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SECURITIES EXCHANGE AND COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 22, 1997
ZITEL CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of incorporation)
0-12194 94-2566313
(Commission File No.) (IRS Employer Identification No.)
47211 BAYSIDE PARKWAY
FREMONT, CALIFORNIA 94538-6517
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (510) 440-9600
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ITEM 5. OTHER EVENTS
A. PLACEMENT OF DEBENTURES
On May 22, 1997, Zitel Corporation (the "Company") completed the private
placement of $25,000,000 in principal amount of 5% convertible subordinated
debentures due November 22, 1999 (the "Debentures") to a small number of
institutional investors in an offering exempt from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"). The Debentures
are convertible into shares of the Company's common stock ("Common Stock") at
any time after 90 days from the date of purchase of the Debentures until
maturity, unless previously redeemed or repurchased by the Company. The
Debentures are convertible into the number of shares of Common Stock equal to
the amount of principal and accrued interest being converted divided by the
lesser of (i) 90% of the market price, or (ii) $26.975. For purposes of the
conversion formula, the market price is equal to the average of the reported
closing bid prices for the Common Stock on the five trading days preceding each
date of conversion. The holders of the Debentures have registration rights with
respect to the Common Stock as set forth in a Registration Rights Agreement
pursuant to which the Company has agreed to register for resale under the
Securities Act the Common Stock issuable upon conversion of the Debentures, on
or before August 20, 1997.
The foregoing description does not purport to be complete and is qualified
by reference to the definitive agreement filed as Exhibits herewith.
B. RISK FACTORS
The Company from time to time makes forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in the following risk factors and
elsewhere in the Company's SEC filings. In evaluating the Company's business,
prospective investors should consider carefully the following factors in
addition to the other information concerning the Company.
RECENT LEVELS OF NET SALES; DEPENDENCE ON ROYALTY REVENUE
In recent years the Company has not generated net sales sufficient to
produce an operating profit and has relied on a stream of royalty payments under
an agreement with IBM to support its activities. These royalties amounted to
$15,421,000 in fiscal 1995 and $14,473,000 in fiscal 1996. In late 1996 IBM
introduce a new version of the royalty bearing device with substantially greater
capacity and royalty revenue declined to $2,318,000 in the first quarter of
fiscal 1997 and $1,196,000 in the quarter ended March 31, 1997. The Company
believes that IBM is transitioning to a device which does not bear royalty, and
that royalty revenue will continue to decline. In addition, net sales further
declined in the recent quarters to $1,576,000 in the quarter ended March 31,
1997 resulting in operating losses and net losses in the two most recent
quarters. In the most recent quarter the Company realized a negative net margin
on net sales. The Company must generate substantial
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additional net sales of its CASD products in order to restore gross margins on
those products and must generate revenue from its new Solution Services division
or develop other sources of revenue in order to remain a viable operating
entity. There is no assurance that the Company can achieve those objectives.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results have in the past varied and may
in the future vary significantly depending on a number of factors, including:
the level of competition, the size, timing, cancellation or rescheduling of
significant orders; product configuration and mix; market acceptance of new
products and product enhancements; new product announcements or introductions by
the Company's competitors; deferrals of customer orders in anticipation of new
products or product enhancements; changes in pricing by the Company or its
competitors; the impact of price protection measures and return privileges
granted by the Company to its distributors and VARs; the ability of the Company
to develop, introduce and market new products and product enhancements on a
timely basis; hardware component costs and availability, particularly with
respect to hardware components obtained from sole sources; hardware supply
constraints; the Company's success in expanding its sales and marketing
programs; technological changes in the market for the Company's products,
product mix and the mix of sales among the Company's sales channels; levels of
expenditures on research and development; changes in Company strategy; personnel
changes; general economic trends and other factors.
Sales for any quarter are not predictable with any significant degree of
certainty. The Company generally operates with limited order backlog because
its products typically are shipped shortly after orders are received. Sales to
a single customer in a quarter have affected and may affect net sales and
operating margins. As a result, sales in any quarter are generally dependent on
orders booked and shipped in that quarter. Sales are also difficult to forecast
because the Company has not as yet generated significant sales of its products
incorporating CASD technology. Due to the typical timing of customer orders,
the Company often ships products representing a significant portion of its net
sales for a quarter during the last month of that quarter. Any significant
deferral of these sales could have a material adverse effect on the Company's
results of operations in any particular quarter. To the extent that the Company
completes significant sales earlier than expected, operating results for
subsequent quarters may be adversely affected. The Company's expense levels are
based, in part, on its expectations as to future sales. As a result, if sales
levels are below expectations, net income may be disproportionately affected.
The mix of the products marketed by the Company has been evolving over the
last three years, and the Company's net sales have declined over that period.
Due to all of the foregoing factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as an indicator of future performance. It is possible
that in some future quarter the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially and adversely affected.
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INVESTMENT IN MATRIDIGM
The Company has invested $5,586,000 to acquire an approximately 31%
interest in MatriDigm Corporation, a private company organized to provide
software maintenance and re-engineering services for users of IBM mainframe
computer systems. MatriDigm has initially focused on development of a set of
automated tools to identify and specifically modify dates within IBM COBOL
programs to bring them into compliance with the Year 2000 requirements and to
test the modified programs. MatriDigm in February 1997 announced commercial
availability of an automated tool set for a pac-binary solution for programs
written in ANSI COBOL 85 and, to respond to market demand, has recently
announced commercial availability of a windowing solution. MatriDigm intends to
continue to refine its current tool set and to extend its tool set to modify
other COBOL languages as well as other computer languages widely used to write
programs for IBM mainframe computers. Industry sources report a multi-billion
dollar demand for services such as those being developed by MatriDigm and an
automated tool set should provide greater profit margins than can be realized
using other available methods. However, MatriDigm has not realized revenue as
yet, and there is no assurance that it can successfully market its automated
tool set, develop extensions for other computer languages or generate
substantial revenue and profits. During the course of development, the Company
has made additional investments in MatriDigm and may be required to make
additional investments in the future.
VOLATILITY OF STOCK PRICE
The price of the Company's stock has been subject to extreme volatility
over the past nine months, as the closing bid price has ranged between a low of
$5-1/8 and a high of $61-1/4, with a recent price of $25. The Company believes
that the principal reasons for this volatility are rumored progress of and
rumored problems in the development program of MatriDigm Corporation of which
the Company owns approximately 31%. MatriDigm, which expects to provide an
automated solution to the Year 2000 problem, is a private company and the
principal vehicle for public participation in ownership of MatriDigm is
indirectly through ownership of stock of the Company. MatriDigm has been unable
or unwilling to provide public information on a regular basis about the status
of its development effort, and as a result an opportunity is presented for third
parties to initiate rumors which result in significant swings in the price of
the Company's stock. Until MatriDigm successfully generates significant
sustained revenue, it will remain difficult for investors to apply standard
methods of analysis to the value of the Company's investment in MatriDigm and
the pattern of volatility should be expected to continue.
COMPETITION
The data storage market is intensely competitive, with technological
advances fueling continuous erosion of prices for data storage capacity. The
Company competes with much larger independent companies such as EMC and Storage
Technology Corporation as well as manufacturers of computer systems such as
Unisys Corporation, Sun Microsystems, Inc. and Hewlett Packard
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Corporation. Many of its competitors have substantially greater financial
resources and installed bases than the Company and on account of their
substantially higher level of purchases are able to achieve significantly lower
prices from suppliers of component parts. While the Company believes that its
CASD products are currently superior to competitive products, unless it can
significantly increase the level of net sales and additional cost savings on
component purchases it will be unable to generate adequate gross margins on its
CASD products. There can be no assurance that the Company will be able to
generate the level of net sales to achieve adequate gross margins.
The market for Year 2000 services is intensely competitive, with services
being provided by a number of national, regional and local firms, many of which
have existing relationships and contractual arrangements with customers. Many
of these competitors have substantially greater financial, technical and
marketing resources than the Company and MatriDigm. The ability of the Company
and MatriDigm to compete in this market will depend on the ability of MatriDigm
to develop a successful automated solution and as yet there can be no assurance
that MatriDigm will be successful in this effort. In addition, the Company must
attract and retain qualified personnel in which are also highly sought by its
competition and must successfully leverage its own resources with contract and
partnering relationships with other companies, including companies with are also
competitors.
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The markets in which the Company operates are characterized by rapid
technological change, changing customer needs, frequent new product
introductions and evolving industry standards. The introduction of products
embodying new technologies and increased storage capacities by the Company's
competitors and the emergence of new industry standards could render the
Company's existing products obsolete and unmarketable. The Company's future
success will depend upon its ability to develop and to introduce new products,
including products with increasing storage capabilities (including new software
releases and enhancements) on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. The Company has not as yet realized
significant sales of its CASD products. There can be no assurance that the
Company will be successful in generating significant sales of these products.
The failure of the Company to achieve significant net sales from these products
could have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that the Company
will be successful in developing and marketing any other products that respond
to technological changes or evolving industry standards, that the Company will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products, or that its new
products will adequately meet the requirements of the marketplace and achieve
market acceptance. If the Company is unable, for technological or other
reasons, to develop and introduce new products, in a timely manner in response
to changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially and adversely
affected.
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PRODUCT LIABILITY
The Company's standard warranty provides that if the system does not
function to published specifications the Company will repair or replace the
defective component without charge. Although to date the Company's suppliers of
hardware components have generally covered the warranty costs associated with
such components, there can be no assurance that such manufacturers will continue
to be willing or able to cover such costs, and their failure to do so would
result in such costs being borne by the Company. There can be no assurance that
the Company's warranty costs will not be significant in the future. Significant
warranty costs could have a material adverse effect on the Company's business,
operating results or financial condition.
The Company's agreements with its customers typically contained provisions
intended to limit the Company's exposure to potential product liability claims.
It is possible that the limitation of liability provisions contained in the
Company's agreements may not be effective. Although the Company has not
received any product liability claims to date, the sale and support of products
by the Company and the incorporation of products from other companies may entail
the risk of such claims. A successful product liability claim against the
Company could have a material adverse effect on the Company's business,
operating results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success depends significantly upon its proprietary
technology. The Company currently relies on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality agreements and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. The Company has
registered its Zitel, CASD and VAM trademarks and will continue to evaluate the
registration of additional trademarks as appropriate. The Company generally
enters into confidentiality agreements with its employees and with key vendors
and suppliers. The Company currently has issued U.S. patents associated with
its CASD technology. There can be no assurance that these patents will provide
the Company with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have a material adverse effect
on the Company's ability to do business. The Company believes that the rapidly
changing technology in the computer storage industry makes the Company's success
depend more on the technical competence and creative skills of its personnel
than on patents.
There has also been substantial litigation in the computer industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company has from time to time
received claims that it is infringing third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
trademarks or other proprietary rights. The Company expects that companies in
the storage systems market will increasingly be subject to infringement claims
as the number of products and competitors in the Company's target markets
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grows. Any such claims or litigation may be time-consuming and costly, cause
product shipment delays, require the Company to redesign its products or require
the Company to enter into royalty or licensing agreements, any of which could
have a material adverse effect on the Company's business, operating results or
financial condition. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology, duplicate the Company's products or design around
patents issued to the Company or other intellectual property rights of the
Company.
INTERNATIONAL SALES AND OPERATIONS
Sales to customers outside the United States have accounted for significant
portions of the Company's net sales, and the Company expects that international
sales will continue to represent a significant portion of the Company's net
sales. International sales pose certain risks not faced by companies that limit
themselves to domestic sales. Fluctuations in the value of foreign currencies
relative to the U.S. dollar, for example, could make the Company's products less
price competitive and, if the Company in the future denominates any of its sales
in foreign currencies, result in losses from foreign currency transactions.
International sales also cold be adversely affected by factors beyond the
Company's control, including the imposition of government controls, export
license requirements, restrictions on technology exports, changes in tariffs and
taxes and general economic and political conditions. The laws of some countries
does not protect the Company's intellectual property rights to the same extent
as the laws of the United States.
DEPENDENCE ON KEY PERSONNEL
The Company's future performance depends in significant part upon the
continued service of its key technical and senior management personnel. The
Company provides incentives such as salary, benefits and option grants (which
are typically subject to vesting over four years) to attract and retain
qualified employees. The loss of the services of one or more of the Company's
officers or other key employees could have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
future success also depends on its continuing ability to attract and retain
highly qualified technical and management personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its key technical and management employees or that it can attract, assimilate or
retain other highly qualified technical and management personnel in the future.
The future success of the Company's Solution Services Division will depend
to a significant extent on its ability to attract, train, motivate and retain
highly skilled software development professionals, particularly project
managers, software engineers and other senior technical personnel.
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The Company believes that in the U.S. and elsewhere there is a shortage of, and
significant competition for, software development professionals with the
advanced technological skills necessary to perform the services offered by the
Solution Services Division. The increasing recognition of the scope and
significance of the year 2000 problem has materially increased the competition
for personnel with appropriate skills and salary requirements have increased as
availability of such personnel has decline precipitously. The Company's ability
to maintain and renew existing relationships and obtain new business depends, in
large part, on its ability to hire and retain technical personnel with the IT
skills that keep pace with continuing changes in information processing
technology, evolving industry standards and changing client preferences. An
inability to hire such additional qualified personnel could impair the ability
of the Solution Services Division to manage and complete its existing projects
and to bid for or obtain new projects. Further, the Company must train and
manage its growing employee base, requiring an increase in the level of
responsibility for both existing and new management personnel. There can be no
assurance that the management skills and systems currently in place will be
adequate or that the Company will be able to assimilate new employees
successfully. Accordingly, there can be no assurance that the Company will be
successful in retaining current or future employees.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation, as
amended and restated, and Bylaws, as amended, California law and the Company's
indemnification agreements with certain officers and directors of the Company
may be deemed to have an anti-takeover effect. Such provisions may delay, defer
or prevent a tender offer or takeover attempt that a stockholder might consider
to be in that stockholder's best interests, including attempts that might result
in a premium over the market price for the shares held by stockholders.
The Company's Board of Directors may issue additional shares of Common
Stock or establish one or more classes or series of Preferred Stock, having the
number of shares (up to 1,000,000), designations, relative voting rights,
dividend rates, liquidation and other rights, preferences and limitations as
determined by the Board of Directors without stockholder approval.
The Board of Directors of the Company has approved the adoption of a
Preferred Share Purchase Rights Plan (the "Rights Plan"). Terms of the Rights
Plan provide for a dividend distribution of one preferred share purchase right
(a "Right") for each outstanding share of common stock, no par value per share
(the "Common Shares"), of the Company. Each Right entitles the registered
holder to purchase from the Company one one-hundredth of a share of Series A
Junior Participating Preferred Stock, no par value (the "Preferred Stock"), at
an exercise price of $69.50 per one one-hundredth of a Preferred Share (the
"Purchase Price"), subject to adjustment, and a redemption price of $.01 per
Right. Each one one-hundredth of a share of Preferred Stock has designations
and the powers, preferences and rights, and the qualifications, limitations and
restrictions which make its value approximately equal to the value of a Common
Share.
The Rights are not exercisable until the earlier to occur of (i) 10 days
following a public
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announcement that a person, entity or group of affiliated or associated persons
(an "Acquiring Person") have acquired beneficial ownership of 15% or more of the
outstanding Common Shares or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any person
or entity becomes an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 15% or more of such outstanding Common Shares.
The Rights have certain anti-takeover effects as they would cause
substantial dilution to a person or group that attempted to acquire the Company
on terms not approved by the Company's Board of Directors. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors, since the Rights may be redeemed by the Company at $.01 per
Right prior to the earliest of (i) the twentieth day following the time that a
person or group has acquired beneficial ownership of 15% or more of the Common
Shares (unless extended for one or more 10 day periods by the Board of
Directors), (ii) a Change of Control, or (iii) the final expiration date of the
rights.
ITEM 7. EXHIBITS
(c) The following exhibits are furnished in accordance with the provisions
of Item 601 of Regulation S-K:
Exhibit Number Exhibit
4.1 Form of Convertible Subordinated Debenture
4.2 Registration Rights Agreement
4.3 Securities Purchase Agreement
4.4 Placement Agency Agreement
99.1 Press Release, dated May 23, 1997
The foregoing is a partial summary of certain terms of the Debentures and
the rights of the holders. Reference is made to the Exhibits filed with this
report for the actual terms of the Debentures and such rights.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZITEL CORPORATION
Dated: May 29, 1997 By: /s/ Jack H. King
---------------------------
Jack H. King
President and Director
Chief Executive Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
4.1 Form of Convertible Subordinated Debenture
4.2 Registration Rights Agreement
4.3 Securities Purchase Agreement
4.4 Placement Agency Agreement
99.1 Press Release, dated May 23, 1997
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EXHIBIT 4.1
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID
ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE
TO THE BORROWER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT.
ANY PROSPECTIVE TRANSFEREE OF THIS DEBENTURE SHOULD CAREFULLY REVIEW THE TERMS
HEREOF INCLUDING WITHOUT LIMITATION SECTION 1.4(B) RELATING TO THE PRINCIPAL
AMOUNT OF THIS DEBENTURE.
CONVERTIBLE SUBORDINATED DEBENTURE
Fremont, California
May 22, 1997 $_________
FOR VALUE RECEIVED, ZITEL CORPORATION, a California corporation
(hereinafter called the "Borrower") hereby promises to pay to the order of
______________________________ or registered assigns (the "Holder") the sum of
____________________ Dollars ($____________), on November 22, 1999 (the
"Automatic Conversion Date"), and to pay interest on the unpaid principal
balance hereof at the rate of five percent (5%) per annum from May 22, 1997 (the
"Issue Date") until the same becomes due and payable, whether at maturity or
upon acceleration or by prepayment or otherwise. Any amount of principal of or
interest on this Debenture which is not paid when due shall bear interest at the
rate of seven percent (7%) per annum from the due date thereof until the same is
paid ("Default Interest"). Interest shall commence accruing on May 22, 1997,
shall be computed on the basis of a 365-day year and the actual number of days
elapsed and shall be payable at the time of optional or automatic conversion of
the principal to which such interest relates in accordance with Article I below.
All payments of principal and accrued interest (to the extent not converted into
Common Stock in accordance with the terms hereof) shall be made in lawful money
of the United States of America. All payments shall be made at such address as
the Holder shall hereafter give to the Borrower by written notice made in
accordance with the provisions of this Debenture. Whenever any amount expressed
to be due by the terms of this Debenture is due on any day which is not a
Exhibit 4.1 - Page 1
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business day, the same shall instead be due on the next succeeding day which is
a business day and, in the case of any interest payment date which is not the
date on which this Debenture is paid in full, the extension of the due date
thereof shall not be taken into account for purposes of determining the amount
of interest due on such date. As used in this Debenture, the term "business
day" shall mean any day other than a Saturday, Sunday or a day on which
commercial banks in the city of New York, New York are authorized or required by
law or executive order to remain closed. Each capitalized term used herein, and
not otherwise defined, shall have the meaning ascribed thereto in the Securities
Purchase Agreement, dated May 21, 1997, pursuant to which this Debenture was
originally issued (the "Purchase Agreement"). The Automatic Conversion Date is
subject to extension pursuant to Section 1.4 below.
The following terms shall apply to this Debenture:
ARTICLE I. CONVERSION RIGHTS
1.1 CONVERSION RIGHT. The Holder shall have the right from and after
the earlier of (i) the ninetieth (90th) day following the Issue Date and (ii)
the occurrence of an event described in Section 1.6 below, and then at any time
on or prior to the day that all of the principal, accrued interest and other
amounts payable hereunder are paid in full, to convert at any time all or from
time to time any part of the outstanding and unpaid principal amount of this
Debenture of at least $50,000, or such lesser amount as shall remain unpaid at
the time of the conversion (together with accrued interest thereon, unless the
Borrower pays such accrued interest in cash as provided below), into fully paid
and non-assessable shares of Common Stock, as such Common Stock exists on the
date of issuance of this Debenture, or any shares of capital stock of Borrower
into which such Common Stock shall hereafter be changed or reclassified (the
"Common Stock") at the conversion price determined as provided herein (the
"Conversion Price"); provided, however, that unless the Holder delivers a waiver
in accordance with the immediately following sentence, in no event (other than
in connection with an Automatic Conversion (as defined in Section 1.4 below) on
the Automatic Conversion Date) shall the Holder be entitled to convert any
portion of this Debenture in excess of that portion of this Debenture upon
conversion of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of this Debenture) and (2) the number of shares of Common
Stock issuable upon the conversion of the portion of this Debenture with respect
to which the determination of this proviso is being made, would result in
beneficial ownership by the Holder and its affiliates of more than 4.9% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, (i) beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13 D-G thereunder, except as otherwise provided in
clause (1) of such proviso and (ii) the Holder may waive the limitations set
forth therein by written notice to the Borrower upon not less than sixty-one
(61) days prior notice (with such waiver taking effect only upon the expiration
of such 61 day notice period). The number of shares of Common Stock to be
Exhibit 4.1 - Page 2
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issued upon each conversion of this Debenture shall be determined by dividing
the Conversion Amount (as defined below) by the Conversion Price in effect on
the date a notice of conversion, in the form attached hereto as Exhibit A (the
"Notice of Conversion"), is delivered to the Borrower by the Holder in
accordance with Section 1.4 below (the "Conversion Date"). The term "Conversion
Amount" means, with respect to any conversion of this Debenture, the sum of (1)
the principal amount of this Debenture to be converted in such conversion PLUS
(2) accrued and unpaid interest, if any, on such principal amount at the
interest rates provided in this Debenture to the Conversion Date PLUS (3)
Default Interest, if any, on the interest referred to in the immediately
preceding clause (2) (subject to the Borrower's right to pay the interest
referred to in clauses (2) and (3) in cash, as provided below) PLUS (4) at the
Holder's option, any additional amounts (to the extent not already included in
principal) owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or
pursuant to Section 2(c) of the Registration Rights Agreement, dated as of
May 22, 1997, executed in connection with the initial issuance of this Debenture
(the "Registration Rights Agreement"). The Borrower shall have the right to
elect to pay accrued interest (including Default Interest, if any) in cash, in
lieu of conversion to Common Stock in accordance with this Article I. If the
Borrower elects to pay accrued interest (including Default Interest, if any) in
cash, such cash shall be paid simultaneously with the delivery to the Holder of
the certificates representing the Common Stock issuable upon conversion in
accordance with Section 1.4 below. At the written request of the Holder, the
Borrower shall advise such Holder in writing, within two (2) business days of
such request, whether conversion of accrued interest will be paid in Common
Stock or in cash, and such election shall be binding for thirty (30) days
following the date of the Borrower's response. Failure to respond by the
Borrower within two (2) business days shall be deemed to be an election to
convert the accrued interest to Common Stock for any conversions within thirty
(30) days of the request.
1.2 CONVERSION PRICE. The Conversion Price shall be the lesser of
(i) 90% of the Market Price, when Market Price means the average of the Closing
Bid Prices for the Common Stock on The Nasdaq National Market, or on the
principal securities exchange or other securities market on which the Common
Stock is then being traded, for the five (5) consecutive Trading Days (as
defined below) ending one Trading Day prior to the date the Conversion Notice is
sent by the Holder to the Borrower via facsimile (the "Conversion Date"), and
(ii) $26.975 (subject, in each case, to equitable adjustments for stock splits,
stock dividends or rights offerings by the Borrower relating to the Borrower's
securities or the securities of any subsidiary of the Borrower, combinations,
recapitalization, reclassifications, extraordinary distributions and similar
events). "Closing Bid Price" means, for any security as of any date, the last
closing bid price on the Nasdaq National Market as reported by Bloomberg
Financial Markets or an equivalent, reliable reporting service mutually
acceptable to and hereafter designated by Holders of a majority in interest of
the Debentures and the Borrower ("Bloomberg") or, if The Nasdaq National Market
is not the principal trading market for such security, the last closing bid
price of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by Bloomberg, or if the
foregoing do not apply, the last closing bid price of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by
Exhibit 4.1 - Page 3
<PAGE>
Bloomberg, or, if no closing bid price is reported for such security by
Bloomberg, then the last closing trade price of such security as reported by
Bloomberg, or, if no last closing trade price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the
Closing Bid Price cannot be calculated for such security on such date on any of
the foregoing bases, the Closing Bid Price of such security on such date shall
be the fair market value as mutually determined by the Borrower and the Holders
of a majority in interest of Debentures being converted for which the
calculation of the closing bid price is required in order to determine the
Conversion Price of such Debentures. "Trading Day" shall mean any day on which
the Common Stock is traded for any period on the Nasdaq National Market, or on
the principal securities exchange or other securities market on which the Common
Stock is then being traded.
1.3 AUTHORIZED SHARES. The Borrower covenants that during the period
the conversion right exists, the Borrower will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the full conversion of this Debenture and the other
Debentures issued on the Issue Date. As of the date of issuance of this
Debenture, 3,000,000 authorized and unissued shares of Common Stock have been
duly reserved for issuance upon conversion of this Debenture and the other
Debentures issued on the Issue Date (the "Reserved Amount"). The Borrower
represents that upon issuance, such shares will be duly and validly issued,
fully paid and non-assessable. The Borrower (i) acknowledges that it has
irrevocably instructed its transfer agent to issue certificates for the Common
Stock issuable upon conversion of this Debenture and (ii) agrees that its
issuance of this Debenture shall constitute full authority to its officers and
agents who are charged with the duty of executing stock certificates to execute
and issue the necessary certificates for shares of Common Stock in accordance
with the terms and conditions of this Debenture.
If, at any time a Holder of this Debenture submits a Notice of
Conversion, the Borrower does not have sufficient authorized but unissued shares
of Common Stock available to effect such conversion in accordance with the
provisions of this Article I (a "Conversion Default"), subject to Section 6.8,
the Borrower shall issue to the Holder all of the shares of Common Stock which
are then available to effect such conversion. The portion of this Debenture
which the Holder included in its Conversion Notice and which exceeds the amount
which is then convertible into available shares of Common Stock (the "Excess
Amount") shall, notwithstanding anything to the contrary contained herein, not
be convertible into Common Stock in accordance with the terms hereof until (and
at the Holder's option at any time after) the date additional shares of Common
Stock are authorized by the Borrower, at which time the Conversion Price in
respect thereof shall be the lower of (i) the Conversion Price on the Conversion
Default Date (as defined below) and (ii) the Conversion Price on the Conversion
Date thereafter elected by the Holder in respect thereof. The Borrower shall
pay to the Holder payments ("Conversion Default Payments") for a Conversion
Default in the amount of (N/365) x .24 x the Excess Amount on the Conversion
Date in respect of the Conversion Default (the "Conversion Default Date"), where
(i) N = the number of days from the Conversion Default Date to the date (the
"Authorization Date")
Exhibit 4.1 - Page 4
<PAGE>
that the Borrower authorizes a sufficient number of shares of Common Stock to
effect conversion of the full outstanding principal balance of this Debenture.
The Borrower shall use its best efforts to authorize a sufficient number of
shares of Common Stock as soon as practicable following the earlier of (i) such
time that the Holder notifies the Borrower or that the Borrower otherwise
becomes aware that there are or likely will be insufficient authorized and
unissued shares to allow full conversion thereof and (ii) a Conversion Default.
The Borrower shall send notice to the Holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of Holder's
accrued Conversion Default Payments. The accrued Conversion Default Payments
for each calendar month shall be paid in cash or shall be convertible into
Common Stock (at such time as there are sufficient authorized shares of Common
Stock) at the Market Price, at the Holder's option, as follows:
(a) In the event Holder elects to take such payment in cash,
cash payment shall be made to Holder by the fifth day of the month following the
month in which it has accrued; and
(b) In the event Holder elects to take such payment in Common
Stock, the Holder may convert such payment amount into Common Stock at the
Conversion Price (as in effect at the time of conversion) at any time after the
fifth day of the month following the month in which it has accrued (at such time
as there are sufficient authorized shares of Common Stock) in accordance with
the terms of this Article I.
The Holder's election shall be made in writing to the Borrower at any
time prior to 9:00 p.m., New York City Time, on the third day of the month
following the month in which Conversion Default payments have accrued. If no
election is made, the Holder shall be deemed to have elected to receive cash.
Nothing herein shall limit the Holder's right to pursue actual damages (to the
extent in excess of the Conversion Default Payments) due to the Borrower's
failure to maintain a sufficient number of authorized shares of Common Stock.
1.4 METHOD OF CONVERSION.
(a) This Debenture may be converted by the Holder in whole or in
part (provided such partial conversion is at least $50,000, or such lesser
amount as shall remain unpaid at the time of the conversion (together with
accrued and unpaid interest thereon)) at any time from time to time after the
earlier of (i) ninety (90) days from the Issue Date and (ii) the occurrence of
an event described in Section 1.6 below, by (A) submitting to the Borrower a
Notice of Conversion (by facsimile or other reasonable means of communication
dispatched on the Conversion Date prior to 9:00 p.m., New York City Time) and
(B) subject to Section 1.4(b), surrendering this Debenture at the principal
office of the Borrower. So long as the registration statement filed pursuant to
Section 2(a) of the Registration Rights Agreement (the "Registration Statement")
is effective (or the Common Stock issuable upon conversion hereof may otherwise
be resold publicly without restriction) and there is not then a continuing Event
of Default, each
Exhibit 4.1 - Page 5
<PAGE>
Debenture issued and outstanding on November 22, 1999 (the "Automatic Conversion
Date"), automatically shall be converted into shares of Common Stock on such
date at the then effective Conversion Price in accordance with, and subject to,
the provisions of this Article I (the "Automatic Conversion"). The Automatic
Conversion Date shall be the Conversion Date for purposes of determining the
Conversion Price and the time within which certificates representing the Common
Stock must be delivered to the holder. Notwithstanding anything to the contrary
contained herein, the Automatic Conversion Date shall be extended for the
aggregate number of days comprising any Allowed Delays under the Registration
Rights Agreement.
(b) Notwithstanding anything to the contrary set forth herein,
upon conversion of this Debenture in accordance with the terms hereof, the
Holder shall not be required to physically surrender this Debenture to the
Borrower unless the entire unpaid principal amount of this Debenture is so
converted. The Holder and the Borrower shall maintain records showing the
principal amount so converted and the dates of such conversions or shall use
such other method, reasonably satisfactory to the Holder and the Borrower, so as
not to require physical surrender of this Debenture upon each such conversion.
In the event of any dispute or discrepancy, such records of the Borrower shall
be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if any portion of this Debenture is converted as
aforesaid, the Holder may not transfer this Debenture unless the Holder first
physically surrenders this Debenture to the Borrower, whereupon the Borrower
will forthwith issue and deliver upon the order of the Holder a new note of like
tenor, registered as the Holder (upon payment by the Holder of any applicable
transfer taxes) may request, representing in the aggregate the remaining unpaid
principal amount of this Debenture. The Holder and any assignee, by acceptance
of this Debenture, acknowledge and agree that, by reason of the provisions of
this paragraph, following conversion of a portion of this Debenture, the unpaid
and unconverted principal amount of this Debenture represented by this Debenture
may be less than the amount stated on the face hereof.
(c) The Borrower shall not be required to pay any tax which may
be payable in respect of any transfer involved in the issue and delivery of
shares of Common Stock or other securities or property on conversion of this
Debenture in a name other than that of the Holder (or in street name), and the
Borrower shall not be required to issue or deliver any such shares or other
securities or property unless and until the person or persons (other than the
Holder or the custodian in whose street name such shares are to be held for the
Holder's account) requesting the issuance thereof shall have paid to the
Borrower the amount of any such tax or shall have established to the
satisfaction of the Borrower that such tax has been paid.
(d) Upon receipt by the Borrower from the Holder of a facsimile
transmission (or other reasonable means of communication) of a Notice of
Conversion meeting the requirements for conversion as provided in this Section
1.4, the Borrower shall issue and deliver or cause to be issued and delivered to
the Holder certificates for the Common Stock issuable upon such conversion
within three (3) business days after such receipt (and, solely in the case of
conversion of the entire unpaid principal amount hereof, surrender of this
Debenture)
Exhibit 4.1 - Page 6
<PAGE>
(such third business day being hereinafter referred to as the "Deadline") in
accordance with the terms hereof and the Purchase Agreement (including, without
limitation, in accordance with the requirement that certificates for shares of
Common Stock issued on or after the effective date of the Registration Statement
upon conversion of this Debenture shall not bear any restrictive legend).
(e) Upon receipt by the Borrower of a Notice of Conversion, the
Holder shall be deemed to be the holder of record of the Common Stock issuable
upon such conversion, the outstanding principal amount and the amount of accrued
and unpaid interest on this Debenture shall be reduced to reflect such
conversion, and, unless the Borrower defaults on its obligations under this
Article I, all rights with respect to the portion of this Debenture being so
converted shall forthwith terminate except the right to receive the Common Stock
or other securities, cash or other assets, as herein provided, on such
conversion. If the Holder shall have given a Notice of Conversion as provided
herein, the Borrower's obligation to issue and deliver the certificates for
Common Stock shall be absolute and unconditional, irrespective of the absence of
any action by the Holder to enforce the same, any waiver or consent with respect
to any provision thereof, the recovery of any judgment against any person or any
action to enforce the same, any failure or delay in the enforcement of any other
obligation of the Borrower to the holder of record, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder of any obligation to the Borrower, and irrespective of any other
circumstance which might otherwise limit such obligation of the Borrower to the
Holder in connection with such conversion. The date of receipt of such Notice
of Conversion shall be the Conversion Date so long as it is received before 9:00
p.m., New York City Time, on such date.
(f) In lieu of delivering physical certificates representing the
Common Stock issuable upon conversion, provided the Borrower's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the Holder and its compliance with
the provisions contained in Section 1.1 and in this Section 1.4, the Borrower
shall use its best efforts to cause its transfer agent to electronically
transmit the Common Stock issuable upon conversion to the Holder by crediting
the account of Holder's Prime Broker with DTC through its Deposit Withdrawal
Agent Commission ("DWAC") system.
(g) Without in any way limiting the Holder's right to pursue
other remedies, including actual damages and/or equitable relief, the parties
agree that if delivery of the Common Stock issuable upon conversion of this
Debenture is more than one (1) business day after the Deadline (other than a
failure due to the circumstances described in Section 1.3 above, which failure
shall be governed by such Section) the Borrower shall pay to the Holder $500 per
day in cash, for the first day beyond the Deadline and $2,500 per day in cash
for each day thereafter that the Borrower fails to deliver such Common Stock.
Such cash amount shall be paid to Holder by the fifth day of the month following
the month in which it has accrued or, at the option of the Holder (by written
notice to the Borrower by the first day of the month following
Exhibit 4.1 - Page 7
<PAGE>
the month in which it has accrued), shall be added to the principal amount of
this Debenture, in which event interest shall accrue thereon in accordance with
the terms of this Debenture and such additional principal amount shall be
convertible into Common Stock in accordance with the terms of this Debenture.
1.5 CONCERNING THE SHARES. The shares of Common Stock issuable upon
conversion of this Debenture may not be sold or transferred unless either (i)
such shares shall have been included in an effective registration statement
under the Act or (ii) the Borrower or its transfer agent shall have been
furnished with an opinion or other similar letter of legal counsel to the effect
that such sale or transfer is exempt from the registration requirements of the
Act or (iii) such shares are sold pursuant to Rule 144 under the Act (or a
successor rule). Except as otherwise provided in the Purchase Agreement (and
subject to the removal provisions set forth below), each certificate for shares
of Common Stock issuable upon conversion of this Debenture that has not been so
included in an effective registration statement or that has not been sold
pursuant to an effective registration statement or an exemption that permits
removal of the legend, shall bear a legend substantially in the following form,
as appropriate:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID
ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE
TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT."
The legend set forth above shall be removed and the Borrower shall
issue to the Holder a new certificate therefor free of any transfer legend if
(i) the Borrower or its transfer agent shall have received an opinion or other
similar letter of counsel, to the effect that a public sale or transfer of such
Common Stock may be made without registration under the Act and any applicable
state securities laws, or that the Common Stock issuable upon conversion of this
Debenture (to the extent such securities are deemed to have been acquired on the
same date) can be sold pursuant to Rule 144 (or a successor rule thereto)
without any restriction as to the number of shares of Common Stock acquired as
of a particular date that can then be immediately sold or (ii) in the case of
the Common Stock issuable upon conversion of this Debenture, a registration
statement under the Act covering such securities is in effect. Nothing in this
Debenture shall (i) limit the Borrower's obligation under the Registration
Rights Agreement or (ii) affect in any way the Holder's obligations to comply
with applicable prospectus delivery requirements upon the resale of the
securities referred to herein.
1.6 EFFECT OF MERGER, CONSOLIDATION, ETC. If at any time when this
Debenture
Exhibit 4.1 - Page 8
<PAGE>
is issued and outstanding, there shall be any merger, consolidation, exchange of
shares, recapitalization, reorganization, or other similar event, as a result of
which shares of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or securities of
the Borrower or another entity, or in case of any sale or conveyance of all or
substantially all of the assets of the Borrower other than in connection with a
plan of complete liquidation of the Borrower, then the Holder of this Debenture
shall thereafter have the right to receive upon conversion of this Debenture,
upon the bases and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock immediately theretofore issuable upon conversion,
such stock, securities or assets which the Holder would have been entitled to
receive in such transaction had this Debenture been converted immediately prior
to such transaction, and in any such case appropriate provisions shall be made
with respect to the rights and interests of the Holder of this Debenture to the
end that the provisions hereof (including, without limitation, provisions for
adjustment of the Conversion Price and of the number of shares issuable upon
conversion of the Debenture) shall thereafter be applicable, as nearly as may be
practicable in relation to any securities or assets thereafter deliverable upon
the exercise hereof. Subject to the terms of the Purchase Agreement, the
Borrower shall not effect any transaction described in this Section 1.6 unless
(a) it first gives, to the extent practicable, forty-five (45) days prior
written notice (but in any event at least thirty (30) business days prior
written notice) of the record date of the special meeting of stockholders to
approve, or if there is no such record date, the consummation of, such merger,
consolidation, exchange of shares, recapitalization, reorganization or other
similar event or sale of assets (during which time the Holder shall be entitled
to convert this Debenture) and (b) the resulting successor or acquiring entity
(if not the Borrower) assumes by written instrument the obligations of this
Section 1.6. The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers or share exchanges.
1.7 CERTAIN PAYMENTS IN LIEU OF CONVERSION. In no event shall the
Borrower issue more than the Maximum Share Amount (as defined below and subject
to adjustment as provided herein) upon conversion of this Debenture, unless the
Borrower shall have obtained Stockholder Approval (as defined below) or a waiver
of such requirement by The Nasdaq Stock Market. As used herein, Stockholder
Approval means approval by the stockholders of the Borrower in accordance with
Rule 4460(i) of the rules of The Nasdaq Stock Market. Once the Maximum Share
Amount has been issued (the date of which is hereinafter referred to as the
"Maximum Conversion Date"), unless the Borrower shall have obtained Stockholder
Approval or a waiver of such requirement by The Nasdaq Stock Market, in lieu of
any further right to convert this Debenture, and in full satisfaction of the
Borrower's obligations under this Debenture, the Borrower shall pay to the
Holder, within fifteen (15) business days of the Maximum Conversion Date, an
amount equal to the greater of (i) the sum of (a) 111.11% TIMES the then
outstanding principal amount of this Debenture immediately following the Maximum
Conversion Date PLUS (b) accrued and unpaid interest on such principal amount
PLUS (c) accrued and unpaid Default Interest, if any, on the amount referred to
in the immediately preceding clause (b) at the rate provided in this Debenture
PLUS (d) any optional amounts that may
Exhibit 4.1 - Page 9
<PAGE>
be added thereto at the Maximum Conversion Date by the Holder in accordance with
the terms hereof (the then outstanding principal amount of this Debenture
immediately following the Maximum Conversion Date PLUS the amounts referred to
in clauses (b), (c) and (d) above shall collectively be referred to as the
"Remaining Convertible Amount"), or (ii) the Remaining Convertible Amount
DIVIDED BY the Conversion Price (based on the five (5) consecutive trading days
ending on the date which is two (2) trading days prior to the date of payment)
MULTIPLIED BY the closing sale price of the Common Stock on Nasdaq or the
principal trading market for the Common Stock on the trading day immediately
preceding the date of payment. The Maximum Share Amount shall mean an aggregate
of 3,039,597 shares of Common Stock (19.9% of the Borrower's outstanding shares
of Common Stock as of May 21, 1997), subject to equitable adjustment from time
to time for stock splits, stock dividends, combinations, capital reorganizations
and similar events relating to the Common Stock occurring after the date hereof.
With respect to each Holder of Debentures, the Maximum Share Amount shall refer
to such Holder's PRO RATA share thereof determined in accordance with Section
6.8 below. In the event that Borrower obtains Stockholder Approval, the
approval of The Nasdaq Stock Market or otherwise concludes that it is able to
increase the number of shares to be issued above the Maximum Share Amount (such
increased number being the "New Maximum Share Amount"), the references to
Maximum Share Amount, above, shall be deemed to be, instead, references to the
greater New Maximum Share Amount. In the event that Stockholder Approval is not
obtained or a registration statement covering the additional shares of Common
Stock which constitute the New Maximum Share Amount is not effective prior to
the Maximum Share Amount being issued (if such registration statement is
necessary to allow for the public resale of such securities), the Maximum Share
Amount shall remain unchanged; provided, however, that the Holder may grant an
extension of the effective date of such registration statement. In the event
that (a) the aggregate number of shares of Common Stock issued pursuant to this
Debenture and the other Debentures issued on the Issue Date represents at least
fifty percent (50%) of the Maximum Share Amount and (b) the sum of (x) the
aggregate number of shares of Common Stock issued pursuant to this Debenture and
the other Debentures issued on the Issue Date PLUS (y) the aggregate number of
shares of Common Stock that remain issuable pursuant to this Debenture and the
other Debentures issued on the Issue Date, represents at least one hundred
percent (100%) of the Maximum Share Amount (the "Triggering Event"), the
Borrower will use its best efforts to seek and obtain Stockholder Approval (or
obtain such other relief as will allow conversions hereunder in excess of the
Maximum Share Amount) as soon as practicable following the Triggering Event and
before the Maximum Conversion Date.
1.8 MATRIDIGM DISTRIBUTION. In the event of any distribution to the
Borrower's shareholders of any assets or securities or rights to acquire assets
or securities in respect of MatriDigm Corporation or any assignee or successor
thereof or thereto (a "MatriDigm Distribution"), in lieu of any adjustment to
the Fixed Conversion Price that may otherwise be required hereunder, the Holder
shall be entitled to receive fifty percent (50%) of the MatriDigm Distribution
distributable with respect to each share of the Borrower's Common Stock for each
share of Common Stock issuable upon conversion of this Debenture (without regard
to any
Exhibit 4.1 - Page 10
<PAGE>
limitations on conversions) at the then applicable Conversion Price (based on
the average closing bid price of the Common Stock during the five (5) Trading
Days ending one day prior to the public announcement of such MatriDigm
Distribution). To the extent that this Debenture is converted subsequent to
such announcement in accordance with the terms hereof, the number of shares in
respect of which the MatriDigm Distribution is payable in accordance with this
Section 1.8 shall be reduced on a share for share basis. Notwithstanding
anything to the contrary contained herein, the Borrower may not effect a
MatriDigm Distribution unless public announcement shall have been made and the
Holder shall have received advance notice of the record date in respect thereof
in accordance with Section 6.12 below and the Registration Statement covering
the resale of the Common Stock issuable upon conversion of this Debenture is
effective (and sales of Common Stock may be made thereunder) during the period
between such notification and such record date. The advance notice required by
Section 6.12 in respect of a MatriDigm Distribution shall be extended by one day
for each day that sales cannot be made pursuant to such Registration Statement
during such period.
ARTICLE II. CERTAIN COVENANTS
2.1 DISTRIBUTIONS ON CAPITAL STOCK. Except as provided in Section
1.8 hereof, so long as the Borrower shall have any obligation under this
Debenture, the Borrower shall not (a) pay, declare or set apart for such
payment, any dividend or other distribution (whether in cash, property or other
securities) on shares of capital stock other than dividends on shares of Common
Stock solely in the form of additional shares of Common Stock or (b) directly or
indirectly or through any subsidiary make any other payment or distribution in
respect of its capital stock.
2.2 RESTRICTION ON STOCK REPURCHASES. So long as the Borrower shall
have any obligation under this Debenture, and except for net exercises of
options and warrants in accordance with the terms thereof, the Borrower shall
not redeem, repurchase or otherwise acquire (whether for cash or in exchange for
property or other securities or otherwise) in any one transaction or series of
related transactions any shares of capital stock of the Borrower or any
warrants, rights or options to purchase or acquire any such shares.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events of default (each, an "Event of
Default") shall occur:
3.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower fails (a) to
pay the principal hereof when due, whether at maturity, upon mandatory
prepayment pursuant to Section 1.7, upon acceleration or otherwise or (b) to pay
any installment of interest hereon when due and, in the case of this clause (b)
only, such failure continues for a period of ten (10) calendar days after notice
of such failure to pay interest is received by the Borrower;
Exhibit 4.1 - Page 11
<PAGE>
3.2 CONVERSION AND THE SHARES. The Borrower fails to issue shares of
Common Stock to the Holder (or announces that it will not honor its obligation
to do so) upon exercise by the Holder of the conversion rights of the Holder in
accordance with the terms of this Debenture (for a period of at least ninety
(90) days, if such failure is solely as a result of the circumstances governed
by Section 1.3 and the Borrower is using its best efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable), fails to
transfer any certificate for shares of Common Stock issued to the Holder upon
conversion of this Debenture and when required by this Debenture or the
Registration Rights Agreement, or fails to remove any restrictive legend on any
certificate for any shares of Common Stock issued to the Holder upon conversion
of this Debenture as and when required by this Debenture, the Purchase Agreement
or the Registration Rights Agreement and any such failure shall continue uncured
(or any announcement not to honor conversions shall not be rescinded) for ten
(10) business days after the Borrower shall have been notified thereof in
writing by the Holder.
3.3 FAILURE TO EFFECT REGISTRATION. The Borrower fails to obtain
effectiveness with the Securities and Exchange Commission of the Registration
Statement prior to November 30, 1997 or the Registration Statement lapses in
effect (or sales cannot otherwise be made thereunder) for more than thirty (30)
consecutive Trading Days or sixty (60) Trading Days in any twelve month period
after the Registration Statement becomes effective;
3.4 BREACH OF COVENANTS. The Borrower breaches any material covenant
or other material term or condition contained in Sections 1.3, 1.6, 1.7, 1.8 or
4.1 of this Debenture (other than as specifically provided in Sections 3.1, 3.2
and 3.3 hereof) or Sections 4(i) and 4(j) of the Purchase Agreement and such
breach continues for a period of ten (10) business days after written notice
thereof to the Borrower from the Holder;
3.5 BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation or
warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Purchase Agreement and the Registration
Rights Agreement), shall be false or misleading in any material respect when
made and the breach of which has (or with the passage of time will have) a
material adverse effect on the rights of the Holder with respect to this
Debenture, the Purchase Agreement or the Registration Rights Agreement and such
effect substantially diminishes the value of the Holder's investment in the
Borrower;
3.6 RECEIVER OR TRUSTEE. The Borrower or any subsidiary of the
Borrower shall make an assignment for the benefit of creditors, or apply for or
consent to the appointment of a receiver or trustee for it or for a substantial
part of its property or business, or such a receiver or trustee shall otherwise
be appointed;
3.7 JUDGMENTS. Any money judgment, writ or similar process shall be
entered or filed against the Borrower or any subsidiary of the Borrower or any
of its property or other
Exhibit 4.1 - Page 12
<PAGE>
assets for more than $500,000, and shall remain unvacated, unbonded or unstayed
for a period of twenty (20) days unless otherwise consented to by the Holder,
which consent will not be unreasonably withheld;
3.8 BANKRUPTCY. Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Borrower or any subsidiary of the Borrower; or
3.9 DELISTING OF COMMON STOCK. The Common Stock is not listed on at
least one of the Nasdaq National Market, the Nasdaq SmallCap Market, the New
York Stock Exchange or the American Stock Exchange;
then, upon the occurrence and during the continuation of any Event of
Default specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7 or 3.9, at the option
of the Holders of a majority of the aggregate principal amount of the
outstanding Debentures issued pursuant to the Securities Purchase Agreement, the
Borrower shall, and upon the occurrence of an Event of Default specified in
Section 3.6 or 3.8, the Debentures shall become immediately due and payable and
the Borrower shall pay to the Holder, in full satisfaction of its obligations
hereunder, an amount equal to the greater of (i) the SUM of (w) 115% TIMES the
then outstanding principal amount of this Debenture PLUS (x) accrued and unpaid
interest on the unpaid principal amount of this Debenture to the date of payment
PLUS (y) Default Interest, if any, on the interest referred to in the
immediately preceding clause PLUS (z) any additional amounts (to the extent not
already included in principal) owed to the Holder pursuant to Sections 1.3 and
1.4(g) hereof or pursuant to Section 2(c) of the Registration Rights Agreement
(the then outstanding principal amount of this Debenture to the date of payment
PLUS the amounts referred to in clauses (x), (y) and (z) shall collectively be
known as the "Default Sum") or (ii) the Default Sum DIVIDED BY the then
applicable Conversion Price (based on the average closing bid price during the
five (5) Trading Days ending one day prior to the date the Holders exercise
their option pursuant to this paragraph or the date of the occurrence of an
event referred to in Section 3.6 or 3.8) MULTIPLIED BY the closing bid price of
the Common Stock on the Nasdaq National Market or the principal trading market
for the Common Stock on the date the Holders exercise their option pursuant to
this paragraph or the date of the occurrence of an event referred to in Section
3.6 or 3.8 (the "Default Amount") and all other amounts payable hereunder shall
immediately become due and payable, all without demand, presentment or notice,
all of which hereby are expressly waived, together with all costs, including,
without limitation, legal fees and expenses, of collection, and the Holder shall
be entitled to exercise all other rights and remedies available at law or in
equity.
If the Borrower fails to pay the Default Amount within five (5)
business days of written notice that such amount is due and payable, then the
Holder shall have the right at any time, so long as the Borrower remains in
default (and so long and to the extent that there are sufficient authorized
shares), to require the Borrower, upon written notice, to immediately issue, in
lieu of the Default Amount, the number of shares of Common Stock of the Borrower
equal to
Exhibit 4.1 - Page 13
<PAGE>
the Default Amount divided by the Conversion Price then in effect.
ARTICLE IV. PREPAYMENT
4.1 PREPAYMENT. So long as no Event of Default shall have occurred
and be continuing, upon the occurrence of a merger or consolidation involving
the Borrower or sale of all or substantially all of the Borrower's assets in a
transaction where the consideration for the sale will be liquidated to the
Borrower's shareholders (collectively, a "Merger Transaction"), the Borrower
shall have the right, exercisable on not less than twenty (20) Trading Days
prior written notice to the Holder, to prepay the Debentures, in whole but not
in part, in accordance with this Section 4.1. Any notice of prepayment (a
"Prepayment Notice") shall be delivered to the Holder at its registered address
appearing on the records of the Borrower and shall state (1) that the Borrower
is exercising its right to prepay this Debenture and all other Debentures issued
on the Issue Date and (2) the date of prepayment. On the date fixed for
prepayment (the "Prepayment Date"), the Borrower shall make payment of the
Prepayment Amount (as hereinafter defined) to or upon the order of the Holder as
specified by the Holder in writing to the Borrower at least one business day
prior to the Prepayment Date. If the Borrower exercises its right to prepay the
Debentures, the Borrower shall make payment to the Holder or upon the order of
the Holder of an amount in cash (the "Prepayment Amount") equal to (a) in the
event of a Merger Transaction occurring within one year from the Issue Date, the
cash value of the merger consideration that would be payable with respect to the
shares of Common Stock into which this Debenture is then convertible (without
regard to any limitations or restrictions on conversion contained in this
Debenture) so long as the Prepayment Amount is at least $35 per share or (b) in
the event of a Merger Transaction occurring after one year from the Issue Date,
at the greater of (i) the sum of (a) 111.11% MULTIPLIED BY the then outstanding
principal amount of this Debenture on the Prepayment Date PLUS (b) accrued and
unpaid interest on such principal amount PLUS (c) accrued and unpaid Default
Interest, if any, on the amount referred to in the immediately preceding clause
(b) at the rate provided in this Debenture PLUS (d) any additional amounts (to
the extent not already included in principal) owed to the Holder pursuant to
Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of the Registration
Rights Agreement or (ii) the Remaining Convertible Amount DIVIDED BY the
Conversion Price (based on the five (5) consecutive Trading Days ending one day
prior to the public announcement of the Merger Transaction) MULTIPLIED BY an
amount per share equal to the consideration per share to be paid in the Merger
Transaction. Notwithstanding anything to the contrary contained in this Section
4.1, the Holder shall at all times prior to the Prepayment Date maintain the
right to convert all or any part of this Debenture in accordance with Article I
and any amounts so converted after receipt of a Prepayment Notice and prior to
the Prepayment Date set forth in such notice and payment of the Prepayment
Amount shall be deducted from the amount which is otherwise subject to
prepayment pursuant to such notice.
ARTICLE V. SUBORDINATION
5.1. AGREEMENT TO SUBORDINATE. Except as otherwise provided in
Section 1.7,
Exhibit 4.1 - Page 14
<PAGE>
Article III and Article IV of this Debenture, the principal amount of this
Debenture is payable solely in shares of Common Stock upon conversion in
accordance with Article I hereof. Notwithstanding anything in this Debenture to
the contrary, the Borrower agrees, and by accepting this Debenture the Holder
agrees, that the indebtedness evidenced by this Debenture is subordinate and
subject in right of payment, to the extent and in the manner expressly provided
in this Article V, to the prior payment in full of all Senior Debt, and that the
subordination is for the benefit of and enforceable by the holders of Senior
Debt. This Debenture shall in all respects rank at least PARI PASSU with all
other present and future obligations of the Borrower, and only Senior Debt shall
rank senior to this Debenture.
5.2 INSOLVENCY, BANKRUPTCY, DISSOLUTION OF BORROWER. Upon any
payment or distribution (whether in cash, securities or other property) to
creditors of the Borrower upon any Insolvency Event:
(a) all Senior Debt shall first be paid in full before the
Holder shall be entitled to receive any payment or other distribution on or
in respect of this Debenture; and
(b) until all Senior Debt is paid in full, any payment or
distribution to which the Holder of this Debenture would be entitled but
for this Article V shall be made to holders of Senior Debt as their
interests may appear, except that the Holder may receive shares of the
Borrower as reorganized or readjusted or securities of the Borrower or any
other corporation if the payment of such securities is subordinate to
Senior Debt to at least the same extent as this Debenture is subordinate to
Senior Debt.
5.3 DEFAULT ON SENIOR DEBT. (a) The Borrower may not pay the
principal of, premium, if any, or interest on, this Debenture or make any
deposit in respect of this Debenture and may not repurchase, redeem or otherwise
retire this Debenture (collectively, "pay this Debenture") if (i) the principal
of or interest on any Senior Debt is not paid when due or (ii) any other default
on Senior Debt occurs and the maturity of such Senior Debt is accelerated in
accordance with its terms unless, in each case, the default has been cured or
waived and any such acceleration has been rescinded or such Senior Debt has been
paid in full. During the continuance of any default (other than a default
described in clause (i) or (ii) of the preceding sentence) with respect to any
Senior Debt pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Borrower may not pay this Debenture for a period (a "Payment Blockage Period")
commencing upon the receipt by the Borrower and the Holder of written notice of
such default from a representative of such Senior Debt specifying an election to
effect a Payment Blockage Period (a "Payment Blockage Notice") and ending 179
days thereafter (or earlier if such Payment Blockage Period is terminated (i) by
written notice to the Borrower from the representative which gave such Payment
Blockage Notice, (ii) by repayment in full of such Senior Debt or (iii) because
the default specified in such Payment Blockage Notice is no
Exhibit 4.1 - Page 15
<PAGE>
longer continuing). Notwithstanding the immediately preceding sentence (but
subject to the provisions contained in the first sentence of this Section),
unless the holders of such Senior Debt or the representative of such holders
shall have accelerated the maturity of such Senior Debt, the Borrower shall
resume payments (including any missed payments) on this Debenture after the end
of such Payment Blockage Period unless such payment is otherwise prohibited
under this Article V. Multiple Payment Blockage Periods may be imposed so long
as (x) the cumulative period covered by all such Payment Blockage Periods does
not exceed 179 days in any 365 consecutive day period and (y) no more than one
Payment Blockage Period may result from the same default.
(b) The failure to make a payment or distribution on this
Debenture by reason of this Article V shall not be construed or deemed to
prevent the occurrence of an Event of Default hereunder; provided that any
acceleration of payment of this Debenture resulting therefrom shall be rescinded
if and when the following conditions shall be simultaneously satisfied (x) each
payment or distribution which gave rise to such Event of Default shall be made
and (y) no other such Event of Default shall have occurred.
5.4 SUBORDINATED ACCELERATION; STANDSTILL. (a) The Holder agrees to
give the Borrower not less than 10 days' prior written notice of its intention
to accelerate the maturity of this Debenture pursuant to Article III hereof.
The Borrower will promptly notify holders of Senior Debt of any obligation to
make payments to be made under Section 1.7.
(b) The Holder will not for a period of ninety (90) days
following an acceleration of this Debenture pursuant to Article III, including
by reason of the Borrower's breach of its covenants under Section 1.7 (other
than if an Insolvency Event shall have occurred or if the Senior Debt shall have
been accelerated) pursue or exercise any other right, power or remedy arising
under Article III of this Debenture.
5.5. PERMITTED PAYMENTS. So as to eliminate any doubt, except as
provided in Sections 5.2 and 5.3, payments of interest, payments under 1.3 and
1.4(g) of this Debenture, and payments under Section 2(c) of the Registration
Rights Agreement (whether in cash or Common Stock (as applicable))
(collectively, "Permitted Payments") shall be made by the Borrower on the terms
of this Debenture.
5.6 TURNOVER. If the Holder receives any payment or other
distribution on this Debenture (whether in cash, property, securities or
whatever) at a time when such payment or distribution should not have been made
to the Holder by reason of this Article V, such payment or distribution shall be
deemed to have been received and held in trust for the benefit of the holders of
the Senior Debt, and shall be segregated from other property of the Holder and
be paid and delivered as promptly as practicable to the holders of the Senior
Debt, as their interests may appear, for application to, or collateral for, the
payment or prepayment of the Senior Debt.
5.7 RELATIVE RIGHTS. This Article V defines the relative rights of
the Holder
Exhibit 4.1 - Page 16
<PAGE>
and the holders of Senior Debt. Nothing herein shall:
(a) impair, as between the Borrower and the Holder, the
obligation of the Borrower, which is absolute and unconditional, to pay
principal of, premium, if any, and interest on this Debenture in accordance
with its terms and to fulfill its other obligations hereunder; or
(b) except as otherwise expressly provided herein, prevent the
Holder from exercising its available remedies upon a default, subject to
the rights of holders of Senior Debt to receive distributions otherwise
payable to the Holder.
5.8 AGREEMENT TO COOPERATE. In the event that a payment may not be
made on the Debentures as a result of the provisions of this Article V,
including without limitation, as a result of an Insolvency Event or a default on
any Senior Debt, the Borrower shall, if requested by the Holder, reasonably
assist the Holder in attempting to purchase such Senior Debt or otherwise cure
such default so that the payment may be made on the Debenture. Nothing in this
Section 5.8 shall obligate the Holder to purchase such Senior Debt or to attempt
to cure any such default.
5.9 CONVERSION. Notwithstanding anything to the contrary contained
in this Article V, nothing in this Article V shall restrict the rights of the
Holder to convert the Conversion Amount (as defined in Section 1.1) in
accordance with Article I, including, without limitation, after an Insolvency
Event and during the pendency of a default on Senior Debt. To the extent any
Permitted Payments would be payable, but for the provisions of this Article V,
in cash (whether at the Borrower's option or the Holder's option), such
Permitted Payments shall automatically be added to the Conversion Amount
including after an Insolvency Event or during the pendency of a default on
Senior Debt and shall thereafter and during such pendency be convertible into
Common Stock in accordance with Article I.
5.10 DEFINITIONS.
(a) "Bank Credit Agreement" shall mean that certain credit
agreement by and between the Borrower and Comerica Bank, as the same may be
amended, supplemented or otherwise modified from time to time, as well as any
future credit agreement that may be executed by the Borrower and Comerica Bank
or another financial institution that replaces Comerica Bank as the Borrower's
primary commercial bank or lending institution.
(b) "Bankruptcy Code" means the Bankruptcy Reform Act of 1978,
11 U.S.C. Section 101 ET SEQ., or any successor statute thereto.
(c) "Insolvency Event" means (i) any winding-up, insolvency,
bankruptcy, liquidation or reorganization of the Borrower, whether voluntary or
involuntary, (ii) any proceeding or case for reorganization, liquidation,
bankruptcy, dissolution or other winding-up of
Exhibit 4.1 - Page 17
<PAGE>
the Borrower or its assets, whether or not involving insolvency or bankruptcy,
(iii) any assignment by the Borrower for the benefit of creditors or (iv) any
receivership or other similar proceeding or any marshalling of assets of the
Borrower.
(d) "Senior Debt" means (i) all obligations and liabilities of
the Borrower, whether for or on account of principal, reimbursement obligations,
accrued and unpaid interest (including without limitation all interest accruing
on and after an Insolvency Event), fees, expenses, indemnities and other amounts
payable under or in connection with the Bank Credit Agreement and all documents
or instruments executed in connection therewith, whether outstanding on the date
of issuance of this Debenture or hereafter created, assumed or incurred.
Notwithstanding the foregoing definition of Senior Debt, the Holder agrees that
upon the written request of the Borrower at any time prior to an Insolvency
Event, it shall by written amendment modify such definition of Senior Debt to
include any material obligation or liability (including any amendment,
modification or extension of an existing obligation or liability) that the
Borrower intends to incur, but only if, in good faith, the Borrower certifies
that the incurrence of such obligation or liability is in the best interests of
the Borrower and either (a) the holder of the proposed Senior Debt will not
extend credit or services unless such obligation or liability becomes Senior
Debt or (b) the terms under which such holder will extend credit or services are
commercially unreasonable unless such obligations or liabilities becomes Senior
Debt. Notwithstanding the foregoing, (x) no such modification to the definition
of Senior Debt shall become effective unless set forth in a written document
executed by the Holder and (y) trade payables incurred in the ordinary course of
business, debt which is convertible into equity securities of the Borrower and
shall not under any circumstances become Senior Debt.
ARTICLE VI. MISCELLANEOUS
6.1 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the
part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privileges. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
6.2 NOTICES. Any notice herein required or permitted to be given
shall be in writing and may be personally served or delivered by courier or sent
by United States mail and shall be deemed to have been given upon receipt if
personally served (which shall include telephone line facsimile transmission) or
sent by courier or three (3) days after being deposited in the United States
mail, certified, with postage pre-paid and properly addressed, if sent by mail.
For the purposes hereof, the address of the Holder shall be as shown on the
records of the Borrower; and the address of the Borrower shall be Zitel
Corporation, 47211 Bayside Parkway, Fremont, California 94538-6517 (facsimile
number: (510) 440-8526). Both the Holder and the Borrower may change the
address for service by service of written notice to the other as herein
provided.
Exhibit 4.1 - Page 18
<PAGE>
6.3 AMENDMENTS. This Debenture and any provision hereof may only be
amended by an instrument in writing signed by the Borrower and the Holder. The
term "Debenture" and all reference thereto, as used throughout this instrument,
shall mean this instrument (and the other Debentures issued pursuant to the
Purchase Agreement) as originally executed, or if later amended or supplemented,
then as so amended or supplemented.
6.4 ASSIGNABILITY. This Debenture shall be binding upon the Borrower
and its successors and assigns, and shall inure to be the benefit of the Holder
and its successors and assigns; provided, however, that so long as no Event of
Default has occurred, this Debenture shall only be transferable to (i) an
affiliate of a Holder or (ii) to other persons who do not compete, directly or
indirectly, with the Borrower in the Borrower's business in increments of not
less than Three Million Dollars ($3,000,000). Each transferee of this Debenture
must be an "accredited investor" (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding the foregoing or anything else in this Debenture to the
contrary, this Debenture may be pledged as collateral in connection with a BONA
FIDE margin account or other lending arrangement.
6.5 COST OF COLLECTION. If default is made in the payment of this
Debenture, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys' fees.
6.6 GOVERNING LAW. This Debenture shall be governed by the internal
laws of the State of California, without regard to the principles of conflict of
laws.
6.7 CERTAIN AMOUNTS. Whenever pursuant to this Debenture the
Borrower is required to pay an amount in excess of the outstanding principal
amount (or the portion thereof required to be paid at that time) plus accrued
and unpaid interest plus Default Interest on such interest, the Borrower and the
Holder agree that the actual damages to the Holder from the receipt of cash
payment on this Debenture may be difficult to determine and the amount to be so
paid by the Borrower represents stipulated damages and not a penalty and is
intended to compensate the Holder in part for loss of the opportunity to convert
this Debenture and to earn a return from the sale of shares of Common Stock
acquired upon conversion of this Debenture at a price in excess of the price
paid for such shares pursuant to this Debenture. The Borrower and the Holder
hereby agree that such amount of stipulated damages is not plainly
disproportionate to the possible loss to the Holder from the receipt of a cash
payment without the opportunity to convert this Debenture into shares of Common
Stock.
6.8 ALLOCATIONS OF MAXIMUM SHARE AMOUNT AND RESERVED AMOUNT. The
Maximum Share Amount and the Reserved Amount (including any increases thereto)
shall be allocated pro rata among the Holders of Debentures based on the
principal amount of Debentures then held by each Holder relative to the
aggregate principal amount of the Debentures then outstanding.
6.9 DAMAGES SHARES. The shares of Common Stock that may be issuable
to
Exhibit 4.1 - Page 19
<PAGE>
the Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant to Section
2(c) of the Registration Rights Agreement ("Damages Shares") shall be treated as
Common Stock issuable upon conversion of this Debenture for all purposes hereof
and shall be subject to all of the limitations and afforded all of the rights of
the other shares of Common Stock issuable hereunder, including without
limitation, the right to be included in the Registration Statement filed
pursuant to the Registration Rights Agreement. For purposes of calculating
interest payable on the outstanding principal amount hereof, except as otherwise
provided herein, amounts convertible into Damages Shares ("Damages Amounts")
shall not bear interest but must be converted prior to the conversion of any
outstanding principal amount hereof, until the outstanding Damages Amounts is
zero.
6.10 DENOMINATIONS. At the request of the Holder, upon surrender of
this Debenture, the Borrower shall promptly issue new Debentures in the
aggregate outstanding principal amount hereof, in the form hereof, in such
denominations of at least $100,000 as the Holder shall request.
6.11 PURCHASE AGREEMENT. By its acceptance of this Debenture, each
Holder agrees to be bound by the applicable terms of the Purchase Agreement.
6.12 NOTICE OF CORPORATE EVENTS. Except as otherwise provided below,
the Holder of this Debenture shall have no rights as a Holder of Common Stock
unless and only to the extent that it converts this Debenture into Common Stock.
The Borrower shall provide the Holder with prior notification of any meeting of
the Borrower's shareholders (and copies of proxy materials and other information
sent to shareholders). In the event of any taking by the Borrower of a record
of its shareholders for the purpose of determining shareholders who are entitled
to receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation,
reclassification or recapitalization) any share of any class or any other
securities or property, or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Borrower or any proposed liquidation, dissolution or winding up of the
Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20)
days prior to the record date specified therein (or thirty (30) days prior to
the consummation of the transaction or event, whichever is earlier), of the date
on which any such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time; PROVIDED, HOWEVER, that notwithstanding the foregoing, the
Borrower shall mail a notice to the Holder at least forty-five (45) days in
advance of the taking of any record for the distribution to its shareholders of
any assets or securities or rights to acquire assets or securities in respect of
MatriDigm Corporation or any assignee or successor thereof or thereto. The
Borrower shall make a public announcement of any event requiring notification to
the Holder hereunder substantially simultaneously with the notification to the
Holder in accordance with the terms of this Section 6.12.
Exhibit 4.1 - Page 20
<PAGE>
6.13 FORCE MAJEURE. If the performance of the obligations under this
Debenture by any party is prevented, restricted, or interfered with by reason of
war, revolution, civil commotion, acts of public enemies, blockade, embargo,
strikes, and any other similar and unforseeable acts which are beyond the
reasonable control of the party affected, then the parties so affected shall,
upon giving prior written notice to the other parties, be excused from such
performance to the extent of such prevention, restriction, or interference,
provided that the party so affected shall use its best efforts to avoid or
remove such causes of nonperformance, and shall continue performance hereunder
with the utmost dispatch whenever such causes are removed. Upon such
circumstances arising, the parties shall meet forthwith to discuss what (if any)
modification may be required to the terms of this Debenture, in order to arrive
at an equitable solution.
IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in
its name by its duly authorized officer this 22nd day of May, 1997.
ZITEL CORPORATION
By: Henry C. Harris
Name: Henry C. Harris
Title: Chief Financial Officer
Exhibit 4.1 - Page 21
<PAGE>
Exhibit A
NOTICE OF CONVERSION
OF CONVERTIBLE DEBENTURE
TO: Zitel Corporation
(1) Pursuant to the terms of the attached Convertible Debenture (the
"Debenture"), the undersigned hereby elects to convert $ principal
amount of the Debenture into shares of Common Stock of Zitel Corporation, a
California corporation (the "Borrower"). Capitalized terms used herein and not
otherwise defined herein have the respective meanings provided in the Debenture.
(2) Please issue a certificate or certificates for the number of
shares of Common Stock into which such principal amount of the Debenture (plus
interest thereon to the extent not paid in cash in accordance with the terms of
the Debenture) is convertible (_____ shares, based on the Holder's calculation
attached hereto) in the name(s) specified immediately below or, if additional
space is necessary, on an attachment hereto:
_____________________________ ______________________________
Name Name
_____________________________ ______________________________
Address Address
_____________________________ ______________________________
SS or Tax ID Number SS or Tax ID Number
(3) Holder acknowledges and affirms that the Common Stock issued
pursuant to this Notice of Conversion has been or will be sold in accordance
with the prospectus delivery requirements of the 1933 Act, if applicable, or
pursuant to an exemption under the 1933 Act.
(4) Capitalized terms used in this Notice of Conversion and not
otherwise defined herein shall have the respective meanings provided in the
Debenture.
Date_________________ ______________________________________________
Signature of Registered Holder (must be signed
exactly as name appears in the Debenture).
Exhibit 4.1 - Page 22
<PAGE>
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of May 22, 1997,
by and among Zitel Corporation, a California corporation, with headquarters
located at 47211 Bayside Parkway, Fremont, California 94538 (the "COMPANY"), and
each of the undersigned (together with their respective affiliates and any
assignee or transferee of all of their respective rights hereunder, the "INITIAL
INVESTORS").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties hereto dated as of May 21, 1997 (the "SECURITIES PURCHASE AGREEMENT"),
the Company has agreed, upon the terms and subject to the conditions contained
therein, to issue and sell to the Initial Investors convertible subordinated
debentures (the "DEBENTURES") that are convertible into shares (the "CONVERSION
SHARES") of the Company's common stock (the "COMMON STOCK"), upon the terms and
subject to the limitations and conditions set forth in such Debentures; and
B. To induce the Initial Investors to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"1933 ACT"), and applicable state securities laws;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and each of the
Initial Investors hereby agree as follows:
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have the
following meanings:
(i) "INVESTORS" means the Initial Investors and any transferee
or assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("RULE 415"), and the declaration or ordering of effectiveness of such
Registration Statement by the United States Securities and Exchange Commission
(the "SEC").
Exhibit 4.2 - Page 1
<PAGE>
(iii) "REGISTRABLE SECURITIES" means the Conversion Shares
issued or issuable and any shares of capital stock issued or issuable as a
dividend on or in exchange for or otherwise with respect to any of the foregoing
(including, but limited to, Common Stock issuable upon conversion of the
principal and interest of the Debentures or shares issuable pursuant to the
damage provisions of the Debentures and hereunder).
(iv) "REGISTRATION STATEMENT" means a registration statement of
the Company under the 1933 Act.
b. Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. REGISTRATION.
a. MANDATORY REGISTRATION. The Company shall prepare, and, on or
prior to the date which is forty-five (45) days after the date of the Closing
under the Securities Purchase Agreement (the "CLOSING DATE"), file with the SEC
a Registration Statement on Form S-3 (or, if Form S-3 is not then available, on
such form of Registration Statement as is then available to effect a
registration of the Registrable Securities, subject to the consent of the
Initial Investors, which consent will not be unreasonably withheld) covering the
resale of the Registrable Securities underlying the Debentures issued pursuant
to the Securities Purchase Agreement, which Registration Statement, to the
extent allowable under the 1933 Act and the Rules promulgated thereunder
(including Rule 416), shall state that such Registration Statement also covers
such indeterminate number of additional shares of Common Stock as may become
issuable upon conversion of the Debentures (i) to prevent dilution resulting
from stock splits, stock dividends or similar transactions or (ii) by reason of
changes in the Conversion Price of the Debentures in accordance with the terms
thereof. The number of shares of Common Stock initially included in such
Registration Statement shall be no less than two (2) times the number of
Conversion Shares that are then issuable upon conversion of the Debentures as of
the date of filing of the Registration Statement without regard to any
limitation on the Investor's ability to convert the Debentures.
b. UNDERWRITTEN OFFERING. If any offering pursuant to a
Registration Statement pursuant to Section 2(a) hereof involves an underwritten
offering, the Investors who hold a majority in interest of the Registrable
Securities subject to such underwritten offering, with the consent of a
majority-in-interest of the Initial Investors, shall have the right to select
one legal counsel and an investment banker or bankers and manager or managers to
administer the offering, which investment banker or bankers or manager or
managers shall be reasonably satisfactory to the Company.
c. PAYMENTS BY THE COMPANY. The Company shall use its best efforts
to obtain effectiveness of the Registration Statement as soon as practicable.
If (i) the Registration Statement(s) covering the Registrable Securities
required to be filed by the Company pursuant to Section 2(a) hereof is not
declared effective by the SEC within ninety (90) days after the Closing Date or
if, after the
Exhibit 4.2 - Page 2
<PAGE>
Registration Statement has been declared effective by the SEC, sales cannot be
made pursuant to the Registration Statement, or (ii) the Common Stock is not
listed or included for quotation on the Nasdaq National Market (the
"NASDAQ-NMS"), the Nasdaq SmallCap Market ("NASDAQ SMALLCAP"), the New York
Stock Exchange (the "NYSE") or the American Stock Exchange (the "AMEX") after
being so listed or included for quotation, then the Company will make
payments to the Investors in such amounts and at such times as shall be
determined pursuant to this Section 2(c) as partial relief for the damages to
the Investors by reason of any such delay in or reduction of their ability to
sell the Registrable Securities (which remedy shall not be exclusive of any
other remedies available at law or in equity). The Company shall pay to each
holder of the Debentures or Registerable Securities an amount equal to the
then outstanding principal amount of the Debentures (and, in the case of
holders of Registerable Securities, the principal amount of Debentures from
which such Registerable Securities were converted) ("OUTSTANDING PRINCIPAL
AMOUNT") multiplied by two hundredths (.020) times the sum of: (i) the number
of months (prorated for partial months) after the end of such 90-day period
and prior to the date the Registration Statement is declared effective by the
SEC, provided, however, that there shall be excluded from such period any
delays which are solely attributable to (A) changes required by the Investors
in the Registration Statement with respect to information relating to the
Investors, including, without limitation, changes to the plan of
distribution, or to the failure of the Investors to conduct their review of
the Registration Statement pursuant to Section 3(h) below in a reasonably
prompt manner and (B) changes in the relevant policy, procedure,
interpretation, position, practice or rule of the SEC announced after the
Closing Date; (ii) the number of months (prorated for partial months) that
sales cannot be made pursuant to the Registration Statement after the
Registration Statement has been declared effective (excluding days during an
Allowed Delay (as defined in Section 3(f) below)); and (iii) the number of
months (prorated for partial months) that the Common Stock is not listed or
included for quotation on the Nasdaq-NMS, Nasdaq SmallCap, NYSE or AMEX after
the Registration Statement has been declared effective. (For example, if the
Registration Statement becomes effective one (1) month after the end of such
90-day period, the Company would pay $20,000 for each $1,000,000 of
Outstanding Principal Amount. If thereafter, sales could not be made
pursuant to the Registration Statement for an additional period of one (1)
month, the Company would pay an additional $20,000 for each $1,000,000 of
Outstanding Principal Amount.) Such amounts shall be paid in cash or, at
each Investor's option, may be added to the principal of the Debentures and
thereafter be convertible into Common Stock at the "CONVERSION PRICE" (as
defined in the Debentures) in accordance with the terms of the Debentures.
Any shares of Common Stock issued upon conversion of such amounts shall be
Registrable Securities. If the Investor desires to convert the amounts due
hereunder into Registrable Securities, it shall so notify the Company in
writing within two (2) business days of the date on which such amounts are
first payable in cash and such amounts shall be so convertible (pursuant to
the mechanics set forth under Article I of the Debentures), beginning on the
last day upon which the cash amount would otherwise be due in accordance with
the following sentence. Payments of cash pursuant hereto shall be made within
five (5) days after the end of each period that gives rise to such
obligation, provided that, if any such period extends for more than thirty
(30) days, interim payments shall be made for each such thirty (30) day
period.
d. PIGGY-BACK REGISTRATIONS. If at any time prior to the expiration
of the
Exhibit 4.2 - Page 3
<PAGE>
Registration Period (as hereinafter defined) the Company shall file with the SEC
a Registration Statement relating to an offering for its own account or the
account of others under the 1933 Act of any of its equity securities (other than
on Form S-4 or Form S-8 or their then equivalents relating to equity securities
to be issued solely in connection with any acquisition of any entity or business
or equity securities issuable in connection with stock option or other employee
benefit plans), the Company shall send to each Investor who is entitled to
registration rights under this Section 2(d) written notice of such determination
and, if within fifteen (15) days after the effective date of such notice, such
Investor shall so request in writing, the Company shall include in such
Registration Statement all or any part of the Registrable Securities such
Investor requests to be registered, except that if, in connection with any
underwritten public offering for the account of the Company the managing
underwriter(s) thereof shall impose a limitation on the number of shares of
Common Stock which may be included in the Registration Statement because, in
such underwriter(s)' judgment, marketing or other factors dictate such
limitation is necessary to facilitate public distribution, then the Company
shall be obligated to include in such Registration Statement only such limited
portion of the Registrable Securities with respect to which such Investor has
requested inclusion hereunder as the underwriter shall permit. Any exclusion of
Registrable Securities shall be made pro rata among the Investors seeking to
include Registrable Securities in proportion to the number of Registrable
Securities sought to be included by such Investors; PROVIDED, HOWEVER, that the
Company shall not exclude any Registrable Securities unless the Company has
first excluded all outstanding securities, the holders of which are not entitled
to inclusion of such securities in such Registration Statement or are not
entitled to pro rata inclusion with the Registrable Securities; and PROVIDED,
FURTHER, HOWEVER, that, after giving effect to the immediately preceding
proviso, any exclusion of Registrable Securities shall be made pro rata with
holders of other securities having the right to include such securities in the
Registration Statement other than holders of securities entitled to inclusion of
their securities in such Registration Statement by reason of demand registration
rights. No right to registration of Registrable Securities under this Section
2(d) shall be construed to limit any registration required under Section 2(a)
hereof. If an offering in connection with which an Investor is entitled to
registration under this Section 2(d) is an underwritten offering, then each
Investor whose Registrable Securities are included in such Registration
Statement shall, unless otherwise agreed by the Company, offer and sell such
Registrable Securities in an underwritten offering using the same underwriter or
underwriters and, subject to the provisions of this Agreement, on the same terms
and conditions as other shares of Common Stock included in such underwritten
offering.
e. ELIGIBILITY FOR FORM S-3. The Company represents and warrants
that it meets the registrant eligibility and transaction requirements for the
use of Form S-3 for registration of the sale by the Initial Investors and any
other Investors of the Registrable Securities and the Company shall file all
reports required to be filed by the Company with the SEC in a timely manner so
as to meet the "registrant eligibility" requirements in the general instructions
to Form S-3. The Company further represents and warrants that it currently
meets the "registrant eligibility" requirements for primary issuances set forth
in the general instructions to Form S-3.
Exhibit 4.2 - Page 4
<PAGE>
3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
a. The Company shall prepare promptly, and file with the SEC not
later than forty-five (45) days after the Closing Date, a Registration Statement
with respect to the number of Registrable Securities provided in Section 2(a),
and thereafter use its best efforts to cause such Registration Statement
relating to Registrable Securities to become effective as soon as possible after
such filing, and keep the Registration Statement effective pursuant to Rule 415
at all times until such date as is the earlier of (i) the date on which no
Debentures are outstanding and all of the Registrable Securities have been sold
and (ii) the date on which the Registrable Securities (in the opinion of counsel
to the Initial Investors) may be immediately sold without registration or
limitation under Rule 144(k) (the "REGISTRATION PERIOD"), which Registration
Statement (including any amendments or supplements thereto and prospectuses
contained therein) shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein, or necessary to
make the statements therein not misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration Statement
as may be necessary to keep the Registration Statement effective at all times
during the Registration Period, and, during such period, comply with the
provisions of the 1933 Act with respect to the disposition of all Registrable
Securities of the Company covered by the Registration Statement until such time
as all of such Registrable Securities have been disposed of in accordance with
the intended methods of disposition by the seller or sellers thereof as set
forth in the Registration Statement. In the event the number of shares
available under a Registration Statement filed pursuant to this Agreement is
insufficient to cover all of the Registrable Securities issued or issuable upon
conversion of the Debentures, the Company shall amend the Registration
Statement, or file a new Registration Statement (on the short form available
therefore, if applicable), or both, so as to cover all of the Registrable
Securities, in each case, as soon as practicable, but in any event within twenty
(20) business days (subject to reasonable extensions arising from the Company's
obligation to obtain Stockholder Approval (as defined in the Debenture) or to
effect an increase in the authorized number of shares of Common Stock pursuant
to Section 1.7 of the Debenture) after the necessity therefor arises (based on
the market price of the Common Stock and other relevant factors on which the
Company reasonably elects to rely). The Company shall use its best efforts to
cause such amendment and/or new Registration Statement to become effective as
soon as practicable following the filing thereof. The provisions of Section
2(c) above shall be applicable with respect to such obligation, with the ninety
(90) days running from the day after the date on which the Company reasonably
first determines (or reasonably should have determined) the need therefor.
c. The Company shall furnish to each Investor whose Registrable
Securities are included in the Registration Statement and its legal counsel (i)
promptly after the same is prepared and
Exhibit 4.2 - Page 5
<PAGE>
publicly distributed, filed with the SEC, or received by the Company, one copy
of the Registration Statement and any amendment thereto, each preliminary
prospectus and prospectus and each amendment or supplement thereto, and, in the
case of the Registration Statement referred to in Section 2(a), each letter
written by or on behalf of the Company to the SEC or the staff of the SEC, and
each item of correspondence from the SEC or the staff of the SEC, in each case
relating to such Registration Statement (other than any portion of any thereof
which contains information for which the Company has sought confidential
treatment), and (ii) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor. The
Company will immediately notify each Investor by facsimile of the effectiveness
of the Registration Statement or any post-effective amendment.
d. The Company shall use reasonable efforts to (i) register and
qualify the Registrable Securities covered by the Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as the Investors who hold a majority in interest of the Registrable
Securities being offered reasonably request, (ii) prepare and file in those
jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; PROVIDED, HOWEVER, that
the Company shall not be required in connection therewith or as a condition
thereto to (a) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (b) subject itself
to general taxation in any such jurisdiction, (c) file a general consent to
service of process in any such jurisdiction, or (d) make any change in its
charter or bylaws, which in each case the Board of Directors of the Company
determines to be contrary to the best interests of the Company and its
stockholders.
e. In the event Investors who hold a majority-in-interest of the
Registrable Securities being offered in the offering (with the approval of a
majority-in-interest of the Initial Investors, so long as such Initial Investors
own, in the aggregate, at least 50% of the then outstanding Registerable
Securities) select underwriters for the offering, the Company shall enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, including, without limitation, customary indemnification and
contribution obligations, with the underwriters of such offering.
f. As promptly as practicable after becoming aware of such event,
the Company shall notify each Investor of the happening of any event, of which
the Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission,
Exhibit 4.2 - Page 6
<PAGE>
and deliver such number of copies of such supplement or amendment to each
Investor as such Investor may reasonably request; provided that, for not more
than fifteen (15) consecutive trading days (or a total of not more than (i)
twenty (20) trading days in any four (4) month period or (ii) forty-five (45)
trading days in any twelve (12) month period), the Company may delay the
disclosure of material non-public information concerning the Company the
disclosure of which at the time is not, in the good faith opinion of the Board
of Directors of the Company, in the best interests of the Company and, in the
opinion of counsel to the Company, otherwise required (an "Allowed Delay");
provided, further, that the Company shall promptly (i) notify the Investors in
writing of the existence of material non-public information giving rise to an
Allowed Delay and (ii) advise the Investors in writing to cease all sales under
the Registration Statement until the end of the Allowed Delay. Upon expiration
of the Allowed Delay, the Company shall again be bound by the first sentence of
this Section 3(f) with respect to the information giving rise thereto.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
and, if such an order is issued, to obtain the withdrawal of such order at the
earliest possible moment and to notify each Investor who holds Registrable
Securities being sold (or, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof.
h. The Company shall permit a single firm of counsel designated by
the Initial Investors to review the Registration Statement and all amendments
and supplements thereto (as well as all requests for acceleration or
effectiveness thereof) a reasonable period of time prior to their filing with
the SEC, and not file any document in a form to which such counsel reasonably
objects and will not request acceleration of the Registration Statement without
prior notice to such counsel.
i. The Company shall make generally available to its security
holders as soon as practical, but not later than ninety (90) days after the
close of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 under the 1933 Act) covering a twelve-month
period beginning not later than the first day of the Company's fiscal quarter
next following the effective date of the Registration Statement.
j. At the request of any Investor, the Company shall furnish, on the
date that Registrable Securities are delivered to an underwriter, if any, for
sale in connection with the Registration Statement, (i) an opinion, dated as of
such date, from counsel representing the Company for purposes of such
Registration Statement, in form, scope and substance as is customarily given in
an underwritten public offering, addressed to the underwriters and the Investors
and (ii) a letter, dated such date, from the Company's independent certified
public accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters and the Investors.
k. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to the
Registration Statement, (iii) one firm of
Exhibit 4.2 - Page 7
<PAGE>
attorneys and one firm of accountants or other agents retained by the Initial
Investors, (iv) one firm of attorneys and one firm of accountants or other
agents retained by all other Investors, and (v) one firm of attorneys retained
by all such underwriters (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "RECORDS"), as shall be reasonably deemed
necessary by each Inspector to enable each Inspector to exercise its due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request
for purposes of such due diligence; PROVIDED, HOWEVER, that each Inspector and
Investor shall hold in confidence and shall not make any disclosure (except, in
the case of an Inspector, to an Investor) of any Record or other information
which the Company determines in good faith to be confidential, and of which
determination the Inspectors are so notified, unless (a) the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in any
Registration Statement, (b) the release of such Records is ordered pursuant to a
subpoena or other order from a court or government body of competent
jurisdiction, or (c) the information in such Records has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company shall not be required to disclose any confidential
information in such Records to any Inspector until and unless such Inspector
shall have entered into confidentiality agreements (in form and substance
satisfactory to the Company) with the Company with respect thereto,
substantially in the form of this Section 3(k). Each Investor agrees that it
shall, upon learning that disclosure of such Records is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential. Nothing herein shall be deemed to limit
the Investors' ability to sell Registrable Securities in a manner which is
otherwise consistent with applicable laws and regulations.
l. The Company shall hold in confidence and not make any disclosure
of information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor prior
to making such disclosure, and allow the Investor, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
m. The Company shall use its best efforts either to (i) cause all
the Registrable Securities covered by the Registration Statement to be listed on
each national securities exchange on which securities of the same class or
series issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange, or
(ii) secure the designation and quotation, of all the Registrable Securities
covered by the Registration Statement on
Exhibit 4.2 - Page 8
<PAGE>
the Nasdaq-NMS or, if not eligible for the Nasdaq-NMS on the Nasdaq SmallCap
and, without limiting the generality of the foregoing, to arrange for at least
two market makers to register with the National Association of Securities
Dealers, Inc. ("NASD") as such with respect to such Registrable Securities.
n. The Company shall provide a transfer agent and registrar, which
may be a single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.
o. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be offered pursuant to the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
managing underwriter or underwriters, if any, or the Investors may reasonably
request and registered in such names as the managing underwriter or
underwriters, if any, or the Investors may request, and, within three (3)
business days after a Registration Statement which includes Registrable
Securities is ordered effective by the SEC, the Company shall deliver, and shall
cause legal counsel selected by the Company to deliver, to the transfer agent
for the Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) an instruction in the
form attached hereto as EXHIBIT 1 and an opinion of such counsel in the form
attached hereto as EXHIBIT 2.
p. The Company shall cooperate with the Investors to effectuate the
intent of this Agreement.
4. OBLIGATIONS OF THE INVESTORS.
In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:
a. It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least five (5)
business days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Investor of the information the Company
requires from each such Investor.
b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the
Exhibit 4.2 - Page 9
<PAGE>
preparation and filing of the Registration Statement hereunder, unless such
Investor has notified the Company in writing of such Investor's election to
exclude all of such Investor's Registrable Securities from the Registration
Statement.
c. In the event Investors holding a majority-in-interest of the
Registrable Securities being registered (with the approval of the Initial
Investors, so long as such Initial Investors own, in the aggregate, at least 50%
of the then outstanding Registerable Securities) determine to engage the
services of an underwriter, each Investor agrees to enter into and perform such
Investor's obligations under an underwriting agreement, in usual and customary
form, including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
e. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements in usual and
customary form entered into by the Company, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and any expenses in excess of those payable by the
Company pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including, without limitation, all registration, listing and
qualification fees, printers and accounting fees, the fees and disbursements of
counsel for the Company, and the reasonable fees and disbursements of counsel
selected by the Initial Investors pursuant to Sections 2(b) and 3(h) hereof
shall be borne by the Company.
Exhibit 4.2 - Page 10
<PAGE>
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable Securities,
(ii) the directors, officers, partners, employees, agents and each person who
controls any Investor within the meaning of the 1933 Act or the Securities
Exchange Act of 1934, as amended (the "1934 ACT"), if any, (iii) any underwriter
(as defined in the 1933 Act) for the Investors, and (iv) the directors,
officers, partners, employees and each person who controls any such underwriter
within the meaning of the 1933 Act or the 1934 Act, if any (each, an
"INDEMNIFIED PERSON"), against any joint or several losses, claims, damages,
liabilities or expenses (collectively, together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "CLAIMS") to which any of them may become
subject insofar as such Claims arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or the omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading; (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading; or
(iii) any violation or alleged violation by the Company of the 1933 Act, the
1934 Act, any other law, including, without limitation, any state securities
law, or any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities (the matters in the foregoing clauses (i) through (iii)
being, collectively, "VIOLATIONS"). Subject to the restrictions set forth in
Section 6(c) with respect to the number of legal counsel, the Company shall
reimburse the Indemnified Person, promptly as such expenses are incurred and are
due and payable, for any reasonable legal fees or other reasonable expenses
incurred by them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld; and
(iii) with respect to any preliminary prospectus, shall not inure to the benefit
of any Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented, such corrected prospectus was
timely made available by the Company pursuant to Section 3(c) hereof, and the
Indemnified Person was promptly advised in writing not to use the
Exhibit 4.2 - Page 11
<PAGE>
incorrect prospectus prior to the use giving rise to a Violation and such
Indemnified Person, notwithstanding such advice, used it. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Indemnified Person and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees severally and not jointly
to indemnify, hold harmless and defend, to the same extent and in the same
manner set forth in Section 6(a), the Company, each of its directors, each of
its officers who signs the Registration Statement, each person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act, any
underwriter and any other stockholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any person who
controls such stockholder or underwriter within the meaning of the 1933 Act or
the 1934 Act (collectively and together with an Indemnified Person, an
"INDEMNIFIED PARTY"), against any Claim to which any of them may become subject,
under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out
of or is based upon any Violation by such Investor, in each case to the extent
(and only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement or such
Violation is a failure of such Investor to comply with applicable prospectus
delivery requirements under the 1933 Act (and such failure was not caused, in
whole or in part, by any action or failure to act by the Company or any third
party, so long as such Investor used reasonable efforts to comply with such
requirements); and subject to Section 6(c) such Investor will reimburse any
legal or other expenses (promptly as such expenses are incurred and are due and
payable) reasonably incurred by them in connection with investigating or
defending any such Claim; PROVIDED, HOWEVER, that the indemnity agreement
contained in this Section 6(b) shall not apply to amounts paid in settlement of
any Claim if such settlement is effected without the prior written consent of
such Investor, which consent shall not be unreasonably withheld; PROVIDED,
FURTHER, HOWEVER, that the Investor shall be liable under this Agreement
(including this Section 6(b) and Section 7) for only that amount as does not
exceed the net proceeds to such Investor as a result of the sale of Registrable
Securities pursuant to such Registration Statement. Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf of
such Indemnified Party and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9. Notwithstanding anything to
the contrary contained herein, the indemnification agreement contained in this
Section 6(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.
c. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to
Exhibit 4.2 - Page 12
<PAGE>
assume control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; PROVIDED, HOWEVER, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. The indemnifying party shall pay for only one
separate legal counsel for the Indemnified Persons or the Indemnified Parties,
as applicable, and such legal counsel shall be selected by Investors holding a
majority-in-interest of the Registrable Securities included in the Registration
Statement to which the Claim relates (with the approval of a majority-in-
interest of the Initial Investors, so long as such Initial Investors own, in the
aggregate, at least 50% of the then outstanding Registerable Securities), if the
Investors are entitled to indemnification hereunder, or the Company, if the
Company is entitled to indemnification hereunder, as applicable. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is actually prejudiced in its
ability to defend such action. The indemnification required by this Section 6
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as such expense, loss, damage or liability is
incurred and is due and payable.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; PROVIDED, HOWEVER, that (i) no
contribution shall be made under circumstances where the maker would not have
been liable for indemnification under the fault standards set forth in Section
6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any seller of Registrable Securities who was not
guilty of such fraudulent misrepresentation, and (iii) contribution (together
with any indemnification or other obligations under this Agreement) by any
seller of Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the investors to sell securities of the Company
to the public without registration ("RULE 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and
Exhibit 4.2 - Page 13
<PAGE>
defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of Registrable Securities if:
(i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned,
(iii) following such transfer or assignment, the further disposition of such
securities by the transferee or assignee is restricted under the 1933 Act and
applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein, (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement, and (vi) such transferee shall be an "ACCREDITED INVESTOR" as that
term defined in Rule 501 of Regulation D promulgated under the 1933 Act.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with written consent of the Company, each of the Initial
Investors (to the extent such Initial Investor still owns Registrable
Securities) and Investors who hold a majority interest of the Registrable
Securities. Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company.
Exhibit 4.2 - Page 14
<PAGE>
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices required or permitted to be given under the terms
hereof shall be sent by certified or registered mail (return receipt requested)
or delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile and shall be effective five days after being placed in
the mail, if mailed by regular U.S. mail, or upon receipt, if delivered
personally or by courier (including a recognized overnight delivery service) or
by facsimile, in each case addressed to a party. The addresses for such
communications shall be:
If to the Company:
Zitel Corporation
47211 Bayside Parkway
Fremont, California 94538
Attention: Chief Financial Officer
Facsimile: (510) 440-8526
With copy to:
Cooley Godward Castro Haddleson & Tatum
One Maritime Plaza, 20th Floor
San Francisco, California 94111-3580
Attention: John Cardoza, Esquire
Facsimile: (415) 951-3699
If to an Investor: to the address set forth immediately below such Investor's
name on the signature pages to the Securities Purchase Agreement.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. This Agreement shall be enforced, governed by and construed in
accordance with the laws of the California applicable to agreements made and to
be performed entirely within such State. In the event that any provision of
this Agreement is invalid or unenforceable under any applicable statute or rule
of law, then such provision shall be deemed inoperative to the extent that it
Exhibit 4.2 - Page 15
<PAGE>
may conflict therewith and shall be deemed modified to conform with such statute
or rule of law. Any provision hereof which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other
provision hereof.
e. This Agreement and the Securities Purchase Agreement (including
all schedules and exhibits thereto) constitute the entire agreement among the
parties hereto with respect to the subject matter hereof and thereof. There are
no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein and therein. This Agreement and the Securities
Purchase Agreement supersede all prior agreements and understandings among the
parties hereto with respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made by Investors holding a majority of the
Registrable Securities, determined as if the Debentures then outstanding have
been converted into or exercised for Registrable Securities.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rules of
strict construction will be applied against any party.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
Exhibit 4.2 - Page 16
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned Initial Investor have
caused this Agreement to be duly executed as of the date first above written
ZITEL CORPORATION
By: Henry C. Harris
Name: Henry C. Harris
Its: Chief Financial Officer
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P., Investment Manager
By: RGC General Partner Corp.
By: Wayne D. Bloch
Name: Wayne D. Bloch
Its: Managing Director
HALIFAX FUND L.P.
By: Palladin Group L.P., as attorney in fact
By: Palladin Capital Management, LLC, General Partner
By: Andrew Kaplan
Name: Andrew Kaplan
Its: Senior Vice President
NELSON PARTNERS
By: Anne Dupuy
Name: Anne Dupuy
Its: Officer
OLYMPUS SECURITIES, LTD.
By: Anne Dupuy
Name: Anne Dupuy
Its: Alternate Director
Exhibit 4.2 - Page 17
<PAGE>
EXHIBIT 4.3
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of May 21, 1997,
by and among Zitel Corporation, a California corporation, with headquarters
located at 47211 Bayside Parkway, Fremont, California 94538 (the "COMPANY"), and
each of the purchasers set forth on the signature pages hereto (the "BUYERS").
WHEREAS:
A. The Company and the Buyers are executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by Rule 506
under Regulation D ("REGULATION D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 ACT");
B. The Buyers desire to purchase and the Company desires to issue and sell,
upon the terms and conditions set forth in this Agreement, convertible
subordinated debentures of the Company, in the form attached hereto as EXHIBIT
"A", in the aggregate principal amount of Twenty-Five Million Dollars
($25,000,000), convertible into shares of common stock, no par value per share,
of the Company (the "COMMON STOCK"), upon the terms and subject to the
limitations and conditions set forth in such debentures;
C. Each Buyer wishes to purchase, upon the terms and conditions stated in this
Agreement, such convertible debentures of the Company in the principal amount
set forth immediately below its name on the signature pages hereto; and
D. Contemporaneous with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement, in
the form attached hereto as EXHIBIT "B" (the "REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company has agreed to provide certain registration rights
under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws;
NOW THEREFORE, the Company and each of the Buyers (severally and not
jointly) hereby agree as follows:
1. PURCHASE AND SALE OF DEBENTURES.
a. Purchase of Debentures. The Company shall issue and sell to each
Buyer and each Buyer severally agrees to purchase from the Company such
principal amount of convertible subordinated debentures as is set forth
immediately below such Buyer's name on the signature pages
Exhibit 4.3 - Page 1
<PAGE>
hereto (collectively, together with any debenture(s) issued in replacement
thereof in accordance with the terms thereof, the "DEBENTURES") for an aggregate
principal amount of Twenty-Five Million Dollars ($25,000,000).
b. Form of Payment. On the Closing Date (as defined below), (i)
each Buyer shall pay the purchase price for the Debentures to be issued and sold
to it (the "PURCHASE PRICE") by wire transfer of immediately available funds to
the Company, in accordance with the Company's written wiring instructions,
against delivery of the Debentures in the principal amount equivalent to the
Purchase Price, and (ii) the Company shall deliver such Debentures duly executed
on behalf of the Company, to the Buyer, against delivery of such Purchase Price.
c. Closing Date. Subject to the satisfaction (or waiver) of the
conditions thereto set forth in Section 6 and Section 7 below, the date and time
of the issuance and sale of the Debentures pursuant to this Agreement (the
"CLOSING DATE") shall be 12:00 noon Eastern Standard Time on May 22, 1997 or
such other mutually agreed upon time. The closing of the transactions
contemplated by this Agreement (the "CLOSING") shall occur on the Closing Date
at the offices of LaSalle National Bank, 135 South LaSalle Street, Chicago,
Illinois 60603 (the "ESCROW AGENT").
d. Escrow. Notwithstanding anything to the contrary contained
herein pertaining to deliveries at Closing, the Closing may be conducted through
the Escrow Agent as set forth in that certain escrow agreement dated May 19,
1997 by and between the Company, Rochon Capital Group, Ltd. and the Escrow
Agent.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer severally represents and warrants to the Company that:
a. Investment Purpose. As of the date hereof, the Buyer is
purchasing the Debentures and any and all shares of Common Stock issuable
thereunder or under the Registration Rights Agreement (including, but not
limited to, Common Stock issuable upon conversion of the principal and interest
of the Debentures or shares issuable pursuant to the damage provisions of the
Debentures and Registration Rights Agreement) (the "CONVERSION SHARES" and,
collectively with the Debentures, the "SECURITIES") for its own account for
investment only and not with a present view towards the public sale or
distribution thereof, except pursuant to sales registered or exempted under the
1933 Act.
b. Accredited Investor Status. The Buyer is an "accredited
investor" as that term is defined in Rule 501(a) of Regulation D.
c. Reliance on Exemptions. The Buyer understands that the
Securities are being offered and sold to it in reliance upon specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying upon the truth and accuracy of,
Exhibit 4.3 - Page 2
<PAGE>
and the Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the Buyer
to acquire the Securities.
d. Information. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by the Buyer or its advisors. The Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received what the Buyer believes to be satisfactory answers to
any such inquiries. The Company has provided the Buyer with a document dated
May 20, 1997, containing certain risk factors relating to the Company and the
Buyer has reviewed the risk factors set forth therein. Neither such inquiries
or review nor any other due diligence investigation conducted by Buyer or any of
its advisors or representatives shall modify, amend or affect Buyer's right to
rely on the Company's representations and warranties contained in Section 3
below. The Buyer understands that its investment in the Securities involves a
significant degree of risk.
e. Governmental Review. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
f. Transfer or Resale. The Buyer understands that (i) except as
provided in the Registration Rights Agreement, the Securities have not been and
are not being registered under the 1933 Act or any applicable state securities
laws, and may not be transferred unless (a) subsequently registered thereunder,
or (b) the Buyer shall have delivered to the Company an opinion of counsel
(which opinion shall be reasonably acceptable to the Company) to the effect that
the Securities to be sold or transferred may be sold or transferred pursuant to
an exemption from such registration or (c) sold pursuant to Rule 144 promulgated
under the 1933 Act (or a successor rule); (ii) any sale of such Securities made
in reliance on Rule 144 may be made only in accordance with the terms of said
Rule and further, if said Rule is not applicable, any resale of such Securities
under circumstances in which the seller (or the person through whom the sale is
made) may be deemed to be an underwriter (as that term is defined in the 1933
Act) may require compliance with some other exemption under the 1933 Act or the
rules and regulations of the SEC thereunder; and (iii) neither the Company nor
any other person is under any obligation to register such Securities under the
1933 Act or any state securities laws or to comply with the terms and conditions
of any exemption thereunder (in each case, other than pursuant to the
Registration Rights Agreement).
g. Legends. The Buyer understands that the Debentures and, until
such time as the Conversion Shares have been registered under the 1933 Act, as
contemplated by the Registration Rights Agreement, the Conversion Shares, may
bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the certificates for such
Securities):
"The securities represented by this certificate have not been registered
under the Securities Act
Exhibit 4.3 - Page 3
<PAGE>
of 1933, as amended. The securities have been acquired for investment
and may not be sold, transferred or assigned in the absence of an
effective registration statement for the securities under said Act, or
an opinion of counsel, in form, substance and scope reasonably
acceptable to the Company, that registration is not required under
said Act or unless sold pursuant to Rule 144 under said Act."
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by applicable state securities laws, (a)
such Security is registered for sale under an effective registration statement
filed under the 1933 Act, or (b) such holder provides the Company with an
opinion of counsel, in form, substance and scope reasonably acceptable to the
Company, to the effect that a public sale or transfer of such Security may be
made without registration under the 1933 Act or (c) such holder provides the
Company with reasonable assurances that such Security can be sold pursuant to
Rule 144 under the 1933 Act (or a successor rule thereto) without any
restriction as to the number of Securities acquired as of a particular date that
can then be immediately sold. The Buyer agrees to sell all Securities,
including those represented by a certificate(s) from which the legend has been
removed, only pursuant to (i) a registration statement with respect to which the
Buyer has been notified (and Buyer has not received any contrary written notice)
is effective under the 1933 Act, or (ii) advice of counsel that such sale is
exempt from the registration requirements of Section 5 of the 1933 Act.
h. Authorization; Enforcement. This Agreement and the Registration
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of the Buyer and are valid and binding agreements of the Buyer
enforceable in accordance with their terms.
i. Residency. The Buyer is a resident of the jurisdiction set forth
immediately below such Buyer's name on the signature pages hereto.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Buyer that:
a. Organization and Qualification. The Company and each of its
Subsidiaries (as defined below), if any, is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated, with full power and authority (corporate and other) to
own, lease, use and operate its properties and to carry on its business as and
where now owned, leased, used, operated and conducted. SCHEDULE 3(a) sets forth
a list of all of the Subsidiaries of the Company and the jurisdiction in which
each is incorporated. The Company and each of its Subsidiaries is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which the nature of the business conducted by it makes
such qualification necessary except where the failure to be so qualified or in
good standing would not have a Material Adverse Effect. "MATERIAL ADVERSE
EFFECT" means any material adverse effect on the operations, assets, financial
condition or prospects of the Company and its Subsidiaries, taken as a whole, or
on the transactions contemplated
Exhibit 4.3 - Page 4
<PAGE>
hereby or by the agreements or instruments to be entered into in connection
herewith. "SUBSIDIARIES" means any corporation or other organization, whether
incorporated or unincorporated, in which the Company owns, directly or
indirectly, any equity or other ownership interest.
b. Authorization; Enforcement. (i) The Company has all requisite
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement and the Debentures and to consummate the
transactions contemplated hereby and thereby and to issue the Securities, in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
this Agreement, the Registration Rights Agreement and the Debentures by the
Company and the consummation by it of the transactions contemplated hereby and
thereby (including without limitation the issuance of the Debentures and the
issuance and reservation for issuance of the Conversion Shares issuable upon
conversion or exercise thereof) have been duly authorized by the Company's Board
of Directors and no further consent or authorization of the Company, its Board
or Directors, or its shareholders is required, (iii) this Agreement has been
duly executed and delivered by the Company, and (iv) this Agreement constitutes,
and upon execution and delivery by the Company of the Registration Rights
Agreement and the Debentures, each of such instruments will constitute, a legal,
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms.
c. Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of (i) 40,000,000 shares of Common Stock of which
15,270,928 shares are issued and outstanding, 2,318, 246 shares are reserved for
issuance pursuant to the Company's stock option plans, no shares are reserved
for issuance pursuant to securities (other than the Debentures) exercisable for,
or convertible into or exchangeable for shares of Common Stock and 3,000,000
shares are reserved for issuance upon conversion of the Debentures (subject to
adjustment pursuant to the Company's covenant set forth in Section 4(h) below);
and (ii) 1,000,000 shares of preferred stock, none of which shares are issued
and outstanding (excluding 200,000 shares of preferred stock reserved for
issuance pursuant to the Company's rights plans). All of such outstanding
shares of capital stock are, or upon issuance will be, duly authorized, validly
issued, fully paid and nonassessable. No shares of capital stock of the Company
are subject to preemptive rights or any other similar rights of the stockholders
of the Company or any liens or encumbrances imposed through the actions or
failure to act of the Company. Except as disclosed in SCHEDULE 3(c), as of the
effective date of this Agreement, (i) there are no outstanding options,
warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal,
agreements, understandings, claims or other commitments or rights of any
character whatsoever relating to, or securities or rights convertible into or
exchangeable for any shares of capital stock of the Company or any of its
Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is
or may become bound to issue additional shares of capital stock of the Company
or any of its Subsidiaries, and (ii) there are no agreements or arrangements
under which the Company or any of its Subsidiaries is obligated to register the
sale of any of its or their securities under the 1933 Act (except the
Registration Rights Agreement) and (iii) there are no anti-dilution or price
adjustment provisions contained in any security issued by the Company (or in any
agreement providing rights to security holders) that will be triggered by the
issuance of the Debentures or Conversion Shares. The
Exhibit 4.3 - Page 5
<PAGE>
Company has furnished to the Buyer true and correct copies of the Company's
Restated Certificate of Incorporation as in effect on the date hereof
("CERTIFICATE OF INCORPORATION"), the Company's By-laws, as in effect on the
date hereof (the "BY-LAWS"), and the terms of all securities convertible into or
exercisable for Common Stock of the Company and the material rights of the
holders thereof in respect thereto. The Company shall provide the Buyer with a
written update of this representation signed by the Company's Chief Executive or
Chief Financial Officer on behalf of the Company as of the Closing Date.
d. Issuance of Shares. The Conversion Shares are duly authorized
and, upon issuance in accordance with the terms of this Agreement (including the
issuance of the Conversion Shares upon conversion of the Debentures) will be
validly issued, fully paid and non-assessable, and free from all taxes, liens
and charges with respect to the issue thereof and shall not be subject to
preemptive rights or other similar rights of stockholders of the Company. The
term Conversion Shares includes the shares of Common Stock issuable upon
conversion of the Debentures, including without limitation, such additional
shares, if any, as are issuable as a result of the events described in Section
2(c) of the Registration Rights. The Company understands and acknowledges the
potentially dilutive effect to the Common Stock of the issuance of the
Conversion Shares upon conversion of the Debentures.
e. No Conflicts. The execution, delivery and performance of this
Agreement, the Registration Rights Agreement and the Debentures by the Company
and the consummation by the Company of the transactions contemplated hereby and
thereby (including, without limitation, the issuance and reservation for
issuance of the Conversion Shares) will not (i) conflict with or result in a
violation of any provision of the Certificate of Incorporation or By-laws, (ii)
violate or conflict with, or result in a breach of any provision of, or
constitute a default (or an event which with notice or lapse of time or both
could become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or result
in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations) applicable to the
Company or any of its Subsidiaries or by which any property or asset of the
Company or any of its Subsidiaries is bound or affected (except for such
conflicts, defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have a Material
Adverse Effect) or (iii) cause the Buyers, or any of them, to be deemed to be an
Acquiring Person, as that term is defined in the Rights Agreement dated as of
June 12, 1996 between the Company and American Stock Transfer & Trust Company,
as rights agent (the "Rights Agreement"), assuming that the Buyers are not
Affiliates or Associates, as such terms are defined in the Rights Agreement.
Neither the Company nor any of its Subsidiaries is in violation of its
Certificate of Incorporation, By-laws or other organizational documents and
neither the Company nor any of its Subsidiaries is in default (and no event has
occurred which with notice or lapse of time or both could put the Company or any
of its Subsidiaries in default) under, and neither the Company nor any of its
Subsidiaries has taken any action or failed to take any action that would give
to others any rights of termination, amendment, acceleration or cancellation of,
any agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party or by
Exhibit 4.3 - Page 6
<PAGE>
which any property or assets of the Company or any of its Subsidiaries is bound
or affected, except for possible defaults as would not, individually or in the
aggregate, have a Material Adverse Effect. The businesses of the Company and its
Subsidiaries, if any, are not being conducted, and shall not be conducted so
long as a Buyer owns any of the Securities, in violation of any law, ordinance
or regulation of any governmental entity, except for involuntary violations
which either singly or in the aggregate do not have a Material Adverse Effect.
Except as specifically contemplated by this Agreement and as required under the
1933 Act and any applicable state securities laws, the Company is not required
to obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency or any regulatory or self
regulatory agency in order for it to execute, deliver or perform any of its
obligations under this Agreement, the Registration Rights Agreement or the
Debentures in accordance with the terms hereof or thereof. Except as disclosed
in SCHEDULE 3(e), all consents, authorizations, orders, filings and
registrations, which the Company is required to obtain pursuant to the preceding
sentence, have been obtained or effected on or prior to the date hereof. The
Company is not in violation of the listing requirements of the Nasdaq National
Market ("NASDAQ") and does not reasonably anticipate that the Common Stock will
be delisted by Nasdaq in the foreseeable future.
f. SEC Documents, Financial Statements. Since September 30, 1994,
the Company has timely filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the Exchange Act of 1934, as amended (the "1934 ACT") (all of
the foregoing filed prior to the date hereof and all exhibits included therein
and financial statements and schedules thereto and documents (other than
exhibits) incorporated by reference therein, being hereinafter referred to
herein as the "SEC DOCUMENTS"). The Company has delivered to each Buyer true
and complete copies of the SEC Documents, except for such exhibits and
incorporated documents. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have
been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except as
set forth in the financial statements of the Company included in the SEC
Documents, the Company has no liabilities, contingent or otherwise, other than
(i) liabilities incurred in the ordinary course of business subsequent to
September 30, 1996 and (ii)
Exhibit 4.3 - Page 7
<PAGE>
obligations under contracts and commitments incurred in the ordinary course of
business and not required under generally accepted accounting principles to be
reflected in such financial statements, which, individually or in the aggregate,
are not material to the financial condition or operating results of the Company.
g. Absence of Certain Changes. Since September 30, 1996, there has
been no material adverse change and no material adverse development in the
assets, liabilities, business, properties, operations, financial condition,
results of operations or prospects of the Company or any of its Subsidiaries,
except as disclosed in SCHEDULE 3(g).
h. Absence of Litigation. There is no action, suit, claim,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company or any of its Subsidiaries that could have a Material
Adverse Effect. SCHEDULE 3(h) contains a complete list and summary description
of any pending or threatened proceeding against or affecting the Company or any
of its Subsidiaries, without regard to whether it would have a Material Adverse
Effect.
i. Patents, Copyrights, etc. The Company and each of its
Subsidiaries owns or possesses the requisite licenses or rights to use all
patents, patent rights, inventions, know-how, trade secrets, trademarks, service
marks, service names, trade names and copyrights (collectively, the
"INTELLECTUAL PROPERTY") necessary to enable it to conduct its business as now
operated (and, except as set forth in SCHEDULE 3(i) hereof, to the best of the
Company's knowledge, as presently contemplated to be operated in the future);
there is no claim or action by any person pertaining to, or proceeding pending,
or to the Company's knowledge threatened which challenges the right of the
Company or of a Subsidiary with respect to any Intellectual Property necessary
to enable it to conduct its business as now operated (and, except as set forth
in SCHEDULE 3(i) hereof, to the best of the Company's knowledge, as presently
contemplated to be operated in the future); to the best of the Company's
knowledge, the Company's or its Subsidiaries, current and intended products,
services and processes do not infringe on any Intellectual Property or other
rights held by any person; and the Company is unaware of any facts or
circumstances which might give rise to any of the foregoing. The Company and
each of its Subsidiaries have taken reasonable security measures to protect the
secrecy, confidentiality and value of their Intellectual Property.
j. No Materially Adverse Contracts, Etc. Neither the Company nor
any of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the future to have a
Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a
party to any contract or agreement which in the judgment of the Company's
officers has or is expected to have a Material Adverse Effect.
k. Tax Status. Except as set forth on SCHEDULE 3(k), the Company
and each of
Exhibit 4.3 - Page 8
<PAGE>
its Subsidiaries has made or filed all federal and state income and all other
tax returns, reports and declarations required by any jurisdiction to which it
is subject (unless and only to the extent that the Company and each of its
Subsidiaries has set aside on its books provisions reasonably adequate for the
payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provisions
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim.
l. Certain Transactions. Except as set forth on SCHEDULE 3(l) and
except for arm's length transactions pursuant to which the Company or any of its
Subsidiaries makes payments in the ordinary course of business upon terms no
less favorable than the Company or any of its Subsidiaries could obtain from
third parties and other than the grant of stock options disclosed on SCHEDULE
3(c), none of the officers, directors, or employees of the Company is presently
a party to any transaction with the Company or any of its Subsidiaries (other
than for services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
m. Disclosure. All information relating to or concerning the
Company or any of its Subsidiaries set forth in this Agreement and provided to
the Buyers pursuant to Section 2(d) hereof and otherwise in connection with the
transactions contemplated hereby is true and correct in all material respects
and the Company has not omitted to state any material fact necessary in order to
make the statements made herein or therein, in light of the circumstances under
which they were made, not misleading. No event or circumstance has occurred or
exists with respect to the Company or any of its Subsidiaries or its or their
business, properties, prospects, operations or financial conditions, which,
under applicable law, rule or regulations, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed (assuming for this purposes that the Company's reports filed under the
1934 Act are being incorporated into an effective registration statement filed
by the Company under the 1933 Act).
n. Acknowledgment Regarding Buyers' Purchase of Debentures. The
Company acknowledges and agrees that the Buyers are acting solely in the
capacity of arm's length purchasers with respect to this Agreement and the
transactions contemplated hereby. The Company further acknowledges that no
Buyer is acting as a financial advisor or fiduciary of the Company (or in any
similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by any Buyer or any of their respective
representatives or agents in connection with this Agreement and the transactions
contemplated hereby is merely incidental to the Buyers, purchase of
Exhibit 4.3 - Page 9
<PAGE>
the Debentures. The Company further represents to each Buyer that the Company's
decision to enter into this Agreement has been based solely on the independent
evaluation of the Company and its representatives.
o. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales in any security or solicited any offers to
buy any security under circumstances that would require registration under the
1933 Act of the issuance of the Securities to the Buyers. The issuance of the
Securities to the Buyers will not be integrated with any other issuance of the
Company's securities which requires stockholder approval under the rules of The
Nasdaq Stock Market.
p. No Brokers. The Company has taken no action which would give
rise to any claim by any person for brokerage commissions, finder's fees or
similar payments relating to this Agreement or the transactions contemplated
hereby, except for dealings with Rochon Capital Group, Ltd., whose commissions
and fees will be paid for by the Company.
q. Permits; Compliance. The Company and each of its Subsidiaries is
in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the "COMPANY PERMITS"), and there is
no action pending or, to the knowledge of the Company, threatened regarding
suspension or cancellation of any of the Company Permits. Neither the Company
nor any of its Subsidiaries is in conflict with, or in default or violation of,
any of the Company Permits, except for any such conflicts, defaults or
violations which, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect. During the period commencing on
September 30, 1996 and ending on the date hereof, neither the Company nor any of
its Subsidiaries has received any notification with respect to possible
conflicts, defaults or violations of applicable laws, except for notices
relating to possible conflicts, defaults or violations, which conflicts,
defaults or violations would not have a Material Adverse Effect.
r. Environmental Matters.
(i) Except as set forth in SCHEDULE 3(r), there are, to the
Company's knowledge, with respect to the Company or any of its Subsidiaries or
any predecessor of the Company, no past or present violations of Environmental
Laws (as defined below), releases of any material into the environment, actions,
activities, circumstances, conditions, events, incidents, or contractual
obligations which may give rise to any common law environmental liability or any
liability under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 or similar federal, state, local or foreign laws and
neither the Company nor any of its Subsidiaries has received any notice with
respect to any of the foregoing, nor is any action pending or, to the Company's
knowledge, threatened in connection with any of the foregoing. The term
"ENVIRONMENTAL LAWS" means all federal, state, local or foreign laws relating to
pollution or protection of human health or the
Exhibit 4.3 - Page 10
<PAGE>
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants contaminants, or toxic or hazardous substances or wastes
(collectively, "HAZARDOUS MATERIALS") into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.
(ii) Other than those that are or were stored, used or disposed
of in compliance with applicable law, no Hazardous Materials are contained on or
about any real property currently owned, leased or used by the Company or any of
its Subsidiaries, and no Hazardous Materials were released on or about any real
property previously owned, leased or used by the Company or any of its
Subsidiaries during the period the property was owned, leased or used by the
Company or any of its Subsidiaries, except in the normal course of the Company's
or any of its Subsidiaries' business.
(iii) Except as set forth in SCHEDULE 3(r), there are no
underground storage tanks on or under any real property owned, leased or used by
the Company or any of its Subsidiaries that are not in compliance with
applicable law.
s. Title to Property. The Company and its Subsidiaries have good
and marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in SCHEDULE 3(s) or such
as would not have a Material Adverse Effect. Any real property and facilities
held under lease by the Company and its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as would not have
a Material Adverse Effect.
t. Insurance. The Company and each of its Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its subsidiaries are
engaged. Neither the Company nor any such Subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not have a Material
Adverse Effect.
4. COVENANTS.
a. Best Efforts. The parties shall use their best efforts to
satisfy timely each of the conditions described in Section 6 and 7 of this
Agreement.
Exhibit 4.3 - Page 11
<PAGE>
b. Form D; Blue Sky Laws. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Securities for sale to the Buyers at the
applicable closing pursuant to this Agreement under applicable securities or
"blue sky" laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to each Buyer on or prior to such Closing Date.
c. Reporting Status; Eligibility to Use Form S-3. The Company's
Common Stock is registered under Section 12(g) of the 1934 Act. So long as any
Buyer beneficially owns any of the Securities, the Company shall timely file all
reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would permit such termination. The Company currently meets, and will take all
necessary action to continue to meet, the "registrant eligibility" requirements
as set forth in the general instructions to Form S-3. The Company currently
meets the "registrant eligibility" requirements for primary issuances set forth
in the general instructions to Form S-3.
d. Use of Proceeds. The Company shall use the proceeds from the
sale of the Debentures in the manner set forth in SCHEDULE 4(d) attached hereto
and made a part hereof and shall not, directly or indirectly, use such proceeds
for any loan to or investment in any other corporation, partnership, enterprise
or other person (except in connection with its currently existing direct or
indirect Subsidiaries).
e. Additional Equity Capital; Right of First Refusal. Subject to
the exceptions described below, the Company agrees that during the period
beginning on the date hereof and ending sixty (60) days following the Closing
Date (the "LOCK-UP PERIOD"), the Company will not, without the prior written
consent of a majority-in-interest of the Buyers, negotiate or contract with any
party to obtain additional equity financing (including debt financing with an
equity component). In addition, subject to the exceptions described below, the
Company will not conduct any equity financing (including debt with an equity
component) ("FUTURE OFFERINGS") during the period beginning on the first day
immediately following the Lock-Up Period and ending one hundred eighty (180)
days thereafter unless it shall have first delivered to each Buyer, at least
fifteen (15) business days prior to the closing of such Future Offering, written
notice describing the proposed Future Offering, including the terms and
conditions thereof, and providing each Buyer an option during the ten (10) day
period following delivery of such notice to purchase its pro rata share (based
on the ratio that the principal amount of Debentures purchased by it hereunder
bears to the aggregate principal amount of Debentures purchased hereunder) of
the securities being offered in the Future Offering on the same terms as
contemplated by such Future Offering (the limitations referred to in this and
the immediately preceding sentence are collectively referred to as the "CAPITAL
RAISING LIMITATIONS"). The Capital Raising Limitations shall not apply to any
transaction involving (i) issuances of securities in a firm commitment
underwritten public offering (excluding a continuous offering pursuant to Rule
415 under
Exhibit 4.3 - Page 12
<PAGE>
the 1933 Act) or (ii) issuances of securities in connection with a merger,
consolidation or sale of assets, or in connection with any strategic partnership
or joint venture (the primary purpose of which is not to raise equity capital),
or in connection with the disposition or acquisition of a business, product or
license by the Company. The Capital Raising Limitations also shall not apply to
the issuance of securities upon exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of the date hereof or to
the grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan approved by
a majority of the Company's disinterested directors.
f. Expenses. Each party to this Agreement shall bear its own
expenses, whether or not the transactions contemplated hereby are consummated.
g. Financial Information. The Company agrees to send the following
reports to each Buyer until such Buyer transfers, assigns, or sells all of the
Securities: (i) within ten (10) days after the filing with the SEC, a copy of
its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and any
Current Reports on Form 8-K; (ii) within one (1) day after release, copies of
all press releases issued by the Company or any of its Subsidiaries; and (iii)
contemporaneously with the making available or giving to the stockholders of the
Company, copies of any notices and other information the Company makes available
or gives to such stockholders.
h. Reservation of Shares. The Company shall at all times have
authorized, and reserved for the purpose of issuance, a sufficient number of
shares of Common Stock to provide for the full conversion of the outstanding
Debentures and issuance of the Conversion Shares in connection therewith (based
on the Conversion Price of the Debentures in effect from time to time). The
Company shall not reduce the number of shares of Common Stock reserved for
issuance upon conversion of the Debentures without the consent of each Buyer,
which consent will not be unreasonably withheld. The Company shall use its best
efforts at all times to maintain the number of shares of Common Stock so
reserved for issuance at no less than two (2) times the number that is then
actually issuable upon full conversion of the Debentures (based on the
Conversion Price of the Debentures in effect from time to time).
i. Listing. The Company shall promptly secure the listing of the
Conversion Shares upon each national securities exchange or automated quotation
system, if any, upon which shares of Common Stock are then listed (subject to
official notice of issuance) and shall maintain, so long as any other shares of
Common Stock shall be so listed, such listing of all Conversion Shares from time
to time issuable upon conversion of the Debentures. The Company will take all
action necessary to obtain and maintain the listing and trading of its Common
Stock on Nasdaq, the Nasdaq SmallCap Market ("NASDAQ SMALLCAP"), the New York
Stock Exchange ("NYSE"), or the American Stock Exchange ("AMEX") and will comply
in all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the National Association of Securities Dealers ("NASD")
and such exchanges, as applicable.
Exhibit 4.3 - Page 13
<PAGE>
j. Corporate Existence. So long as a Buyer beneficially owns any
Debentures, the Company shall maintain its corporate existence and shall not
sell all or substantially all of the Company's assets, except in the event of a
merger or consolidation or sale of all or substantially all of the Company's
assets, where (i) the surviving or successor entity in such transaction (A)
assumes the Company's obligations hereunder and under the agreements and
instruments entered into in connection herewith and (B) is a publicly traded
corporation whose Common Stock is listed for trading on Nasdaq, Nasdaq SmallCap,
NYSE or AMEX or (ii) the Debentures are prepaid in accordance with Article IV
thereof.
k. Solvency. The Company (both before and after giving effect to
the transactions contemplated by this Agreement) is solvent (I.E., its assets
have a fair market value in excess of the amount required to pay its probable
liabilities on its existing debts as they become absolute and matured) and
currently the Company has no information that would lead it to reasonably
conclude that the Company would not have, nor does it intend to take any action
that would impair, its ability to pay its debts from time to time incurred in
connection therewith as such debts mature; PROVIDED, HOWEVER that the Buyer
hereby acknowledge (i) that the Company does not currently have funds reserved
specifically for repayment of the Debentures and (ii) that the Company expects
all amounts payable under the Debentures to be converted into Common Stock in
accordance with Article I thereof. The Company did not receive a qualified
opinion from its auditors with respect to its most recent fiscal year end and
does not anticipate or know of any basis upon which its auditors might issue a
qualified opinion in respect of its current fiscal year.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its transfer agent to
issue certificates, registered in the name of each Buyer or its nominee, for the
Conversion Shares in such amounts as specified from time to time by each Buyer
to the Company upon proper conversion of the Debentures (the "Irrevocable
Transfer Agent Instructions"). Prior to registration of the Conversion Shares
under the 1933 Act, all such certificates shall bear the restrictive legend
specified in Section 2(g) of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5, and stop transfer instructions to give effect to Section 2(f)
hereof (in the case of the Conversion Shares, prior to registration of the
Conversion Shares under the 1933 Act), will be given by the Company to its
transfer agent and that the Securities shall otherwise be freely transferable on
the books and records of the Company as and to the extent provided in this
Agreement and the Registration Rights Agreement. Nothing in this Section shall
affect in any way the Buyer's obligations and agreement set forth in Section
2(g) hereof to comply with all applicable prospectus delivery requirements, if
any, upon resale of the Securities. If a Buyer provides the Company with an
opinion of counsel, reasonably satisfactory to the Company in form, substance
and scope, that registration of a resale by such Buyer of any of the Securities
is not required under the 1933 Act, the Company shall permit the transfer, and,
in the case of the Conversion Shares, promptly instruct its transfer agent to
issue one or more certificates in such name and in such denominations as
specified by such Buyer. The Company acknowledges that a breach by it of its
obligations hereunder
Exhibit 4.3 - Page 14
<PAGE>
will cause irreparable harm to the Buyers, by obliterating the intent and
purpose of the transaction contemplated hereby. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Section 5 will be inadequate and agrees, in the event of a breach or threatened
breach by the Company of the provisions of this Section, that the Buyers shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate transfer, without the necessity
of showing economic loss and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Debentures to
a Buyer at the Closing is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions thereto, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion. The obligation of the Company to issue and
sell the Debentures to any Buyer hereunder is distinct and separate from its
obligation to issue and sell Debentures to any other Buyer hereunder and any
failure by one or more Buyers to fulfill the conditions set forth herein or to
consummate the purchase of Debentures hereunder will not relieve the Company of
its obligations with respect to any other Buyer:
a. The applicable Buyer shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Company.
b. The applicable Buyer shall have delivered the Purchase Price in
accordance with Section 1(b) above.
c. The representations and warranties of the applicable Buyer shall
be true and correct in all material respects as of the date when made and as of
the Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and the applicable Buyer shall
have performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the applicable Buyer at or prior to the Closing
Date.
d. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been exacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
e. The aggregate amount of the Purchase Price received by the
Company from all Buyers shall be at least Twenty Million Dollars ($20,000,000)
and, in the event that less than $20,000,000 is received by the Company for the
purchase of the Debentures, the Company will promptly return or cause to be
returned to the Buyers that have wired funds to the Company all of the funds
received from such Buyers.
Exhibit 4.3 - Page 15
<PAGE>
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
The obligation of each Buyer hereunder to purchase the Debentures at the
Closing, is subject to the satisfaction, at or before the Closing Date of each
of the following conditions, provided that these conditions are for such Buyer's
sole benefit and may be waived by such Buyer at any time in its sole discretion:
a. The Company shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Buyer.
b. The Company shall have delivered to such Buyer duly executed
Debentures being so purchased in accordance with Section 1(b) above.
c. The Irrevocable Transfer Agent Instructions, in form and
substance satisfactory to a majority-in-interest of the Buyers, shall have been
delivered to and acknowledged in writing by the Company's Transfer Agent.
d. The representations and warranties of the Company shall be true
and correct in all material respects as of the date when made and as of the
Closing Date as though made at such time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date. The Buyer
shall have received a certificate or certificates, executed by the chief
executive officer of the Company, dated as of the Closing Date, to the foregoing
effect and as to such other matters as may be reasonably requested by such
Buyer, including, but not limited to, certifications with respect to the
Company's Certificate of Incorporation, By-laws and Board of Directors'
resolutions relating to the transactions contemplated thereby.
e. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been exacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
f. The Buyer shall have received an opinion of the Company's
counsel, dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer and in substantially the same form as EXHIBIT "C"
attached hereto.
g. The Buyer shall have received an officer's certificate described
in Section 3(c) above, dated as of the Closing Date.
Exhibit 4.3 - Page 16
<PAGE>
h. The Common Stock shall have been authorized for quotation on
Nasdaq and trading thereon shall not have been suspended by the SEC or Nasdaq.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the California without regard to the
principles of conflict of laws.
b. Counterparts; Signatures by Facsimile. This Agreement may be
executed in two or more counterparts, all of which shall be considered one and
the same agreement and shall become effective when counterparts have been signed
by each party and delivered to the other party. This Agreement, once executed
by a party, may be delivered to the other party hereto by facsimile transmission
of a copy of this Agreement bearing the signature of the party so delivering
this Agreement.
c. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.
f. Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile and shall be effective five days
after being placed in the mail, if mailed by regular U.S. mail, or upon receipt,
if delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile, in each case addressed to a party. The addresses for
such communications shall be:
If to the Company:
Zitel Corporation
47211 Bayside Parkway
Fremont, California 94538
Attention: Chief Financial Officer
Facsimile: (510) 440-8526
Exhibit 4.3 - Page 17
<PAGE>
With copy to:
Cooley Godward Castro Huddleson & Tatum
One Maritime Plaza, 20th Floor
San Francisco, California 94111-3580
Attention: John Cardoza, Esquire
Facsimile: (415) 951-3699
If to a Buyer: To the address set forth immediately below such Buyer's
name on the signature pages hereto.
Each party shall provide notice to the other party of any change in
address.
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. Neither
the Company nor any Buyer shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other.
Notwithstanding the foregoing, any Buyer may assign its rights hereunder to any
person that purchases Securities in a private transaction from a Buyer or to any
of its "affiliates," as that term is defined under the 1934 Act, without the
consent of the Company.
h. Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. The representations and warranties of the Company and
the agreements and covenants set forth in Sections 3, 4, 5 and 8 shall survive
the closing hereunder notwithstanding any due diligence investigation conducted
by or on behalf of the Buyers. The Company agrees to indemnify and hold
harmless each of the Buyers and all their officers, directors, employees and
agents for loss or damage arising as a result of or related to any breach or
alleged breach by the Company of any of its representations, warranties and
covenants set forth in Sections 3 and 4 hereof or any of its covenants and
obligations under this Agreement, the Registration Rights Agreement and the
Debentures, including advancement of expenses as they are incurred.
j. Publicity. The Company and each of the Buyers shall have the
right to review a reasonable period of time before issuance of any press
releases, SEC, Nasdaq or NASD filings, or any other public statements with
respect to the transactions contemplated hereby; PROVIDED, HOWEVER, that the
Company shall be entitled, without the prior approval of each of the Buyers, to
make any press release or SEC, Nasdaq or NASD filings with respect to such
transactions as is required by applicable law and regulations (although each of
the Buyers shall be consulted by the Company in connection with any such press
release prior to its release and shall be provided with a copy thereof and be
given an opportunity to comment thereon).
Exhibit 4.3 - Page 18
<PAGE>
k. Further Assurances. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. No Strict Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
Exhibit 4.3 - Page 19
<PAGE>
IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused this
Agreement to be duly executed as of the date first above written.
ZITEL CORPORATION
By: Henry C. Harris
Name: Henry C. Harris
Its: Chief Financial officer
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P.,
Investment Manager
By: RGC General Partner Corp.
SIGNATURE:
By: Wayne D. Bloch
Name: Wayne D. Bloch
Its: Managing Director
RESIDENCE: Cayman Islands
ADDRESS:
440 E. Swedesford Road
Suite 2025
Wayne, PA 19087
Facsimile: (610) 971-2212
Telephone: (610) 902-0200
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Purchase Price: $8,333,333.33
Exhibit 4.3 - Page 20
<PAGE>
HALIFAX FUND, L.P.
By: Palladin Group L.P., as attorney in fact
By: Palladin Capital Management LLC, General Partner
SIGNATURE:
By: Andrew Kaplan
Name: Andrew Kaplan
Its: Senior Vice President
RESIDENCE: Cayman Islands
ADDRESS:
c/o Palladin Group L.P.
40 West 57th Street
New York, NY 10019
Facsimile: (212) 698-0599
Telephone: (212) 698-0515
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Purchase Price: $8,333,333.33
Exhibit 4.3 - Page 21
<PAGE>
NELSON PARTNERS
SIGNATURE:
By: Anne Dupuy
Name: Anne Dupuy
Its: Officer
RESIDENCE: Bermuda
ADDRESS:
c/o Leeds Management Services
129 Front Street, 5th Floor
Hamilton HM12 Bermuda
Facsimile: (441) 292-2239
Telephone: (441) 295-8617
Attention: Anne Dupuy
With a copy to:
Citidel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606
Facsimile: (312) 368-4347
Telephone: (312) 696-2165
Attention: Kenneth A. Simpler
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Purchase Price: $4,166,666.67
Exhibit 4.3 - Page 22
<PAGE>
OLYMPUS SECURITIES, LTD.
SIGNATURE:
By: Anne Dupuy
Name: Anne Dupuy
Its: Alternate Director
RESIDENCE: Bermuda
ADDRESS:
c/o Leeds Management Services
129 Front Street, 5th Floor
Hamilton HM12 Bermuda
Facsimile: (441) 292-2239
Telephone: (441) 295-8617
Attention: Anne Dupuy
With a copy to:
Citidel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606
Facsimile: (312) 368-4347
Telephone: (312) 696-2165
Attention:: Kenneth A. Simpler
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Purchase Price: $4,166,666.67
Exhibit 4.3 - Page 23
<PAGE>
EXHIBIT 4.4
$25,000,000
ZITEL CORPORATION
5% Convertible Subordinated Debentures Due 1999
PLACEMENT AGENCY AGREEMENT
--------------------------
May 19, 1997
Rochon Capital Group, Ltd.
As Placement Agent
1000 Fourth Street, Suite 775
San Rafael, California 94901
Ladies and Gentlemen:
This letter confirms our agreement (this "Agreement") to retain Rochon
Capital Group, Ltd. as our exclusive agent (the "Placement Agent") through
May 26, 1997 (the "Engagement Period") to identify for Zitel Corporation (the
"Company") prospective purchasers (collectively, the "Purchasers") in a
private placement (the "Placement") of up to $25,000,000 aggregate principal
amount of 5% Convertible Subordinated Debentures Due 1999 (the "Debentures"),
convertible into shares of the Company's common stock, no par value per share
(the "Common Stock").
The Placement Agent will have no obligation to purchase any of the
Debentures offered by the Company in the Placement. During the Engagement
Period, the Placement Agent shall have the exclusive right to arrange for all
sales of securities by the Company, including the exclusive right to identify
buyers for the Debentures; provided, however, that the Company shall not be
prohibited from issuing securities in connection with acquisitions or
strategic alliances with potential corporate partners. The Engagement Period
shall be automatically extended for a reasonable period of time if, during
the Engagement Period, sales relating to commitments from Purchasers are not
consummated during the Engagement Period due to delays in the preparation of
final documentation.
The Placement is intended to be exempt from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Section 4(2) and Regulation D ("Regulation D") of the rules and regulations
of
Exhibit 4.4 - Page 1
<PAGE>
the Securities and Exchange Commission (the "Commission") promulgated under
the Securities Act (the "Rules and Regulations"). In order to effectuate the
Closing (as defined in Section 1 hereof), the Company, the Placement Agent
and LaSalle National Bank shall enter into an escrow agreement (the "Escrow
Agreement").
The engagement described herein shall be in accordance with applicable
laws and pursuant to the following procedures and terms and conditions:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The representations and
warranties set forth in Section 2 of the Securities Purchase Agreements to be
entered into between the Company and each Purchaser (the "Securities Purchase
Agreements") are hereby incorporated by reference as of the date of
consummation of the sale of the Debentures (the "Closing").
2. COVENANTS OF THE COMPANY.
(a) Neither the Company nor any affiliate (as defined in Rule 501(b)
of Regulation D under the Securities Act) will sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in the Securities Act) which will be integrated with the sale of the
Debentures or the shares of Common Stock issuable upon conversion of the
Debentures (the "Underlying Common Shares") in a manner which would require
the registration under the Securities Act of the Debentures or the Underlying
Common Shares.
(b) Any press release to be issued by the Company in connection with
the Placement shall be subject to the prior review by the Placement Agent.
In addition, each press release to be issued by the Company in connection
with the Placement shall identify Rochon Capital Group, Ltd. as the Placement
Agent.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLACEMENT AGENT.
(a) With respect to each offer or sale of the Debentures, neither the
Placement Agent nor any of its representatives has engaged or will engage in
any form of general solicitation or general advertising, including, but not
limited to, advertisements, articles, notices or other communication
published in any newspaper, magazine or similar
Exhibit 4.4 - Page 2
<PAGE>
medium or broadcast over television or radio, or any seminar or meeting whose
attendees have been invited by any general solicitation or general
advertising.
(b) The Placement Agent covenants and agrees that it will take no
action, nor fail to take any action, if such action or failure to take such
action would have the effect that the offer or sale of the Debentures would
not be exempt from the registration requirements of the Securities Act or the
registration or qualification requirements of any state or political
subdivision of the United States in which the Debentures are to be offered or
sold. The Placement Agent shall only offer the Debentures to persons for
which the Placement Agent has a reasonable belief that such persons are
"accredited investors" as such term is defined in Rule 501 under the
Securities Act.
4. COMPENSATION OF THE PLACEMENT AGENT. The Company shall pay the
Placement Agent, directly from the escrowed funds at the Closing, a fee of
4.5% of the gross proceeds from the Placement hereunder. The Company further
agrees to pay to the Placement Agent all of the Placement Agent's actual
out-of-pocket expenses incurred in connection with this transaction,
regardless of whether the sales contemplated hereby are consummated,
including, but not limited to, fees and disbursements of its counsel and
counsel to the Purchasers (which fees shall be paid at the sole discretion of
the Placement Agent), fees and disbursements of the escrow agent and any
co-management and due diligence fees, up to $80,000, directly from the
escrowed funds at Closing or, in the event there is no Closing, within five
business days after submission of invoices or receipts therefor by the
Placement Agent. The Company will pay all of its expenses incurred in
connection with these transactions.
5. CLOSING. The Closing may be held at such place or places as shall be
specified by the Placement Agent. Debentures in the names of the respective
Purchasers and in the respective denominations aggregating the full number of
Debentures sold at the Closing shall be delivered by the Company to the
Escrow Agent as contemplated by the Securities Purchase Agreements.
6. CONDITION TO CLOSING. The Company and the Placement Agent agree that
the issuance and sale of the Debentures and all obligations of the Placement
Agent provided herein shall be subject to the receipt by the Placement Agent
of a legal opinion of Cooley Godward Castro Huddleson & Tatum, counsel to the
Exhibit 4.4 - Page 3
<PAGE>
Company, indicating that the Placement Agent is entitled to rely thereon, in
the form required to be delivered pursuant to Section 7 the Securities
Purchase Agreements.
7. INDEMNIFICATION.
(a) The Company will indemnify and hold harmless the Placement Agent
and each of its partners, directors, officers, associates, affiliates,
subsidiaries, employees, consultants, attorneys and agents, and each person,
if any, controlling either the Placement Agent or any of its affiliates
within the meaning of either Section 15 of the Securities Act or Section 20
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from
and against any and all losses, claims, damages, liabilities, costs or
expenses (and any legal or other expenses incurred by the Placement Agent in
investigating or defending the same or in giving testimony or furnishing
documents in response to a request of any government agency or to a subpoena)
in any way relating to or in any way arising out of (i) the activities of the
Placement Agent contemplated by this Agreement or in connection with the
Placement, (ii) the inaccuracy of any representation or warranty, or the
breach of any covenant, contained herein, or (iii) any offering documents or
other materials including the Offering Materials, and will reimburse, as
incurred, the Placement Agent and each such controlling or other person for
any legal or other expenses incurred by the Placement Agent or such
controlling or other person in connection with investigating, defending or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action. Such indemnity shall not, however, cover any
such loss, claim, damage, liability, cost or expense to the extent that it
arises out of or is based upon (i) a breach by the Placement Agent of its
obligations in Section 3 hereof (a "Non-Indemnity Event") or (ii) the willful
misconduct of any person seeking indemnification hereunder.
(b) The Placement Agent will indemnify and hold harmless the Company
and each person, if any, controlling the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, to the
same extent set forth in subsection (a) above, but only to the extent that
any loss, claim, damage, liability, cost or expense arises out of or is based
upon a Non-Indemnity Event.
(c) If any action, proceeding or investigation is commenced by a third
party as to which the indemnified party hereunder proposes to demand
indemnification under this letter
Exhibit 4.4 - Page 4
<PAGE>
Agreement, it will notify the indemnifying party with reasonable promptness.
The indemnified party shall have the right to retain counsel of its own
choice (which choice shall be reasonably satisfactory to the indemnifying
party) to represent it and such counsel shall, to the extent consistent with
its professional responsibilities, cooperate with the indemnifying party and
any counsel designated by the indemnifying party. The indemnifying party
will not be liable under this letter agreement for any settlement of any
claim against the indemnifying party made without the indemnifying party's
written consent, which shall not be unreasonably withheld. Notwithstanding
anything to the contrary contained in the foregoing paragraph (b) or the
following paragraph (d), the Placement Agent shall not be obligated to pay
any amount in respect of its obligation to indemnify or contribute greater
than the Placement Fee.
(d) In order to provide for just and equitable contribution, if a claim
for indemnification pursuant to this Section 7 is made but it is found in a
final judgment by a court of competent jurisdiction (not subject to further
appeal) that such indemnification may not be enforced in such case, even
though the express provisions hereof provided for indemnification in such
case, then the Company, on the one hand, and the Placement Agent, on the
other hand, shall contribute to the losses, claims, damages, liabilities or
costs to which the indemnified persons may be subject in accordance with the
relative benefits received from the Placement of the Debentures and the
securities underlying the Debentures by the Company, on the one hand, and the
Placement Agent, on the other hand, and also the relative fault of the
Company, on the one hand, and the Placement Agent, on the other hand, in
connection with the statements, acts or omissions which resulted in such
losses, claims, damages, liabilities or costs, and the relevant equitable
considerations shall also be considered. No person found liable for a
fraudulent misrepresentation shall be entitled to contribution from any
person who is not also found liable for such fraudulent misrepresentation.
8. NON-CIRCUMVENTION; RIGHT OF FIRST REFUSAL.
(a) NON-CIRCUMVENTION. The Company hereby agrees that, whether or
not this Agreement is terminated and/or whether or not the Placement is
consummated, the Company will not enter into any agreement, transaction, or
arrangement, including pursuant to Section 4(e) of the Securities Purchase
Agreements, with any prospective purchaser (including their agents,
Exhibit 4.4 - Page 5
<PAGE>
principals and affiliates, the accounts and funds which they manage or
advise, and regardless of whether a transaction is consummated with such
purchaser) who has (i) been identified to the Company as a prospective
purchaser by the Placement Agent or (ii) otherwise communicated with the
Company regarding the Placement, unless such agreement, transaction or
arrangement is effected through or with the written consent of the Placement
Agent. The Placement Agent shall, within five business days after the
Closing, provide the Company with a list of the names of the parties to whom
clause (i) of the preceding sentence applies, which list and names the
Company agrees to hold strictly confidential; if there is no Closing, then
such list shall be provided within five business days of the expiration of
the Engagement Period.
(b) RIGHT OF FIRST REFUSAL. For a period of 240 calendar days from the
Closing Date, if the Company desires to sell any equity securities of the
Company or securities convertible into or exchangeable or exercisable for any
equity securities of the Company (other than in connection with underwritten
public offerings, acquisitions or strategic alliances in which the Company
issues securities to potential corporate partners), subject to the Securities
Purchase Agreements, the Company will offer the Placement Agent in writing
the exclusive right to find buyers for such securities upon terms that are
reasonably acceptable to the Company and the Placement Agent. The Placement
Agent will then have 10 business days from the date of the offer to accept or
reject it. If accepted, the Placement Agent will have an additional 10
business days from acceptance to obtain firm commitments from buyers to
purchase the securities, or the Company will be free to engage others to
assist it in offering such securities.
9. SURVIVAL. The respective indemnities of the Company and the Placement
Agent and the representations, warranties and agreements of the Company set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any termination or cancellation of this Agreement or
any investigation made by or on behalf of the Placement Agent, the Company or
any person referred to in Section 7 hereof, and shall survive any termination
of this Agreement and/or issuance of the Debentures, and any successor or
assign of the Placement Agent and/or its designee(s), the Company, or any
such person or any legal representative of such person shall be entitled to
the benefit of the respective indemnities, agreements, warranties and
representations.
Exhibit 4.4 - Page 6
<PAGE>
10. TERMINATION. Reserved.
11. GENERAL PROVISIONS.
(a) PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Placement Agent, the Company, the controlling and
other persons referred to in Section 7 hereof, and their respective
successors, legal representatives, heirs, designees and assigns, and no other
person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained.
(b) AMENDMENT. No amendment or modification hereto, or waiver of the
terms hereof, shall be valid unless in a writing executed by each of the
parties hereto or by the party or parties to be bound.
(c) NOTICES. All notices, requests and other communications under this
Agreement shall be in writing and shall be deemed to have been delivered 48
hours after having been mailed in a general or branch post office and
enclosed in a registered or certified postpaid envelope; 24 hours after
having been sent by overnight courier; when delivered to a telegraph company
or when scanned graphically or otherwise by telegraphic communications
equipment of the sending party and accompanied by a substantially
contemporaneous telephone call; and, in each case, addressed to the
respective parties at the addresses stated below or to such other changed
addresses as the parties may have fixed by notice; PROVIDED, HOWEVER, that
any notice of change of address shall be effective only upon receipt.
To the Placement
Agent: Rochon Capital Group, Ltd.
1000 Fourth Street, Suite 775
San Rafael, California 94901
Attention: Phillip L. Neiman
Telephone: (415) 459-4944
Facsimile: (415) 459-6555
with a copy to: Stroock & Stroock & Lavan LLP
2029 Century Park East
Suite 1800
Los Angeles, CA 90067
Attention: Richard S. Forman, Esq.
Telephone: (310) 556-5800
Facsimile: (310) 556-5959
Exhibit 4.4 - Page 7
<PAGE>
To the Company: Zitel Corporation
47211 Bayside Parkway
Fremont, California 94538
Attention: Henry C. Harris
Telephone: (510) 440-9600
Facsimile: (510) 550-9696
with a copy to: Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
Palo Alto, California 94306
Attention: John Cardoza, Esq.
Telephone: (415) 693-2045
Facsimile: (415) 951-3699
(d) SEVERABILITY. If any provision herein is found to be unenforceable,
invalid or illegal, such provision shall be deemed deleted from this
Agreement and the remainder of this Agreement shall not be affected or
impaired thereby.
(e) ATTORNEYS' FEES. If any action, including, without limitation,
arbitration, should arise among the parties hereto to enforce or interpret
the provisions of this Agreement, the prevailing party in such action shall
be reimbursed for all reasonable expenses incurred in connection with such
action, including reasonable attorneys' fees.
(f) INTEGRATION. This Agreement expresses the entire agreement and
understanding of the parties hereto with respect to the matters set forth
herein and supersedes all prior agreements, arrangements and understandings
among the parties hereto with respect to the matters set forth herein.
(g) GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of New York without regard to the
principles of conflicts of laws.
(h) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall constitute an original, but all of which
shall together constitute one and the same agreement. Facsimile signatures
are considered to be originals and shall have the same effect.
(i) FURTHER ASSURANCES. The parties hereto agree to execute any and
all such further agreements, instruments or documents, and to take any and
all such further action, as may be necessary or desirable to carry into
effect the purpose and intent of this Agreement.
Exhibit 4.4 - Page 8
<PAGE>
(j) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not affect the meanings herein.
If the foregoing correctly sets forth the understandings among the
Placement Agent and the Company, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among us.
Very truly yours,
ZITEL CORPORATION
By:
------------------------------------
Name: Henry C. Harris
Title: Chief Financial Officer
ACCEPTED AND AGREED TO AS OF
THE DATE FIRST WRITTEN ABOVE:
ROCHON CAPITAL GROUP, LTD.
By:
-------------------------------------------
Name: Phillip L. Neiman
Title: President
Exhibit 4.4 - Page 9
<PAGE>
EXHIBIT 99.1
Contacts:
Zitel Corporation
Jack H. King
President & C.E.O.
510-440-9600
800-622-5020
Morgen-Walke Associates, Inc.
Suzanne Craig, Lisa Laukkanen, Doug Sherk
415-296-7383
David Sasso, Josh Passman
212-850-5698
FOR IMMEDIATE RELEASE
ZITEL CORPORATION COMPLETES $25 MILLION PRIVATE PLACEMENT
FREMONT, CA, May 23, 1997 -- Zitel Corporation (Nasdaq: ZITL) announced
today the completion of a private placement of $25,000,000 in principal
amount of 5% convertible subordinated debentures to a small number of
institutional investors. The debentures are convertible into shares of
common stock on a formula based on a trailing average closing bid price at
the dates of conversion. The formula would require issuance of approximately
1,215,000 shares if the debentures were converted today. The purchasers have
registration rights with respect to the common stock issuable upon
conversion. Rochon Capital Group Ltd. acted as placement agent in the
transaction. Proceeds will be used for general corporate purposes.
Zitel Corporation specializes in the design, manufacture and marketing of
high-performance, enterprise-class, storage subsystems for enterprise-wide,
mission-critical, applications which include relational database, batch and
on-line transaction processing. The Company also develops and markets
single-system and multi-system performance measurement and modeling software
used on a variety of UNIX and proprietary platforms to measure the
performance of Client/Server environments. Additionally, the Company's
Solution Service Division is a certified reseller of the MatriDigm
Corporation's Year 2000 compliance services. Zitel products are offered
through systems integrators, value added resellers and distributors, OEMs and
directly to end users. The Company is headquartered at 47211 Bayside
Parkway, Fremont, CA 94538. Telephone: (510) 440-9600 or (800) 622-5020.
FAX: (510) 440-9696. http://www.zitel.com. For information on Year 2000
compliance services, call (888) FIND-FIX.
Exhibit 99.1 - Page 1
