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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended December 31, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 0-12194
ZITEL CORPORATION
(Exact name of Registrant as specified in its charter)
California 94-2566313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
47211 Bayside Parkway 94538-6517
Fremont, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 440-9600
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes __X__ No _____
The number of shares of the Registrant's Common Stock outstanding as of December
31, 1996 was 15,166,691.
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ZITEL CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1996 (unaudited) and September 30, 1996 . 3
Condensed Consolidated Statements of
Operations (unaudited) - Three Months
Ended December 31, 1996 and 1995 .................... 4
Condensed Consolidated Statements of
Cash Flows (unaudited) - Three Months Ended
December 31, 1996 and 1995 ........................... 5
Notes to Condensed Consolidated
Financial Statements ................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations .................................. 9
Exhibits to Part I.
Exhibit 11.1 - Computation of Net Income (Loss)
per Common and Common Equivalent Share ................ 12
PART II. Other Information
Item 5. Other Information ................................ 13
Item 6. Exhibits and Reports on Form 8-K ................. 14
Page 2
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($000's)
December 31, September 30,
1996 1996
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 7,826 $ 9,216
Short-term investments 2,680 2,382
Accounts receivable, net 5,243 5,542
Inventories 3,627 4,211
Deferred and refundable taxes 2,522 2,224
Other current assets 467 480
------- -------
Total current assets 22,365 24,055
Fixed assets, net 2,379 2,253
Other assets, net 5,808 4,391
------- -------
Total assets $30,552 $30,699
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,947 $ 2,066
Accrued liabilities 1,472 1,544
------- -------
Total current liabilities 3,419 3,610
Shareholders' equity:
Common stock 21,334 20,723
Retained earnings 5,799 6,366
------- -------
Total shareholders' equity 27,133 27,089
------- -------
Total liabilities and
shareholders' equity $30,552 $30,699
======= =======
The accompanying notes are an integral part of these financial statements.
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
Three Months Ended
December 31,
------------------
1996 1995
------ ------
Net sales $ 3,266 $ 2,844
Royalty revenue 2,318 4,469
------- -------
Total revenue 5,584 7,313
Cost of goods sold 2,798 1,920
Research and development expenses 1,621 1,569
Selling, general & administrative expenses 2,493 1,980
------- -------
Operating income (loss) (1,328) 1,844
Other income (442) (785)
------- -------
Income (loss) before income taxes (886) 2,629
Provision (benefit) for income taxes (319) 986
------- -------
Net income (loss) $ (567) $ 1,643
======= =======
Net income (loss) per share $ (.04) $ .11
======= =======
Number of shares used in per share calculations 14,953 15,444
======= =======
The accompanying notes are an integral part of these financial statements.
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's) (UNAUDITED)
Three Months Ended
December 31,
1996 1995
Cash flows provided by (used in) ------- -------
operating activities:
Net income (loss) $ (567) $ 1,643
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 273 243
Provision for doubtful accounts 46 168
Provision for inventory allowances 455 117
Unrealized gains on trading security (298) (641)
Decrease (increase) in accounts receivable 253 (3,831)
Decrease (increase) in inventories 129 (693)
Decrease (increase) in deferred and
refundable taxes (298) 981
Decrease in other current assets 13 72
Decrease in accounts payable (119) (537)
Decrease in accrued liabilities (72) (262)
------- -------
Net cash used in operating activities (185) (2,740)
------- -------
Cash flows used in investing activities:
Purchase of fixed assets (375) (264)
Reduction (purchase) of other assets (416) 43
Investment in unconsolidated company (1,025) (3,357)
------- -------
Net cash used in investing activities (1,816) (3,578)
------- -------
Cash flows provided by (used in) financing activities:
Issuance of common stock 611 164
Repayments of borrowings 0 (8)
------- -------
Net cash provided by financing activities 611 156
------- -------
Net increase (decrease) in cash (1,390) (6,162)
Cash and cash equivalents,
beginning of period 9,216 11,265
------- -------
Cash and cash equivalents,
end of period $ 7,826 $ 5,103
======= =======
The accompanying notes are an integral part of these financial statements.
Page 5
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ZITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts in thousands except per share data)
1. The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission and should be read in conjunction
with the audited financial statements of the Company. Certain information
and footnote disclosures, normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been
condensed or omitted although the Company believes the disclosures which are
made are adequate to make the information presented not misleading. Further,
the condensed consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to present fairly the financial
position and results of operations as of and for the periods indicated. The
results of operations for the three months ended December 31, 1996 are not
necessarily indicative of the results expected for the full year.
2. Fair Value of Financial Instruments:
Carrying value amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable
and other accrued liabilities approximate fair value due to their short
maturities.
3. Marketable Securities:
At December 31, 1996, the Company's marketable securities consisted entirely
of common shares of one company and were classified as trading securities.
The cost of the marketable securities was $341 thousand and the fair market
value of the securities on December 31, 1996 was $2,680 thousand. The
increase in the difference between the cost of those securities and their
fair market value based on quoted market prices on September 30, 1996 and
December 31, 1996 is included in other income.
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4. Inventories:
December 31, September 30,
1996 1996
------------ -------------
Raw materials $1,170 $1,515
Work in process 1,105 738
Finished goods 1,352 1,958
------ ------
$3,627 $4,211
====== ======
5. Investment in Unconsolidated Company:
In November 1995, Zitel purchased 9.6 million shares of preferred stock and
certain technology rights, to be commercialized, of MatriDigm Corporation, a
company in the development stage, in exchange for $3.35 million in cash, $66
thousand in equipment and $150 thousand in future rent and administrative
services. The technology rights include an exclusive license to manufacture
and market certain products using proprietary technology of MatriDigm,
subject to a royalty to the company. In November 1996, Zitel invested an
additional $1.0 million for preferred stock. Zitel also has an option to
purchase 500 thousand shares of MatriDigm's common stock from a shareholder
of the company at $.60 per share, exerciseable beginning July 1997.
6. Deferred Software Implementation Costs:
The Company capitalizes substantially all costs related to the purchase of
software and its implementation which includes purchased software, consulting
fees and the use of certain specified Company resources. As of December 31,
1996, $616 thousand in costs had been capitalized and are included in other
long-term assets. No amortization has been charged as of December 31, 1996.
7. Line of Credit:
The Company has a $3.0 million bank line of credit which expires on January
31, 1998. Interest is at the prime rate (8.25% at December 31, 1996) and is
payable monthly. The Company is required to maintain certain specified
financial ratios and profitable operations on a quarterly basis. The bank
has waived non-compliance with the profitability covenant as of
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December 31, 1996. As of December 31, 1996, the Company had no borrowings
outstanding under the line of credit.
8. Revenue recognition:
Revenue is recognized at the time products are shipped to customers and at
the time services are rendered. Royalty revenue is recognized when earned
and receipt is assured.
9. Income per share amounts are computed using the weighted average number
of common and common equivalent (dilutive stock options) shares outstanding
during each period presented, when dilutive.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company recorded a net loss of $567,000 ($0.04 per share) for the quarter
ended December 31, 1996 compared with net income of $1,643,000 ($0.11 per
share) for the same quarter of the prior year. Included in the current year
is a tax benefit of $319,000 resulting from the recognition of deferred tax
assets in accordance with S.F.A.S. No. 109, Accounting for Income Taxes,
compared to a tax provision of $986,000 (37.5% of income before income
taxes). Weighted average shares outstanding in the first quarter of fiscal
1997 were 14,953,000 compared to 15,444,000 for the first quarter of fiscal
1996.
Total revenue for the quarter ended December 31, 1996 was $5,584,000 versus
$7,313,000 for the same period a year earlier. Revenue for the quarter just
ended included $2,278,000 in royalty revenue from the IBM RAMAC product
versus $4,469,000 in the same quarter of the prior year, a decrease of
$2,191,000. Royalties from IBM were impacted by the transition from the RAMAC
2 generation storage system to RAMAC 3. The new RAMAC 3 contains nine
gigabyte drives versus the previous generation's four gigabyte drives. With
this increased storage capacity, the Company does not expect royalties to
return to historical levels. In addition, should IBM's sales of
royalty-bearing products decline further or should royalty-bearing products
be replaced by non-royalty bearing products, the Company's total revenue
could be materially and adversely affected.
Net sales for the quarter ended December 31, 1996 were $3,266,000 versus
$2,844,000 for the same quarter of the prior year, an increase of $422,000.
The increase in net sales is attributable to an increase in net sales of
CASD/Enterprise, partially offset by a decrease in net sales of other
products. During the quarter, net sales of CASD products increased 36%
compared to net sales of CASD products for the same period a year earlier,
and 89% from net sales of CASD products from the fourth quarter of fiscal
1996. Management continues to believe price/performance characteristics
should make CASD/Enterprise an attractive alternative for vendors and users
of open systems platforms. However, commercial success remains subject to
risks and uncertainties, including unanticipated technical problems, the
continuing need to achieve Company credibility in the open systems market,
and the potential introduction of more cost-effective competitive products.
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Gross margin for the quarter ended December 31, 1996 was 14% of net sales
compared to 32% for the same period a year earlier. The decrease in gross
margin percentage is primarily attributable to reduced average selling
prices. The Company does not believe that the gross margins reported for the
current quarter just ended are necessarily indicative of the gross margins to
be expected in the event net sales should increase significantly; there can
be no assurance that net sales will increase significantly.
Research and development expenses for the quarter ended December 31, 1996
were 29% of total revenue compared to 21% for the same period of the prior
year. Actual spending increased $52,000.
Selling, general and administrative expenses were 45% of total revenue for
the quarter ended December 31, 1996 compared to 27% for the same period of
the prior year. Actual spending increased $513,000. The increase is
primarily attributable to higher salary and related costs associated with an
increase in sales and marketing personnel, an increase in travel and
entertainment, partially offset by a reduction in business promotion.
Other income was $442,000 for the quarter just ended versus other income of
$785,000 for the comparable period of the prior year. For the quarter, other
income included an unrealized gain of $298,000 on an investment held for
resale compared with an unrealized gain of $641,000 on the same investment in
the prior year. Interest income for the quarter was $140,000 versus $139,000
for the same period a year earlier.
Liquidity and Capital Resources
For the quarter ended December 31, 1996, working capital decreased $1,499,000
and cash flows used in operating activities was $185,000. The utilization of
cash in operating activities resulted primarily from net loss of $567,000, an
increase in marketable securities of $298,000, an increase in deferred and
refundable taxes of $298,000 and a decrease in accounts payable of $119,000.
This was offset by a decrease in accounts receivable of $299,000, a decrease
in inventory of $584,000 and depreciation and amortization of $273,000.
During the quarter, $1,816,000 was used in investing activities. In November
of 1996, the Company invested an additional $1,000,000 in preferred stock of
MatriDigm Corporation. $375,000 was used to purchase capital equipment and
$378,000 was used in
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connection with the development and implementation of a software purchased
during the last quarter of fiscal 1996.
Net cash provided by financing activities in the current quarter was
$611,000, generated from the exercise of employee stock options and from the
sale of stock under the Company's employee stock purchase plan. The Company
has a $3,000,000 bank line of credit which expires in January 31, 1998. At
December 31, 1996, the Company had no borrowings outstanding on the line of
credit.
Management believes that the Company will meet its cash requirements from
current cash on hand, other existing working capital, cash flows from
operations, and the utilization of the line of credit.
____________________________________________________________
Zitel and CASD are registered trademarks of Zitel Corporation. IBM and RAMAC
are registered trademarks of IBM Corporation. MatriDigm is a trademark of
MatriDigm Corporation. All other product names and brand names are trademarks
or registered trademarks of their respective holders.
Page 11
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EXHIBIT 11.1
ZITEL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE
(In thousands except per share amounts)
Three Months Ended
December 31,
------------------
1996 1995
------ ------
Weighted average common shares outstanding 14,953 14,572
Computation of incremental
outstanding shares:
Net effect of dilutive stock options
based on treasury stock method 0 872
------ ------
14,953 15,444
====== ======
Net income (loss) $ (567) $1,643
====== ======
Net income (loss) per share $ (.04) $ .11
====== ======
Primary and fully diluted income (loss) per share differ by less than one cent
in all periods presented.
Page 12
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PART II. OTHER INFORMATION
Item 5. Other Information
(a) Marketable Securities. As of February 12, 1997, the Company
had sold all of the marketable securities held at December 31, 1996, and
realized net proceeds of $3,159,401.
(b) MatriDigm Corporation.
Reference is made to the disclosure concerning MatriDigm
Corporation in the Company's report on Form 10-K for the fiscal year ended
September 30, 1996, under the caption, "Business - MatriDigm Corporation".
On February 10, 1997, MatriDigm announced commercial availability of the
first release of its automated Year 2000 Solution. The Company, as an
authorized reseller of MatriDigm's Year 2000 compliance services, has been
allocated its first time slot in the MatriDigm factory and expects to use the
allocated time for conversion of a customer's code. While management is
encouraged by the progress of MatriDigm's development effort, that effort is
continuing. The Company's ability to generate sales is dependent on the
success of MatriDigm's development effort and there can be no assurance that
the Company would be successful in generating profitable sales of conversion
services.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.29 - Preferred Stock Purchase and Put Option
Agreement, dated as of December 2, 1996 among MatriDigm Corporation, BRC
Holdings, Inc., and the Company.
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Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
Page 14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZITEL CORPORATION
Date: February 12, 1997 Henry C. Harris
Henry C. Harris
Vice President, Finance &
Administration
(Chief Financial and
Accounting Officer)
Page 15
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Exhibit 10.29
MATRIDIGM CORPORATION
PREFERRED STOCK PURCHASE AND PUT OPTION AGREEMENT
INTRODUCTION
This Preferred Stock Purchase and Put Option Agreement (this "Agreement")
is made as of December 2, 1996 (the "Effective Date") by and among MatriDigm
Corporation, a California corporation ("MatriDigm" or the "Company"), Zitel
Corporation, a California corporation ("Zitel"), and BRC Holdings, Inc., a
Delaware corporation ("BRC"). Zitel and BRC are referred to herein as the
"Purchasers".
RECITALS
A. The Company has authorized the sale of 1,000,000 shares of its
Series D Preferred Stock (the "Shares") to the Purchasers on the terms and
conditions set forth herein, including the commitment of the Purchasers to
purchase additional authorized shares of Series D, E and/or F Preferred Stock
of the Company, at the option of the Company, on terms and conditions set
forth herein.
B. The Purchasers desire to purchase the Shares in the amounts and on
the terms and conditions set forth herein, and the Company desires to issue
and sell the Shares to the Purchasers on the terms and conditions set forth
herein.
AGREEMENT
Based upon the facts and premises set forth above and the
representations, warranties, and covenants set forth below, the parties
hereby agree as follows:
1. PURCHASE AND SALE OF THE SHARES.
a. SALE AND PURCHASE. Subject to the terms and conditions hereof,
the Company agrees to issue and sell to each of the Purchasers, and each
Purchaser hereby agrees to purchase from the Company, five hundred thousand
(500,000) Shares (for aggregate purchases of one million (1,000,000) Shares),
at a purchase price of $2.00 per Share (the "Purchase Price"), for an
aggregate Purchase Price of two million dollars ($2,000,000).
b. AUTHORIZATION OF SHARES. On or prior to the
Exh. 10.29 - Page 1
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Closing (as defined below), the Company shall have authorized the sale and
issuance of the Series D, E and F Preferred Stock having the rights
preferences, privileges and restrictions set forth in the Amended and
Restated Articles of Incorporation in the form attached hereto as EXHIBIT A
(the "Restated Articles") and adopted and filed the Restated Articles with
the Secretary of State of the State of California.
c. CLOSING. The closing of the sale and purchase of the Shares
under this Agreement (the "Closing") shall take place at such time or place
as the Company and a majority in interest of the Purchasers mutually agree.
At the Closing, subject to the terms and conditions hereof, the Company will
deliver to each Purchaser a certificate representing the Shares purchased by
that Purchaser, against payment of the Purchase Price for the Shares by or on
behalf of the Purchaser by wire transfer or check made payable to the order
of the Company, cancellation of indebtedness or by such other means as shall
be mutually agreeable to the Purchaser and the Company.
2. REPRESENTATIONS, WARRANTIES, AND COVENANTS.
a. BY PURCHASER TO THE COMPANY. Each Purchaser hereby severally
represents, warrants, and covenants to the Company as of the Effective Date
and as of the Closing that:
(i) Purchaser has total assets in excess of $5,000,000.
Purchaser is a sophisticated investor in start-up stage companies in the
Company's industry and has received all necessary information on the basis of
which Purchaser can make an informed decision to make the investment
hereunder prior to the execution of this Agreement. In the case of BRC, the
Chairman and Chief Executive Officer of BRC is the Chairman of the Board of
Directors of the Company. In the case of Zitel, the Chief Executive Officer
and Chief Financial Officer of Zitel are directors of the Company. In each
case, the Purchaser is fully informed as to the business affairs and
prospects of the Company as a result of such relationship.
(ii) Purchaser understands that, in reliance upon applicable
exemptions, the Company has not registered or qualified the Shares and the
Common Stock issuable upon conversion thereof (the "Underlying Shares") under
the Federal Securities Act of 1933 (the "1933 Act") or the California
Corporate Securities Law of 1968 (the "California Law") or the securities
laws of any other state. Purchaser understands that in order to fulfill the
requirements of these exemptions, the
Exh. 10.29 - Page 2
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Company has satisfied certain investment suitability requirements set by the
Company, as indicated by Purchaser's representations made herein.
(iii) Purchaser is acquiring the Shares and Underlying
Shares for Purchaser's own account, for investment only, and not with a view
to or for sale in connection with any distribution thereof or as a stand-in,
proxy or nominee for anyone else.
(iv) Purchaser recognizes that the Company has a limited
history of operations and earnings, and that there is a high risk of loss of
Purchaser's entire investment. Purchaser would have adequate means of
providing for Purchaser's anticipated needs and contingencies if Purchaser's
entire investment were lost. Purchaser recognizes that there is presently no
public market for the Shares and Underlying Shares, and that it is unlikely
that any market will exist in the future. Purchaser has no need for
liquidity for Purchaser's investment in the Shares and Underlying Shares. In
the case of BRC, Purchaser is domiciled in the State of Texas. In the case
of Zitel, Purchaser is domiciled in the State of California.
(v) Purchaser has made such independent investigations as
Purchaser has deemed necessary for the purpose of making the decision to
invest in the Shares. Purchaser has had the opportunity to ask questions of
and receive answers from authorized officers of the Company concerning the
operations, affairs, and financial condition of the Company. Purchaser is
relying solely upon such review, investigations, and answers in making its
decision to invest in the Company, and has thereby acquired all of the
information Purchaser considers needed to make an informed decision to so
invest.
(vi) Purchaser is aware that Purchaser's rights to transfer the
Shares and Underlying Shares are restricted by the 1933 Act, the California
Law, the Cancellation Right referred to in Sections 4 and 5 of this
Agreement, the Market Stand-Off and Right of First Refusal referred to in
Sections 8(b) and 9 of this Agreement, and the absence of a market for the
Shares and Underlying Shares. Purchaser understands that the Shares and
Underlying Shares are considered to be restricted securities by the
Securities and Exchange Commission under the 1933 Act and by the California
Corporations Department under the California Law, and may be so considered
under the laws of the state of Purchaser's domicile, and therefore may not be
sold without registration under the 1933 Act and qualification under the
California Law
Exh. 10.29 - Page 3
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and/or registration or qualification under the law of the state of
Purchaser's domicile, or an opinion of counsel satisfactory to the Company
that the sale or transfer is exempt from such registration and qualification.
(vii) Purchaser has read the legends set forth below and
understands and agrees that the certificates representing the Shares and
Underlying Shares will bear restrictive legends in the forms set forth below
(except for legends not applicable to the Underlying Shares) in addition to
any other legends required by applicable law until such legends are no longer
applicable; and that the Company has made a notation in its records
concerning the restrictions indicated therein, and will not allow any
transfer or sale in violation thereof.
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE FEDERAL SECURITIES ACT OF 1933, AS AMENDED ("ACT") IN RELIANCE IN
PART ON THE EXEMPTION PROVIDED BY RULE 506, OR QUALIFIED UNDER THE CALIFORNIA
CORPORATE SECURITIES LAW OF 1968, AS AMENDED (THE "CALIFORNIA LAW"), OR
QUALIFIED OR REGISTERED UNDER THE SECURITIES LAW OF ANY OTHER STATE (THE
"LAWS"). THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND CONSTITUTE
RESTRICTED SECURITIES FOR PURPOSES OF RULE 144. NEITHER SAID SHARES NOR ANY
INTEREST THEREIN MAY BE TRANSFERRED, SOLD, OR OFFERED FOR SALE IN THE ABSENCE
OF (1) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE ACT AND
QUALIFICATION AND/OR REGISTRATION UNDER THE CALIFORNIA LAW AND ANY OTHER
APPLICABLE LAWS, OR (2) OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION THAT SUCH REGISTRATION AND/OR QUALIFICATION IS NOT REQUIRED AS TO
SAID TRANSFER, SALE, OR OFFER AS A RESULT OF RULE 144 OR OTHERWISE.
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE REDEEMABLE AT THE OPTION
OF THE CORPORATION AND ARE CONVERTIBLE INTO SHARES OF COMMON STOCK BOTH AT
THE OPTION OF THE HOLDER AT ANY TIME PRIOR TO ANY REDEMPTION AND
AUTOMATICALLY UPON THE EARLIER TO OCCUR OF CONSUMMATION OF THE SALE OF THE
CORPORATION'S COMMON STOCK IN A FIRM COMMITMENT UNDERWRITTEN PUBLIC OFFERING,
THE VOTE OF HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF SERIES D
PREFERRED STOCK, OR SUCH TIME AS LESS THAN 500,000 SHARES OF SERIES D
PREFERRED STOCK REMAIN OUTSTANDING.
"A STATEMENT OF THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
GRANTED TO OR IMPOSED UPON EACH CLASS OR SERIES AND THE NUMBER OF SHARES IN
AND DESIGNATION OF EACH CLASS OR SERIES OF SHARES WILL BE FURNISHED TO ANY
SHAREHOLDER UPON REQUEST AND
Exh. 10.29 - Page 4
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WITHOUT CHARGE FROM THE OFFICE OF THE SECRETARY OF THE CORPORATION AT THE
PRINCIPAL EXECUTIVE OFFICE OF THE CORPORATION, WHICH AT THE DATE OF ISSUANCE
OF THIS CERTIFICATE WAS LOCATED AT 47207 BAYSIDE PARKWAY, FREMONT, CALIFORNIA
94538.
"THE HOLDER OF RECORD OF THESE SHARES, AND SUCH HOLDER'S AGENTS AND
ATTORNEYS, MAY BE REQUIRED TO EXECUTE NON-DISCLOSURE STATEMENTS PRIOR TO
BEING PERMITTED TO INSPECT CERTAIN RECORDS OF THE CORPORATION AS DESCRIBED BY
ARTICLE 8 OF THE CORPORATION'S BY-LAWS.
"THE SALE OR TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE, AS
WELL AS THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF, IS
SUBJECT TO THE TERMS AND CONDITIONS OF A PREFERRED STOCK PURCHASE AND PUT
OPTION AGREEMENT BY AND BETWEEN THE REGISTERED HOLDER (OR ITS PREDECESSOR IN
INTEREST) AND THE CORPORATION (THE "AGREEMENT"), INCLUDING A REPURCHASE
OPTION, A MARKET STAND-OFF AGREEMENT AND A RIGHT OF FIRST REFUSAL. A COPY OF
THE AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. IN
ADDITION, THE SHARES AND/OR SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
THEREOF ARE SUBJECT TO FORFEITURE IN THE EVENT OF FAILURE OF THE REGISTERED
HOLDER (OR ITS PREDECESSOR IN INTEREST) TO COMPLY WITH THE TERMS OF A PUT
OPTION RIGHT IN FAVOR OF THE CORPORATION AS SET FORTH IN THE AGREEMENT."
(viii) Purchaser has reviewed the federal, state and local
tax aspects and consequences of this investment to Purchaser's satisfaction
with Purchaser's own tax advisors, and is not relying upon any statements,
representations or advice of the Company or any of its agents as to such
matters.
b. BY THE COMPANY TO PURCHASER. The Company hereby represents and
warrants to Purchaser, as of the date of the Company's acceptance hereof,
that:
(i) The Company is a corporation duly incorporated, validly
existing, and in good legal standing under the laws of the State of
California, and has the corporate power and authority to enter into this
Agreement and to issue and deliver the Shares and to carry out the
transactions herein contemplated.
(ii) The execution, delivery and performance by the Company of
this Agreement and all related transactions have been duly authorized by all
necessary corporate action, and this Agreement constitutes a legal, valid and
binding obligation of the Company, enforceable in accordance with its terms,
except as
Exh. 10.29 - Page 5
<PAGE>
may be limited by bankruptcy, insolvency or other laws affecting enforcement
of creditor's rights, or by the application of customary principles of equity
when equitable remedies are sought.
(iii) The capitalization of the Company is as follows:
A. Authorized and Designated Stock. The Company's
authorized capital stock consists of 100,000,000 shares of Common Stock and
30,000,000 shares of Preferred Stock. Of the Preferred Stock, 9,600,000 are
designated Series A Preferred Stock; 2,000,000 shares are designated Series B
Preferred Stock; 1,500,000 are designated Series C Preferred Stock; 5,000,000
are designated Series D Preferred Stock; 666,666 are designated Series E
Preferred Stock; 500,000 are designated Series F Preferred Stock; and
10,733,334 shares remain as yet undesignated by the Board of Directors. The
Board of Directors is authorized to determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and to increase or decrease (but
not below the number of shares then outstanding) the number of shares of any
such series subsequent to the issuance of share in the series.
B. Outstanding and Reserved Stock. As of the date
of this Agreement, there are outstanding 18,520,000 shares of Common Stock;
9,600,000 shares of Series A Preferred Stock; and 2,000,000 shares of Series
B Preferred Stock. 6,400,000 shares of Common Stock are reserved for
issuance upon exercise of options granted or available for grant pursuant to
the Company's 1996 Stock Option Plan (the "Stock Option Plan"); and 1,500,000
Shares of Series C Preferred Stock are reserved for issuance upon exercise of
an outstanding warrant to purchase Series C Preferred Stock. In addition, an
employment offer letter dated October 3, 1996 from P.E. Esping to Ken Titow
offers Mr. Titow to be given a right of first refusal to participate in
future private stock offerings to the extent of 5% of the offering, which Mr.
Titow has waived in connection with this Agreement.
(iv) The Shares, the Option Shares issued upon payment of the
applicable Put Exercise Price pursuant to exercise of the Put Option under
Section 4 hereof, if any, and the Underlying Shares, when issued in
compliance with the provisions of this Agreement, will be validly issued and
will be fully paid and nonassessable, in that there is no provision of the
Company's
Exh. 10.29 - Page 6
<PAGE>
Articles of Incorporation or Bylaws or applicable statute authorizing the
Company to require further payments from the Purchasers as a consequence of
their mere ownership thereof; provided, however, that the Shares, the Option
Shares and the Underlying Shares (as defined herein) are subject to
forfeiture pursuant to Section 5 in the event of failure of the Purchaser to
comply with the Company's Put Option provided in Section 4 of this Agreement.
(v) The execution, delivery and performance of and compliance
with this Agreement and the issuance of the Shares, the Option Shares and the
Underlying Shares, have not resulted and will not result in any material
violation of, or conflict with, or constitute a material default under, the
Restated Articles or the Bylaws of the Company.
c. SURVIVAL. All representations and warranties made by the
Company and Purchaser hereunder shall survive the execution of this
Agreement, and any investigation at any time made by or on behalf of either
party shall not diminish the party's right to rely upon the other's
representations and warranties.
3. CONFIDENTIALITY OF CORPORATE RECORDS.
Purchaser agrees to abide by the provisions of Article 8 of the
Bylaws of the Company pertaining to confidentiality of corporate records of
the Company to which Purchaser may obtain access as a shareholder of the
Company. The Secretary of the Company will provide Purchaser a copy of the
Company's Bylaws upon request.
4. PUT OPTION.
a. GRANT OF OPTION. In consideration for the right to purchase
the Shares hereunder, each Purchaser hereby grants the Company the right (the
"Put Option"), subject to the terms and conditions set forth in this Section
4, to require each Purchaser to purchase from the Company up to a number,
determined pursuant to Section 4(d) below, of shares of: (x) Series F
Preferred Stock of the Company at the Put Exercise Price of $4.00 per share;
and (y) Series E Preferred Stock of the Company, at the Put Exercise Price of
$3.00 per share; and (z) Series D Preferred Stock of the Company at the Put
Exercise Price of $2.00 per share (in each case, the "Option Shares").
b. MANNER OF EXERCISING PUT OPTION. The Put Option
Exh. 10.29 - Page 7
<PAGE>
shall be exercisable by the Company by delivery to the Purchasers of a Put
Option Exercise Form, in the form attached hereto as EXHIBIT B, completed and
duly executed by the Chief Executive Officer and Chief Financial Officer of
the Company, certifying that the Company has satisfied the conditions set
forth in Section 4(c), and indicating the number of Option Shares of the
applicable series of Preferred Stock which the Company intends to sell to the
Purchasers. Within forty five (45) days after a proper exercise of this Put
Option, each Purchaser shall pay the Company the applicable Put Exercise
Price (as specified in 4(a) above). At the closing of each such exercise of
the Put Option, the Company shall cause to be issued and delivered to the
respective Purchasers the stock certificate or certificates for the
applicable number of Option Shares of the applicable series of Preferred
Stock.
c. EXERCISE CONDITIONS. The Company's exercise of the Put Option
is subject to the following conditions:
(i) The Put Option shall in each case be exercised by the
Company with respect to each of the Purchasers simultaneously, in equal
proportions, in increments of not less than $100,000 total Put Exercise Price
of Option Shares per each Put Option exercise.
(ii) The Company shall be entitled to require the Purchasers to
purchase shares of Series F Preferred Stock at the Put Exercise Price of
$4.00 per Series F Option Share if, and only if, at the time of the exercise
of the Put Option:
(A) The Company has satisfied the Performance Criteria
specified in Section 4(e) (the "Performance Criteria"); and
(B) The Company has already exercised the Put Option to
the extent of an aggregate investment of $2,000,000, whether in the form of
(x) Series D Preferred Stock at the Put Exercise Price of $2.00 per Series D
Option Share, or (y) Series E Preferred Stock at the Put Exercise Price of
$3.00 per Option Share; and
(C) The aggregate Put Exercise Price theretofore received
by the Company in previous exercises of the Put Option, combined with the Put
Exercise Price to be received by the Company upon the instant exercise of the
Put Option, shall not exceed $4,000,000.
Exh. 10.29 - Page 8
<PAGE>
(iii) The Company shall be entitled to require the
Purchasers to purchase shares of Series E Preferred Stock at the Put Exercise
Price of $3.00 per Series E Option Share if, and only if, at the time of an
exercise of the Put Option:
(A) The Company has satisfied the Performance Criteria;
and
(B) The aggregate Put Exercise Price theretofore received
by the Company in previous exercises of the Put Option, combined with the Put
Exercise Price to be received by the Company upon the instant exercise of the
Put Option, shall not exceed $2,000,000.
(iv) The Company shall be entitled to require the Purchasers to
purchase shares of Series D Preferred Stock at the Put Exercise Price of
$2.00 per Series D Option Share if, and only if, at the time of an exercise
of the Put Option, either:
(A) The aggregate Put Exercise Price theretofore received
by the Company in previous exercises of the Put Option, combined with the Put
Exercise Price to be received by the Company upon the instant exercise of the
Put Option, shall not exceed $4,000,000; or
(B) If the Company has already exercised the Put Option
to the extent of more than an aggregate investment of $4,000,000, whether in
the form of Series D, E or F, Preferred Stock, the Company has satisfied the
Performance Criteria.
(v) The representations and warranties of the Company set
forth in Section 2(b) above shall be true and correct as of the date of each
exercise of the Put Option, except as certified in writing furnished to each
Purchaser by an officer of the Company.
d. NUMBER OF SHARES SUBJECT TO PUT OPTION. Each of the Purchasers
shall purchase one-half of the total number of Option Shares being sold in
each Put Option exercise.
(i) Subject to adjustment pursuant to clause (iii) below, the
aggregate dollar value of the Option Shares sold upon exercise of the Put
Option, at the respective Put Exercise Prices set forth in Section 4(a),
shall not exceed $8,000,000, and the aggregate dollar value of the Option
Shares so sold to either Purchaser shall not exceed $4,000,000.
Exh. 10.29 - Page 9
<PAGE>
(ii) Subject to adjustment pursuant to clause (iii) below, the
aggregate number of Series F Option Shares sold pursuant to exercise of the
Put Option shall not exceed 500,000; the aggregate number of Series E Option
Shares sold pursuant to exercise of the Put Option shall not exceed 666,666;
the aggregate number of Series D Option Shares sold pursuant to exercise of
the Put Option under Section 4(c)(iv)(A) shall not exceed 2,000,000; and the
aggregate number of Series D Option Shares sold pursuant to exercise of the
Put Option under Section 4(c)(iv)(B) shall not exceed 2,000,000.
(iii) In the event the Company shall sell any equity
securities pursuant to Section 7(d) below, the Company shall thereupon
determine the maximum remaining number of Option Shares of each series that
would remain available for issuance upon exercise of the Put Option under
Sections 4(c) and 4(d), but for the operation of this clause 4(d)(iii), but
taking into account all previous exercises of the Put Option and any other
changes in circumstance which would preclude satisfaction of a condition for
exercise of the Put Option under Section 4(c) (the "Pre-Adjustment Maximum
Number" for each series). The maximum remaining number of Option Shares of
each series that remain available for issuance upon exercise of the Put
Option shall then be determined by multiplying the Pre-Adjustment Maximum
Number for that series by a fraction equal to (x) the aggregate purchase
price paid for all equity securities sold pursuant to Section 7(d) (including
all previous such sales, but not exceeding 750,000), divided by (y) 8,000,000.
e. PERFORMANCE CRITERIA. The conditions of subsections (ii)(A),
(iii)(A) and (iv)(B) of Section 4(c) shall be satisfied if the Company shall
have the ability to perform Year 2000 conversions commercially at the rate of
at least 44 Million Lines of Code ("MLOC") per month, with production cost,
scan efficiency and fix rate meeting the specifications applicable to the
month of exercise of the Put Option as set forth in the following table:
Month of Production Cost Scan Efficiency Fix Rate
Exercise per LOC Less Greater than: Greater than:
than:
January 1997
(or before) $0.025 0.99900 0.9980
February 1997 $0.023 0.99930 0.9985
March 1997 $0.020 0.99960 0.9990
April 1997 $0.018 0.99990 0.9993
May 1997 (or
later) $0.016 0.99993 0.9996
Exh. 10.29 - Page 10
<PAGE>
For purposes of this Section 4(e):
(i) "Scan Efficiency" is the conversion rate calculated as
1.00 minus the average number of "Errors" per line of code.
(ii) Missing of one date field and misconverting a code
fragment each are computed as a single "Error".
(iii) "Fix Rate" is the number of code fragments actually
fixed, divided by the number of code fragments identified as needing a fix.
f. TERMINATION OF PUT OPTION. The Put Option shall terminate on
the earlier to occur of:
(i) December 31, 1997, or
(ii) Merger of the Company with or into any other corporation
or corporations (other than a wholly owned subsidiary of the Company) or a
sale of all or substantially all of the assets or business of the Company in
one or more related transactions (other than a public offering of the
Company's securities) as a result of which shareholders of the Company
immediately before the transaction own less than a majority of the voting
securities of the successor or surviving corporation immediately thereafter;
or
(iii) Consummation of a firm commitment or best efforts
underwritten public offering of the Company's equity registered with the
Securities and Exchange Commission with gross proceeds to the Company of ten
million dollars ($10,000,000) or more; or
(iv) The sale by the Company of any shares of equity securities
or securities convertible into or exercisable for any equity securities
(excluding shares of Common Stock sold upon exercise of options granted under
the Company's 1996 Stock Option Plan and up to 350,000 additional shares of
Common Stock issuable to Kenneth F. Titow upon exercise of outstanding stock
options) at a price per share in excess of $4.00 (appropriately adjusted to
take account of any stock split, stock dividend, combination of shares or the
like).
5. FAILURE TO COMPLY WITH PUT OPTION; ESCROW OF SHARES.
a. FORFEITURE OF SHARES AND OPTION SHARES FOR NON-
Exh. 10.29 - Page 11
<PAGE>
COMPLIANCE. In the event any Purchaser fails to comply with the Put Option
duly exercised by the Company pursuant to Section 4, the non-complying
Purchaser shall immediately forfeit, and the Company shall have the right to
immediately cancel (but not to transfer), without further consideration to
the Purchaser, the Shares purchased by the non-complying Purchaser and any
Option Shares theretofore purchased by that Purchaser, and any Underlying
Shares issued upon the conversion thereof (collectively, the "Escrowed
Shares"). Upon such event:
(i) All right of the non-complying Purchaser under this
Agreement shall cease and terminate, and such Purchasers shall no longer be
counted for the purpose of obtaining the consent or approval of the
Purchasers for any matter under this Agreement.
(ii) The Shares and Option Shares, if any, so canceled shall
not resume the status of authorized, but unissued shares of Preferred Stock.
Any Underlying Shares so canceled shall resume the status of authorized but
unissued shares of Common Stock.
(iii) The non-complying Purchaser's Proportion shall not
be reallocated to the other Purchasers, but the Company's Put Option with
respect to that Proportion shall be nullified.
b. ESCROW. In order to facilitate efficient enforcement by the
Company of its right pursuant to Section 5(a) (the "Cancellation Right") to
cancel Escrowed Shares of a non-complying shareholder, the stock
certificate(s) representing the Escrowed Shares (the "Certificate(s)") shall
be deposited with an escrow holder designated by the Company (the "Escrow
Holder"). The Escrowed Shares may not be sold, pledged, or otherwise
transferred as long as they remain subject to the Cancellation Right, and any
transfer or purported transfer in violation thereof shall be null and void,
except that Purchaser may transfer the Shares to any purchaser of all or
substantially all of the assets of Purchaser or any Company controlled by or
under common control with Purchaser (collectively, "Permitted
Transferee(s)"), provided the Permitted Transferee(s) agree in writing to be
bound by the Company's Cancellation Right, as well as all other restrictions
against transfer of the Escrowed Shares as set forth in this Agreement,
including, without limitation, those contained in the Market Stand-Off and
Right of First Refusal (as defined in Sections 8(b) and 9 below). The
Purchaser and any Permitted Transferees, as applicable, are referred to
collectively as the "Shareholder."
Exh. 10.29 - Page 12
<PAGE>
c. TERMINATION OF ESCROW. Upon exercise by the Company of the
Cancellation Right, the Escrow shall automatically terminate, and the
Certificate(s) shall be returned to the Company by the Escrow Holder. In
addition, the Company, by written resolution adopted by its Board of
Directors, may terminate the escrow and direct the Escrow Holder to deliver
the Certificate(s) to the Shareholder. Shares so delivered free of escrow
shall nevertheless remain subject to the Cancellation Right and all other
restrictions against transfer of the Shares as set forth in this Agreement,
including, without limitation, those contained in the Market Stand-Off and
Right of First Refusal.
d. TERMINATION OF CANCELLATION RIGHT. The Cancellation Right
shall terminate automatically upon termination of the Put Option, at which
time the Escrow Holder shall deliver the Certificate(s) for the formerly
Escrowed Shares free of escrow to the Shareholder. The formerly Escrowed
Shares so delivered free of escrow shall remain subject to all other
restrictions against transfer of the Shares as set forth in this Agreement,
including, without limitation, those contained in the Market Stand-Off and
Right of First Refusal.
e. SUCCESSION OF ESCROW HOLDER. The Escrow Holder may resign at
any time, provided that (i) its duties are undertaken by a successor escrow
holder, or (ii) the Certificate(s) are deposited with any court of competent
jurisdiction. Any bank doing business in California under due legal
authority is deemed to be a suitable successor. There shall be applied such
additional terms of escrow as any such successor Escrow Holder may at its
discretion require as a condition to its assuming the duties of Escrow
Holder. The original Escrow Holder is authorized to execute as agent for each
party an escrow agreement or instructions containing such additional terms.
f. INDEMNITY OF ESCROW HOLDER. The Escrow Holder shall in no
event be liable for damages to any party resulting from the exercise of its
duties hereunder, or for any other reason, except gross negligence or willful
misconduct. The Company shall pay all fees and expenses of the Escrow Holder
and shall hold the Escrow Holder harmless against all claims arising out of
its performance hereunder.
g. VOTING RIGHTS. The Shareholder shall have full voting rights
and shall be entitled to dividends, if any, with respect to the Escrowed
Shares while they remain in escrow.
Exh. 10.29 - Page 13
<PAGE>
h. CUMULATIVE REMEDIES. The Company's remedies under this Section
shall not be exclusive but shall be cumulative with other remedies provided
at law or equity.
6. RESERVATION OF UNDERLYING SHARES.
The Company will at all times reserve and keep available, solely for
issuance and delivery upon the conversion of the Series D, E and F Preferred
Stock, the number of shares of Common Stock issuable from time to time upon
such conversion.
7. RESTRICTION OF SALE OF NEW SECURITIES.
The Company covenants and agrees that as long as the Company's Put
Option remains in effect, the Company shall not sell any shares of equity
securities or securities convertible into or exercisable for any equity
securities at a price per share less than $4.00 per share (appropriately
adjusted to take account of any stock split, stock dividend, combination of
shares or the like), other than the following:
a. Options, and shares of Common Stock issued or issuable upon
exercise of options, granted under the Company's 1996 Stock Option Plan; and
up to 350,000 additional shares of Common Stock issuable to Kenneth F. Titow
upon exercise of an outstanding non-statutory stock option.
b. Option Shares issued pursuant to an exercise of the Put Option.
c. Option Shares that the Company would have had the right to
require a Purchaser to purchase upon exercise of the Put Option but for the
failure of a Purchaser to comply with the Put Option obligation. Such Option
Shares shall be sold at the applicable Put Exercise Price. In addition,
prior to offering the Option Shares to any third party, the Company shall
first provide the remaining Purchaser ten (10) days written notice, offering
that Purchaser the opportunity to purchase such Option Shares.
d. Additional equity securities up to an aggregate purchase price
of $750,000; provided that upon any sale of equity securities pursuant to
this subsection 7(d), the number of Option Shares that the Company shall have
the right to require the Purchasers to purchase under the Put Option shall be
adjusted as provided in Section 4(d)(iii).
Exh. 10.29 - Page 14
<PAGE>
8. REGISTRATION RIGHTS.
a. PIGGYBACK REGISTRATION RIGHTS.
(i) NOTICE OF REGISTRATION. If (but without any obligation to
do so) the Company proposes to register any of its stock or other securities
under the federal Securities Act of 1993 ("Act") in connection with the
public offering of such securities solely for cash (other than (x) a
registration relating solely to the sale of securities to employees,
consultants and directors of the Company pursuant to a stock option, stock
purchase or similar plan, (y) a registration on any form which does not
include substantially the same information as would be required to be
included in a registration statement covering the sale of the Underlying
Shares, or (z) a registration relating solely to Securities and Exchange
Commission Rule 145), the Company shall, each such time,
(A) promptly give each Purchaser written notice of the
registration; and
(B) include in the registration and in any underwriting
involved therein any of the Underlying Shares specified in a written request
or requests of a Purchaser made within thirty (30) days after the written
notice was given by the Company to the Purchaser.
(ii) UNDERWRITING REQUIREMENTS. If the registration of which
the Company gives notice pursuant to Section 8(a)(i) above is for a
registered public offering involving an underwriting, the Company shall so
advise each Purchaser as part of the written notice. In connection with any
offering involving an underwriting of shares initiated by the Company or by
other shareholders of the Company having registration rights, the Company
shall not be required under Section 8(a)(i) to include any of the Purchasers'
Underlying Shares in the underwriting unless the Purchaser accepts the terms
of the underwriting as agreed upon between the Company and the underwriters
selected by it, and then only in such quantity as will not, in the opinion of
the underwriters, jeopardize the success of the offering by the Company or
the Company's shareholders demanding such registration, subject to
apportionment among selling shareholders as provided in the final sentence of
this Section 8(a)(ii). If the total amount of securities that all
shareholders of the Company request to be included in such offering (when
combined with the securities being offered by the Company or its shareholders
demanding such
Exh. 10.29 - Page 15
<PAGE>
registration) exceeds the amount of securities that the underwriters
reasonably believe compatible with the success of the offering, then the
Company shall be required to include in the offering only that number of
securities pursuant to piggyback registration rights which the underwriters
believe will not jeopardize the success of the offering. The securities so
included pursuant to piggyback registration rights shall be apportioned among
the selling shareholders, including the Purchasers, according to the total
number of securities which each selling shareholder shall have elected to
include in the registration or in such other proportions as shall mutually be
agreed to by the selling shareholders.
b. "MARKET STAND-OFF" AGREEMENT. Each Purchaser shall not, to the
extent requested by the Company, sell or otherwise transfer or dispose of any
Subject Shares during the period of one hundred eighty (180) days following
the effective date of a registration statement of the Company filed under the
Act; provided, however, that this covenant shall apply only to the Company's
initial registration statement (the "First Registration Statement") and
registration statements (excluding registration statements relating solely to
the sale of securities to employees, consultants and directors of the Company
pursuant to a stock option, stock purchase or similar plan) filed within
three (3) years after the effective date of the First Registration Statement,
and provided that all officers and directors of the Company and other holders
of registration rights enter into similar agreements. In order to enforce
the foregoing covenant, the Company may impose stop-transfer instructions
with respect to the Subject Shares until the end of the one hundred eighty
(180) day period.
c. TRANSFER. The rights granted under Section 8(a)(i) may be
transferred to a transferee of not less than 100,000 Subject Shares who
agrees to be bound by the restrictions in Section 8(b) or to a third party
approved by the Company in its sole discretion who likewise agrees.
9. RIGHT OF FIRST REFUSAL.
a. INITIATION OF RIGHT OF FIRST REFUSAL.
(i) Until the consummation of a firm commitment or best
efforts underwritten public offering of the Company's equity registered with
the Securities and Exchange Commission with gross proceeds to the Company of
five million dollars ($5,000,000) or more, each Purchaser and its respective
Exh. 10.29 - Page 16
<PAGE>
successors and assigns (each a "Shareholder"), shall not sell, pledge, assign
or otherwise transfer any of the Shareholder's interest in any of the Subject
Shares to any person without first offering to the Company or its designees
the right and option to purchase said shares as provided hereinafter in this
Section 9 (the "Right of First Refusal").
(ii) Notwithstanding Section 9(a)(i), but subject to Sections
4, 5 and 8(b) above, Purchaser may sell or transfer any interest in any of
the Subject Shares to any Permitted Transferee without first offering said
shares to the Company or its designees, provided any the transferee agrees in
writing to be bound by the restrictions set forth in this Section 9 and those
of Sections 4, 5 and 8(b) above.
(iii) In the event of a pledge, hypothecation of, or the
granting of an option or other right to purchase the Subject Shares, then the
Right of First Refusal shall come into existence at the time of any sale or
transfer of ownership of the shares pursuant to foreclosure under such pledge
or hypothecation or exercise of such option or right, as the case may be;
provided, however, that the Shareholder may not pledge or hypothecate or
grant an option or right to purchase the Subject Shares unless the pledge
holder or option or right holder, as the case may be, agrees in writing at
the time of the pledge or grant of the option or right to be bound by the
Right of First Refusal as contained in this Section 9, and to cause any
proposed assignee or transferee of such pledge or right of option to execute
and deliver to the Company a similar writing prior to such assignment or
transfer.
b. MECHANICS.
(i) Any Shareholder desiring to sell any or all of the Subject
Shares during the term of the Right of First Refusal shall give written
notice to the Secretary of the Company of the Shareholder's bona fide
intention to sell the shares pursuant to a bona fide written offer of a third
party other than the Company (the "Proposed Purchaser"). The notice shall
include a photocopy of the written offer which shall specify the identity of
the Proposed Purchaser, the number of shares proposed to be sold (the
"Offered Shares"), and the price and payment terms of the proposed offer to
buy the Offered Shares. The payment terms of the contemplated sale to the
Proposed Purchaser from the Shareholder (and of the Shareholder to the
Company) must be expressed in terms of cash, cash equivalents (such as
certificates of deposit, shares of stock in publicly traded
Exh. 10.29 - Page 17
<PAGE>
companies, and the like) or a promissory note of the Proposed Purchaser
payable on date(s) specified or ascertained by passage of time. The Company
or its designees shall have the right and option to purchase all of the
Offered Shares, at the price and on the payment terms specified in the
Shareholder's notice, for a period of sixty (60) days from receipt of said
notice from the Shareholder; that is, the Shareholder's notice shall
constitute an irrevocable offer by the Shareholder to sell all of the Offered
Shares to the Company or its designee(s) at the price and on the payment
terms specified in the notice for sixty (60) days from the date of the
Company's receipt of notice.
(ii) The Company shall exercise its option by giving written
notice of its election to do so (the "Exercise Notice") to the Shareholder.
The Company may exercise its option as to any or all of the Offered Shares.
(iii) The Shareholder shall deliver to the Company a share
certificate representing those Offered Shares being repurchased by the
Company within sixty (60) days of the Exercise Notice against payment by the
Company for the account of Shareholder of the purchase price specified in the
Exercise Notice.
(iv) Any Offered Shares for which the Company and its designees
fail to exercise their option as provided in this section may be sold by the
Shareholder to the Proposed Purchaser within a period of ninety (90) days
following the end of the Company's sixty (60)-day option period, provided
that: (A) the sale is made at the price and on the payment terms specified
in the original notice from the Shareholder to the Company or not more
favorable to the Proposed Purchaser; (B) the Proposed Purchaser delivers a
written undertaking to the Secretary of the Company to be bound by the
restrictions on Offered Shares set forth in this Section 9; and (C) the
Company receives an opinion of counsel reasonably satisfactory to it that the
sale of the Offered Shares to the Proposed Purchaser complies with applicable
federal and state corporate securities laws.
(v) Upon receipt of the appropriate undertaking from
Shareholder and Proposed Purchaser as specified in the previous paragraph,
the Company shall transfer the ownership of record of the Offered Shares to
the Proposed Purchaser (and reissue the applicable certificate).
(vi) If within the ninety (90)-day period the Shareholder does
not enter into an agreement for such a sale of
Exh. 10.29 - Page 18
<PAGE>
Offered Shares to the Proposed Purchaser, which sale is consummated within
thirty (30) days of the execution of the agreement, the Right of First
Refusal shall be revived as to the Offered Shares, which thereupon shall not
be sold or transferred unless the Shareholder first offers the Company the
right and option to repurchase any and all such Offered Shares in accordance
with this Section 9.
(vii) Any transfer or purposed transfer of the Subject
Shares or any interest therein shall be null and void unless the terms and
conditions of this Section 9 are observed or are waived by action of the
Company's Board of Directors.
10. MISCELLANEOUS.
a. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable
to contracts between California residents entered into and to be performed
entirely within the State of California.
b. SUCCESSORS AND ASSIGNS. Except as provided above, the rights
of Purchaser under this Agreement may not be assigned without the prior
express written consent of the Company and any attempted assignment without
such consent shall be void. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties
hereto.
c. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
documents delivered pursuant hereto or referred to herein constitute the full
and entire understanding and agreement between the parties with regard to the
subjects hereof and thereof. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), with
the written consent of the Company and the holders of a majority in interest
of the Subject Shares initially sold pursuant to this Agreement or upon
exercise of the Put Option (or issued upon the conversion thereof) that have
not been resold to the public. Any amendment or waiver effected in
accordance with this section shall be binding upon each holder of any such
Subject Shares at the time outstanding, each future holder of all such
Subject Shares, and the Company.
d. NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in
Exh. 10.29 - Page 19
<PAGE>
writing and shall be effective five (5) days after mailed by first-class,
registered or certified mail, postage prepaid, or upon delivery if delivered
by hand, facsimile, telecopy, messenger or a courier delivery service,
addressed to the respective parties at the addresses set forth below
accompanying the parties' names on the signature page to this Agreement, or
at such other addresses as the parties shall provide one another by notice
pursuant to this section; provided, however, that notices may be sent to any
Shareholder who has acquired Subject Shares from a Purchaser at the address
appearing for that person on the stock records of the Company; and each
Shareholder shall be deemed to have been given notice of any change in the
address of the Company's principal executive office which occurs while
Shareholder is a Shareholder of the Company.
e. CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE
SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED
WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE
ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN
EXEMPTION FROM SUCH QUALIFICATION IS UNLAWFUL. PRIOR TO ACCEPTANCE OF SUCH
CONSIDERATION BY THE COMPANY, THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION
FROM SUCH QUALIFICATION BEING AVAILABLE.
f. SEVERABILITY. If the application of any provision or
provisions of this Agreement to any particular facts or circumstances shall
be held invalid or unenforceable by any court of competent jurisdiction, then
(i) the validity and enforceability of such provision or provisions as
applied to any other particular facts or circumstances and the validity of
other provisions of this Agreement shall not in any way be affected or
impaired thereby and (ii) such provision or provisions shall be reformed
without further action by the parties hereto to and only to the extent
necessary to make the same valid and enforceable when applied to such
particular facts and circumstances.
g. SECTION HEADINGS. The section headings in this Agreement are
solely for convenience and shall not be considered in its interpretation.
g. VENUE. Any lawsuit is brought to enforce this Agreement shall
be brought in Santa Clara County or Alameda County, California and the
parties hereby irrevocably agree and submit to the personal and subject
matter jurisdiction and venue of such court.
Exh. 10.29 - Page 20
<PAGE>
h. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be an original, but all of which together shall
constitute one instrument.
i. REMEDIES. In addition to all other rights it may have under
this Agreement, the Company shall have the right to enjoin any sale or other
transfer of the Shares which would violate or cause a breach of the
Cancellation Right, Right of First Refusal, Market Stand-Off or securities
laws of the U.S. or any state. The prevailing party in any litigation or
arbitration proceeding pertaining to the parties' rights and obligations
under this Agreement shall be entitled to recover reasonable attorneys' fees.
AUTHORIZED SIGNATURES
For the purpose of binding the parties to the above Consulting Agreement,
the parties or their the duly authorized representatives have signed their
names on the dates indicated.
MATRIDIGM CORPORATION Address:
MATRIDIGM CORPORATION
Attention: Chief Executive Officer
By _________________________ 47207 Bayside Parkway
James T. Brady, Fremont, CA 94538
Chief Executive Officer
PURCHASERS:
BRC HOLDINGS, INC. Address:
BRC HOLDINGS, INC.
Attention: Chief Executive Officer
By _________________________ 1111 W. Mockingbird Lane, Ste. 1400
P.E. Esping Dallas, TX 75247
Chief Executive Officer
ZITEL CORPORATION Address:
ZITEL CORPORATION
Attention: President
By _________________________ 47211 Bayside Parkway
Jack H. King, Fremont, CA 94538
President
Exh. 10.29 - Page 21
<PAGE>
DESIGNATION OF ESCROW HOLDER
MATRIDIGM CORPORATION hereby designates Rosenblum, Parish & Isaacs, P.C. as
the Escrow Holder pursuant to Section 5 of the above Stock Purchase Agreement;
and Rosenblum, Parish & Isaacs, P.C., hereby accepts such appointment pursuant
to the term and conditions set forth in that section.
ROSENBLUM, PARISH & ISAACS, P.C. MATRIDIGM CORPORATION
By: _________________________ By:
_________________________
Member of the Firm
_________________________
Executive Officer
Exh. 10.29 - Page 22
<PAGE>
EXHIBIT A
FORM OF AMENDED AND RESTATED ARTICLES OF INCORPORATION
Exh. 10.29 - Page 23
<PAGE>
EXHIBIT B
PUT OPTION EXERCISE FORM
To: ___________________
___________________
___________________
___________________
Reference is made to that certain Preferred Stock and Put Option
Agreement dated ______________, 1996, between MatriDigm Corporation (the
"Company") and the Purchasers named therein (the "Agreement"). Capitalized
terms used herein without definition shall have the meanings assigned to them
in the Agreement.
As holder of the Put Option specified in Section 4 of the Agreement, the
Company hereby irrevocably elects to exercise the right thereunder to sell to
______________________ ("Purchaser") ______________________________ shares of
Series ___ Preferred Stock of the Company at the Put Exercise Price per share
of $_______, for an aggregate Put Exercise Price of $___________.
Each of the officers of the Company executing this Put Option Exercise
Form hereby attests and certifies that the Company has satisfied all of the
conditions of this exercise of the Put Option described in the Section 4(c)
of the Agreement.
The Company hereby covenants to cause certificates representing the
Option Shares to be issued promptly following the Purchaser's tendering of
the Put Exercise Price in full.
Dated: ___________________
MATRIDIGM CORPORATION
By: _______________________
Chief Executive Officer
By: _______________________
Chief Financial Officer
Exh. 10.29 - Page 24
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<PAGE>
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<S> <C>
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<PERIOD-START> OCT-01-1996
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0
0
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