In the event of a redemption pursuant to paragraph 7(b),
the holders of the Series A Preferred so redeemed shall, if they so elect, be
entitled to retain the shares so redeemed and for which the Put Price has not
been paid pursuant to a stock pledge agreement approved by the holders of a
majority of the shares of Series A Preferred then outstanding and reasonably
acceptable to the Corporation which agreement shall provide, among other things,
that upon, but only upon, any default in the payment of the Put Price of such
shares of Series A Preferred pursuant to the terms of paragraph 7(b) and until
but only until such default is cured, the number of such shares of Series A
Preferred as to which the Put Price has not been paid shall have the status of
issued and outstanding shares of Series A Preferred and the holders of such
shares of Series A Preferred shall be entitled to exercise any and all rights of
holders with respect to such shares as set forth in these Articles, including,
without limitation, dividend rights, liquidation rights, voting rights and the
right to give consent pursuant to paragraph 6 and shall have all other rights
12.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
of a secured creditor under California law and upon the cure of such default all
such rights shall cease.
(d) LEGAL FUNDS. For the purpose of determining whether funds are
legally available for redemption of shares of Series A Preferred pursuant to
paragraph 7(b), the value of the assets of this Corporation shall be determined
in good faith by the Board of Directors of this Corporation; provided that such
value shall be determined by an independent appraiser reasonably acceptable to
this Corporation if reasonably requested by the holders of a majority of the
shares of Series A Preferred which have been redeemed but for which funds were
not legally available for redemption. Holders of Series A Preferred shall have
no right to bring a legal action against the Corporation for failure to redeem
shares of Series A Preferred to the extent funds are not legally available
therefor, provided the Corporation complies with the provisions of this
Paragraph (d). The Corporation shall not give a Call Notice unless funds are
legally available to redeem all outstanding Shares of Series A Preferred.
(e) PARTIAL REDEMPTION. If the funds of the Corporation legally
available for redemption of shares of Series A Preferred on any Redemption Date
are insufficient to redeem the total number of such shares that the Corporation
had become obligated to redeem on such date, those funds that are legally
available will be used to redeem the maximum possible number of such shares
ratably among the holders of such shares to be redeemed. The shares of Series A
Preferred not redeemed shall remain outstanding and entitled to all the rights
and preferences provided herein. As of any month end thereafter when additional
funds of the Corporation are legally available for the redemption of 100,000 or
more shares of Series A Preferred, such funds will immediately be used to redeem
the balance of the shares that the Corporation has become obligated to redeem on
any Redemption Date but that it has not redeemed because of such lack of legally
available funds; redemptions shall be effected in the order of Redemption Dates
if there be more than one.
8. STATUS OF CONVERTED OR REDEEMED STOCK.
In case any shares of Series A Preferred shall be converted pursuant to
paragraph 4 or redeemed pursuant to paragraph 7 hereof, the shares so converted
shall be canceled and shall not resume the status of authorized but unissued
shares of Preferred Stock.
9. RESIDUAL RIGHTS.
All rights accruing to the outstanding shares of the Corporation not
expressly provided for to the contrary herein shall be vested in the Common
Stock.
V.
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law. Any
repeal or modification of this Article
13.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
shall only be prospective and shall not effect the rights under this Article in
effect at the time of the alleged occurrence of any action or omission to act
giving rise to liability.
VI.
The Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through bylaw
provisions, agreements with agents, vote of shareholders or disinterested
directors or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code, subject only to the applicable
limits set forth in Section 204 of the California Corporations Code with respect
to actions for breach of duty to the Corporation and its shareholders.
THIRD: The foregoing Amended and Restated Articles of Incorporation
have been duly approved by the Board of Directors of this Corporation.
FOURTH: The foregoing Amended and Restated Articles of Incorporation
have been duly approved by the required vote of shareholders in accordance with
the Articles of Incorporation of this Corporation and Section 902 of the
California Corporations Code. The total number of outstanding shares of this
Corporation is 16,000,000 shares of Common Stock. The number of shares voting in
favor of the amendment and restatement equalled or exceeded the vote required.
The percentage vote required was more than 50% of the holders of the outstanding
shares of each of the Common Stock.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated: November 8, 1995
/s/ Franklin C. Chiang
------------------------------
Franklin C. Chiang, President
/s/ Arthur K. Lund
------------------------------
Arthur K. Lund, Secretary
14.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT B-1
MATRIDIGM CORPORATION
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of the 1st day of October, 1995 by
and between MatriDigm Corporation, a California corporation ("Employer") and
Franklin C. Chiang ("Employee").
Employer desires to employ Employee as its Chief Technical Officer and
Employee desires to accept such employment on the terms and conditions set forth
herein.
NOW THEREFORE, the parties agree as follows:
I. DUTIES.
1.1 Employer shall employ Employee as its Chief Technical Officer and
Employee accepts such employment, effective October 1, 1995 (the "Effective
Date") subject to the terms and conditions set forth herein.
1.2 Employee shall have general supervision of the technical
development aspects of the business of Employer, subject to the control of the
Employer's Board of Directors (the "Board").
1.3 Employee shall perform his duties faithfully, diligently, in a
businesslike manner, and for the best interests of Employer during the term of
employment.
1.4 Employee shall report directly to the President of Employer.
1.5 All technical staff personnel of Employer shall report to Employee.
1.6 Employee and Employer, by the Board or the President, shall
establish expected goals, objectives and outcomes by mutual agreement on an
annual basis, no later than the first day of January of each year during the
term of employment hereunder.
1.7 Employee shall be entitled to continue to engage in his private
consulting business provided that such activities do not interfere with his
duties and responsibilities to Employer hereunder and provided that Employee
shall not act as consultant or contractor for any actual or potential business
competitor or customer of, or vendor to, Employer, or any person or entity that
reasonably could be construed to be interested in obtaining knowledge of
Employer's employees, business plans or programs, during the term of employment
hereunder.
II. TERMINATION; SEVERANCE AND DEATH BENEFITS.
2.1 AT WILL EMPLOYMENT. The employment of Employee shall have no
specified term and may be terminated at the will of either party on notice to
the other as defined in Section 2922 of the
1
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
California Labor Code. Nothing herein shall imply or be construed to promise a
specified term of employment.
2.2 SEVERANCE AND DEATH BENEFITS. In the event of termination of
Employee's employment for any reason or for no reason, or Employee's death
during Employee's employment, Employee or his legal successors, as applicable,
shall be entitled to receive the compensation that otherwise would have been due
to Employee hereunder had Employee's employment continued for a period of six
months following the month in which his termination or death occurs. The
quarterly performance bonuses that otherwise would have been payable to Employee
under subsection 3.6 applicable to that six month period following such event
shall be paid in amounts equal to the average of the last four quarterly bonuses
paid to Employee immediately preceding the date of notice of the termination or
death.
III. BENEFITS; PERFORMANCE BONUS.
3.1 Employer shall pay Employee a base salary of [REDACTED] per year.
The base salary shall be paid in biweekly installments in accordance with
Employer's normal administrative procedures.
3.2 Employer shall reimburse such expenses, incurred by Employee in
furtherance of or in connection with the business of Employer, as Employer and
Employee may mutually agree upon. Employee shall account for such expenses in a
manner satisfactory to Employer.
3.3 Employer shall withhold federal and state taxes, social security
taxes, state disability and unemployment taxes and such other taxes or
government-mandated withholdings in accordance with Employer's standard
administrative practices as applied to other employees.
3.5 Employer shall provide Employee with a package of benefits
("Executive Package"), including disability insurance, life insurance, health
insurance, vacation (four weeks per year initially; five weeks per year
beginning with the third year of Employee's employment hereunder), participation
in any applicable profit-sharing, retirement or 401-K programs Employer may
offer, and other benefits, at least equivalent to that provided or offered by
Employer to other administrative officers employed by Employer. Employer shall
ensure that at all times the disability insurance provided to Employee provides
for payment of at least 60% of the income earned by Employee during the
immediately preceding twelve month period.
3.6 The Board or the President of Employer shall set performance
targets and criteria for each year, in its reasonable discretion, in congruity
with the annual goals, objectives and outcomes agreed between Employee and
Employer pursuant to subsection 1.6 hereof. The targets and criteria set by
Employer shall provide for full or partial fulfillment, or degrees of
performance, thereof. Employer shall award Employee an annual bonus in
accordance with the degree to which Employee has fulfilled or achieved the
annual targets and criteria. The target amount of the bonus for full fulfillment
or performance of the targets and criteria shall be set initially at [REDACTED],
and shall be
2
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
adjusted annually on the anniversary hereof on the basis of such factors as the
Board of Directors may deem appropriate.
IV. MISCELLANEOUS.
4.1 Neither party shall assign its rights or delegate its obligations
under this Agreement without the prior written consent of the other party.
4.2 Except as provided in that certain Founders Agreement of even date
herewith by and among Employee, Employer and certain other persons named therein
as Founders, and the agreements executed pursuant thereto (including the
Confidentiality and Intellectual Property Agreement set forth as an exhibit
thereto) and the Indemnification Agreement between the Employer and Employee of
even date herewith, this Agreement comprises the sole and entire agreement
between Employer and Employee, and supersedes and replaces all previous
agreements or understandings between the parties, written or oral, with regard
to the subject matter hereof.
4.3 This Agreement may be modified or amended only by a written
agreement signed by both parties hereto.
4.4 In the event that litigation is brought in any court of law to
determine any rights, obligations or damages under this Agreement, the
prevailing party shall be entitled to recover reasonable costs and attorneys'
fees related to such litigation.
4.5 This Agreement shall be governed by and construed in accordance
with the laws of the State of California.
4.6 Any notice under this Agreement shall be deemed to be received at
the time of delivery, if delivered personally, or three days after the date of
posting with the United States Postal Service, first class postage prepaid,
addressed to the applicable party at the address set forth below:
To Employer:
Chairman, Board of Directors
MatriDigm Corporation
47211 Bayside Parkway
Fremont, CA 94538
To Employee:
Mr. Franklin C. Chiang
532 College Avenue
Palo Alto, CA 95306
3
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, effective for
all purposes as of the date first above written.
MATRIDIGM CORPORATION
By: Barry Lee Katzman Franklin C. Chiang
----------------------------------- ---------------------------------
Name: Assistant Secretary Franklin C. Chiang
4
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT B-1
MATRIDIGM CORPORATION
AMENDMENT OF EMPLOYMENT AGREEMENT
This Amendment of Employment Agreement (the "Amendment") is entered
into this 15th day of November, 1995, by and between MatriDigm Corporation, a
California corporation ("Employer") and Franklin C. Chiang ("Employee").
Reference is made to that certain Employment Agreement dated October 1,
1995, by and between Employer and Employee (the "Agreement"). Capitalized terms
used herein without definition shall have the meanings attributed to them in the
Agreement.
The parties deem it to be in their mutual best interests to amend the
Agreement as set forth herein.
NOW THEREFORE, the parties agree as follows:
1. Section 2.2 of the Agreement is amended to exclude death benefits,
and to apply only to termination of Employee's employment with Employer for any
reason or for no reason, excluding death and disability.
2. Section 3.5 of the Agreement is amended to provide that:
(a) In lieu of health insurance, Employer shall provide
Employee with a supplemental monthly cash payment in the amount of $300.00.
(b) In lieu of disability and life insurance, Employer shall
provide Employee the following arrangement:
In the event of death of Employee while employed by
Employer, or termination of such employment resulting from a disability (as
defined in the Americans with Disabilities Act) (a "Triggering Event"), Employee
(in the case of Employee's disability) or (in the event of Employee's death)
Employee's heir(s), personal representative(s) or, if specified by Employee, the
designated beneficiary(ies), as applicable (in any case, "Beneficiary") shall
have the right to require Employer to purchase shares of Employer's Common Stock
("Shares") held by Beneficiary, as follows:
(i) Not more than once during the period of 90 days
following the Triggering Event, and once during the period of 90 days following
each of the first through the ninth anniversaries of the Triggering Event (total
of ten years), Beneficiary shall have the right to give written notice to
Employer that Beneficiary wishes to receive disability or death benefit
proceeds, as applicable, from the sale of the Shares. The notice shall specify
the amount of proceeds which Beneficiary wishes to receive.
1
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(ii) Subject to subparagraph (v), the maximum amount of
proceeds indicated on any such notice shall be forty percent (40%) of Employee's
annual base salary at the time of the Triggering Event. The total amount
indicated on all such notices in the aggregate shall not exceed four (4) times
Employee's annual base salary at the time of the Triggering Event.
(iii) Within thirty (30) days after receipt of such a
notice, Employer shall effectuate the purchase from Beneficiary of the number of
Shares, the aggregate purchase price of which is equal to the amount of proceeds
requested by Beneficiary in the notice, subject to the maximum provided in
subparagraph (ii). The purchase price per Share to be paid by Employer for the
Shares shall be the greater of (A) the fair market value of the Shares (as
reasonably determined by the Board of Directors of Employer in its discretion
exercised in good faith) in effect on the date of the notice or, if greater,
that in effect on the date that Employer effectuates the purchase of the Shares;
or (B) the quotient obtained by dividing forty percent (40%) of Employee's
annual base salary at the time of the Triggering Event by 900,000.
(iv) Employer may require Beneficiary to provide the stock
certificate representing the Shares to be purchased as a condition of the
purchase, provided that Beneficiary may substitute an affidavit of lost
certificate in form reasonably acceptable to Employer if appropriate. Employer
shall cause a new stock certificate reflecting unpurchased shares represented by
original certificate to be reissued to Beneficiary as promptly as reasonably
practicable after effectuating the purchase.
(v) In the event of liquidation of Employer subsequent to
any Triggering Event, Employer's obligations under this section shall be
accelerated and Employer shall provide Beneficiary the entire amount of all
proceeds remaining available (up to the aggregate maximum of four (4) times
Employee's annual base salary at the time of the Triggering Event) as
consideration for the purchase of the requisite number of Shares, as computed
pursuant to subparagraph (iii), prior and in preference to any other
distribution to shareholders pursuant to the Company's Articles of
Incorporation. A consolidation or merger of Employer with or into any other
corporation or corporations or a sale, conveyance, or other disposition of all
or substantially all of Employer's property, assets or business shall be deemed
to be a liquidation for purposes of this subparagraph.
(vi) Employer's obligation to repurchase Shares from
Beneficiary pursuant to a notice from Beneficiary under subparagraph (i) of this
section shall take precedence and priority over any obligation of Employer to
redeem shares of capital stock of Employer pursuant to Employer's Articles of
Incorporation. In the event that Employer shall have inadequate funds legally
available to effectuate the repurchase required by this section, Employer shall
purchase the number of Shares for which Employer then has funds legally
available, and shall purchase the balance of the Shares to be purchased upon
each month end thereafter, to the extent of funds then legally available, until
the purchase has been completed. Pending purchases, including purchases pursuant
to notices from other employees of Employer pursuant to provisions for
disability or death benefits substantially similar to this one, shall be
completed in the order of applicable notice dates if there be more than one.
2
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(vii) Employer may designate an assignee to purchase the
applicable Shares pursuant to this section, provided that Employer shall remain
liable in the event the assignee fails to purchase the Shares as required.
(viii) Employer shall use commercially reasonable efforts
to obtain, at a price reasonably acceptable to Employer, insurance to provide a
source of funds for the purchase price of the Shares that Employer may be
required to purchase under this section.
IN WITNESS WHEREOF, the parties have executed this Amendment effective
for all purposes as of the date first set forth above.
MATRIDIGM CORPORATION
By:
-------------------------------- ------------------------------
Name: Franklin C. Chiang
3
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT B-2
MATRIDIGM CORPORATION
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of the 1st day of October, 1995 by
and between MatriDigm Corporation, a California corporation ("Employer") and
James T. Brady ("Employee").
Employer desires to employ Employee as its President and Chief
Executive Officer and Employee desires to accept such employment on the terms
and conditions set forth herein.
NOW THEREFORE, the parties agree as follows:
I. DUTIES.
1.1 Subject to termination of Employee's employment with IBM, Employer
shall employ Employee as its President and Chief Executive Officer and Employee
accepts such employment, effective on or about October 15, 1995 (the "Effective
Date") subject to the terms and conditions set forth herein.
1.2 Employee shall have general supervision of the business of
Employer, subject to the control of the Employer's Board of Directors (the
"Board"). Employee shall be a voting member of all standing committees and shall
have such other powers and duties as usually are vested in a chief executive
officer and as may be assigned to him by the Board or pursuant to Employer's
bylaws.
1.3 Employee shall perform his duties faithfully, diligently, in a
businesslike manner, and for the best interests of Employer during the term of
employment.
1.4 Employee shall report directly to the Board.
1.5 All management and staff personnel of Employer shall report to
Employee.
1.6 Employee shall have full authority to hire and terminate personnel.
1.7 Employee shall have full authority to develop and implement the
budget for Employer, subject to the approval of the Board.
1.8 Employee and Employer, by the Board or its designated
representative, shall establish expected goals, objectives and outcomes by
mutual agreement on an annual basis, no later than the first day of January of
each year during the term of employment hereunder.
1.9 Employee shall be authorized to spend up to $10,000 per transaction
without obtaining special approval or authorization.
1
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
1.10 Employee shall not act as consultant or contractor for any actual
or potential business competitor of or customer of, or vendor to, Employer, or
any person or entity that reasonably could be construed to be interested in
obtaining knowledge of Employer's employees, business plans or programs, during
the term of employment hereunder.
II. TERMINATION; SEVERANCE AND DEATH BENEFITS.
2.1 AT WILL EMPLOYMENT. The employment of Employee shall have no
specified term and may be terminated at the will of either party on notice to
the other as defined in Section 2922 of the California Labor Code. Nothing
herein shall imply or be construed to promise a specified term of employment.
2.2 SEVERANCE AND DEATH BENEFITS. In the event of termination of
Employee's employment for any reason or for no reason, or Employee's death
during Employee's employment, Employee or his legal successors, as applicable,
shall be entitled to receive the compensation that otherwise would have been due
to Employee hereunder had Employee's employment continued for a period of six
months following the month in which his termination or death occurs. The
quarterly performance bonuses that otherwise would have been payable to Employee
under subsection 3.6 applicable to that six month period following such event
shall be paid in amounts equal to the average of the last four quarterly bonuses
paid to Employee immediately preceding the date of notice of the termination or
death.
III. BENEFITS; PERFORMANCE BONUS.
3.1 Employer shall pay Employee a base salary of [REDACTED] per year.
The base salary shall be paid in biweekly installments in accordance with
Employer's normal administrative procedures.
3.2 Employer shall provide Employee $200.00 per month as an allowance
for automobile expenses. Employer shall reimburse Employee for reasonable mobile
telephone expenses incurred in the course of Employer's business.
3.3 Employer shall reimburse reasonable entertainment expenses of
Employee and such other expenses, incurred by Employee in furtherance of or in
connection with the business of Employer, as Employer and Employee may mutually
agree upon. Employee shall account for such expenses in a manner satisfactory to
Employer.
3.4 Employer shall withhold federal and state taxes, social security
taxes, state disability and unemployment taxes and such other taxes or
government-mandated withholdings in accordance with Employer's standard
administrative practices as applied to other employees.
3.5 Employer shall provide Employee with a package of benefits
("Executive Package"), including disability insurance, life insurance, health
insurance, vacation (four weeks per year initially;
2
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
five weeks per year beginning with the third year of Employee's employment
hereunder), participation in any applicable profit-sharing, retirement or 401-K
programs Employer may offer, and other benefits, at least equivalent to that
provided or offered by Employer to other administrative officers employed by
Employer. Employer shall ensure that at all times the disability insurance
provided to Employee provides for payment of at least 60% of the income earned
by Employee during the immediately preceding twelve month period.
3.6 The Board shall set performance targets and criteria for each year,
in its reasonable discretion in congruity with the annual goals, objectives and
outcomes agreed between Employee and Employer pursuant to subsection 1.8 hereof.
The targets and criteria set by the Board shall provide for full or partial
fulfillment, or degrees of performance, thereof. The Board shall award Employee
an annual bonus in accordance with the degree to which Employee has fulfilled or
achieved such quarterly targets and criteria. The target amount of the bonus for
full fulfillment or performance of the targets and criteria shall be set
initially at [REDACTED], and shall be adjusted annually on the anniversary
hereof on the basis of such factors as the Board of Directors may deem
appropriate.
3.7 Pursuant to that certain Founders Agreement of even date herewith
among Employer, Employee and the other Founders named therein (the "Founders
Agreement"), as partial consideration for the purchase of shares of Employer's
Common Stock, Employee will deliver to Employer a promissory note executed by
Employee in favor of Employer in the amount of [REDACTED] (the "Note"), which
shall be payable in annual installments of [REDACTED] of principal plus accrued
interest due October 1, 1996, 1997, 1998, 1999 and 2000. On each such payment
due date under the Note, and (except to the extent that Employer exercises any
right to repurchase the shares purchased pursuant to the Founders Agreement by
cancellation of all or any portion of the amount remaining due under the Note)
upon any acceleration of the Note pursuant to its terms, and regardless of
whether Employee is then an employee of Employer, Employer shall grant to
Employee a bonus equal to 167% of the amount of the Note payment then due (which
such 167% gross up is made in order to offset Employee's federal and state
income tax liability for such bonus based on Employee's situation in the forty
percent (40%) income tax bracket), which bonus shall be applied against the
payment then due under the Note.
IV. MISCELLANEOUS.
4.1 Neither party shall assign its rights or delegate its obligations
under this Agreement without the prior written consent of the other party.
4.2 Except as provided in the Founders Agreement and the agreements
executed pursuant thereto (including the Confidentiality and Intellectual
Property Agreement set forth as an exhibit thereto) and the Indemnification
Agreement between the Employer and Employee of even date herewith, this
Agreement comprises the sole and entire agreement between Employer and Employee,
and supersedes and replaces all previous agreements or understandings between
the parties, written or oral, with regard to the subject matter hereof.
3
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
4.3 This Agreement may be modified or amended only by a written
agreement signed by both parties hereto.
4.4 In the event that litigation is brought in any court of law to
determine any rights, obligations or damages under this Agreement, the
prevailing party shall be entitled to recover reasonable costs and attorneys'
fees related to such litigation.
4.5 This Agreement shall be governed by and construed in accordance
with the laws of the State of California.
4.6 Any notice under this Agreement shall be deemed to be received at
the time of delivery, if delivered personally, or three days after the date of
posting with the United States Postal Service, first class postage prepaid,
addressed to the applicable party at the address set forth below:
To Employer:
Chairman, Board of Directors
MatriDigm Corporation
47211 Bayside Parkway
Fremont, CA 94538
To Employee:
Mr. James T. Brady
1060 Queensbridge Court
San Jose, CA 95120-4215
IN WITNESS WHEREOF, the parties have executed this Agreement, effective
for all purposes as of the date first above written.
MATRIDIGM CORPORATION
By: Franklin C. Chiang James T. Brady
----------------------------- -----------------------------------
Name: James T. Brady
4
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT B-2
MATRIDIGM CORPORATION
AMENDMENT OF EMPLOYMENT AGREEMENT
This Amendment of Employment Agreement (the "Amendment") is entered
into this 15th day of November, 1995, by and between MatriDigm Corporation, a
California corporation ("Employer") and James T. Brady ("Employee").
Reference is made to that certain Employment Agreement dated October 1,
1995, by and between Employer and Employee (the "Agreement"). Capitalized terms
used herein without definition shall have the meanings attributed to them in the
Agreement.
The parties deem it to be in their mutual best interests to amend the
Agreement as set forth herein.
NOW THEREFORE, the parties agree as follows:
1. Section 1.1 of the Agreement is amended to provide that the
Effective Date of Employee's employment with Employer shall be December 1, 1995.
2. Section 1.9 of the Agreement is amended to provide that Employee
shall be authorized to spend up to $25,000 per transaction without obtaining
special approval or authorization.
3. Section 2.2 of the Agreement is amended to exclude death benefits,
and to apply only to termination of Employee's employment with Employer for any
reason or for no reason, excluding death and disability.
4. Section 3.5 of the Agreement is amended to provide that:
(a) In lieu of health insurance, Employer shall provide Employee
with a supplemental monthly cash payment in the amount of $400.00.
(b) In lieu of disability and life insurance, Employer shall
provide Employee the following arrangement:
In the event of death of Employee while employed by Employer,
or termination of such employment resulting from a disability (as defined in the
Americans with Disabilities Act) (a "Triggering Event"), Employee (in the case
of Employee's disability) or (in the event of Employee's death) Employee's
heir(s), personal representative(s) or, if specified by Employee, the designated
beneficiary(ies), as applicable (in any case, "Beneficiary") shall have the
right to require Employer to purchase shares of Employer's Common Stock
("Shares") held by Beneficiary, as follows:
(i) Not more than once during the period of 90 days following
the Triggering Event, and once during the period of 90 days following each of
the first through the ninth anniversaries of the Triggering Event (total of ten
years), Beneficiary shall have the right to give written notice to Employer that
Beneficiary wishes to receive disability or death benefit proceeds, as
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
applicable, from the sale of the Shares. The notice shall specify the amount of
proceeds which Beneficiary wishes to receive.
(ii) Subject to subparagraph (v), the maximum amount of
proceeds indicated on any such notice shall be forty percent (40%) of Employee's
annual base salary at the time of the Triggering Event. The total amount
indicated on all such notices in the aggregate shall not exceed four (4) times
Employee's annual base salary at the time of the Triggering Event.
(iii) Within thirty (30) days after receipt of such a notice,
Employer shall effectuate the purchase from Beneficiary of the number of Shares,
the aggregate purchase price of which is equal to the amount of proceeds
requested by Beneficiary in the notice, subject to the maximum provided in
subparagraph (ii). The purchase price per Share to be paid by Employer for the
Shares shall be the greater of (A) the fair market value of the Shares (as
reasonably determined by the Board of Directors of Employer in its discretion
exercised in good faith) in effect on the date of the notice or, if greater,
that in effect on the date that Employer effectuates the purchase of the Shares;
or (B) the quotient obtained by dividing forty percent (40%) of Employee's
annual base salary at the time of the Triggering Event by 600,000.
(iv) Employer may require Beneficiary to provide the stock
certificate representing the Shares to be purchased as a condition of the
purchase, provided that Beneficiary may substitute an affidavit of lost
certificate in form reasonably acceptable to Employer if appropriate. Employer
shall cause a new stock certificate reflecting unpurchased shares represented by
original certificate to be reissued to Beneficiary as promptly as reasonably
practicable after effectuating the purchase.
(v) In the event of liquidation of Employer subsequent to any
Triggering Event, Employer's obligations under this section shall be accelerated
and Employer shall provide Beneficiary the entire amount of all proceeds
remaining available (up to the aggregate maximum of four (4) times Employee's
annual base salary at the time of the Triggering Event) as consideration for the
purchase of the requisite number of Shares, as computed pursuant to subparagraph
(iii), prior and in preference to any other distribution to shareholders
pursuant to the Company's Articles of Incorporation. A consolidation or merger
of Employer with or into any other corporation or corporations or a sale,
conveyance, or other disposition of all or substantially all of Employer's
property, assets or business shall be deemed to be a liquidation for purposes of
this subparagraph.
(vi) Employer's obligation to repurchase Shares from
Beneficiary pursuant to a notice from Beneficiary under subparagraph (i) of this
section shall take precedence and priority over any obligation of Employer to
redeem shares of capital stock of Employer pursuant to Employer's Articles of
Incorporation. In the event that Employer shall have inadequate funds legally
available to effectuate the repurchase required by this section, Employer shall
purchase the number of Shares for which Employer then has funds legally
available, and shall purchase the balance of the Shares to be purchased upon
each month end thereafter, to the extent of funds then legally available, until
the purchase has been completed. Pending purchases, including purchases pursuant
to notices from other employees of Employer pursuant to provisions for
disability or death benefits substantially similar to this one, shall be
completed in the order of applicable notice dates if there be more than one.
2
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(vii) Employer may designate an assignee to purchase the
applicable Shares pursuant to this section, provided that Employer shall remain
liable in the event the assignee fails to purchase the Shares as required.
(viii) Employer shall use commercially reasonable efforts to
obtain, at a price reasonably acceptable to Employer, insurance to provide a
source of funds for the purchase price of the Shares that Employer may be
required to purchase under this section.
IN WITNESS WHEREOF, the parties have executed this Amendment effective
for all purposes as of the date first set forth above.
MATRIDIGM CORPORATION
By:
------------------------------ -------------------------------------
Name: James T. Brady
3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 5,103
<SECURITIES> 1,641
<RECEIVABLES> 3,199
<ALLOWANCES> 88
<INVENTORY> 3,563
<CURRENT-ASSETS> 21,883
<PP&E> 11,050
<DEPRECIATION> 9,587
<TOTAL-ASSETS> 27,206
<CURRENT-LIABILITIES> 2,442
<BONDS> 0
<COMMON> 20,080
0
0
<OTHER-SE> 4,684
<TOTAL-LIABILITY-AND-EQUITY> 27,206
<SALES> 2,844
<TOTAL-REVENUES> 7,313
<CGS> 1,920
<TOTAL-COSTS> 3,549
<OTHER-EXPENSES> (785)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,629
<INCOME-TAX> 986
<INCOME-CONTINUING> 1,643
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,643
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
