<PAGE>
SECURITIES EXCHANGE AND COMMISSION
WASHINGTON, D. C. 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): June 16, 1998
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
<PAGE>
ITEM 5. OTHER EVENTS
PLACEMENT OF DEBENTURES
On June 16, 1998, Zitel Corporation (the "Company") completed the
private placement of $10,000,000 in principal amount of 3% Convertible
Subordinated Debentures due June 15, 1999 (the "Debentures") and five year
Common Stock Purchase Warrants covering 150,000 shares of the Company's
Common Stock (the "Common Stock") to a small number of institutional
investors in a transaction exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"). 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 $ 3.92625 (the
"Conversion Price"). The Conversion Price is equal to 90% of the average
closing bid prices of the Common Stock for each of the five trading days
immediately following, but not including the June 16, 1998 closing date of
the placement. There may be a one-time adjustment to the Conversion Price in
the event that the lesser of 90% of the average of the closing bid prices of
the Common Stock for the ten consecutive trading days preceding but not
including: (a) the 45-day anniversary of the closing price; or (b) the
effective date of a registration statement under the Securities Act
registering the resale of the shares of Common Stock issuable upon conversion
of the Debentures and exercise of the Warrants, is less than the Conversion
Price then that lesser price so calculated shall thereafter be the Conversion
Price. The Conversion Price and number of shares subject to the debentures
are subject to adjustment in the event of certain recapitalizations of and
distributions by the Company and to formula antidilution protection upon
certain sales of Common Stock or Common Stock equivalents at prices less than
the Conversion Price or then the current market of the Common Stock. The
Debentures also provide for certain additional rights in the event that prior
to the aforesaid 45-day anniversary or effective date the closing bid price
of the Common Stock for five consecutive trading days is less than 50% of
111.11% of the original Conversion Price. The exercise price of the Warrants
is equal to 130% of the Conversion Price.
All Debentures outstanding on June 16, 1999 will convert automatically,
provided certain conditions specified in the Debentures are satisfied. 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 September 14,
1998.
The foregoing description does not purport to be complete and is
qualified by reference to the definitive agreements filed as Exhibits
herewith.
2
<PAGE>
ITEM 7. EXHIBITS
(c) The following exhibits are furnished in accordance with the
provisions of Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
Exhibit Number Exhibit
<S> <C>
4.1 Form of Convertible Subordinated Debenture
4.2 Form of Common Stock Purchase Warrant
4.3 Registration Rights Agreement
4.4 Securities Purchase Agreement
4.5 Placement Agency Agreement
</TABLE>
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.
3
<PAGE>
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: June 25, 1998 By: /s/ Jack H. King
----------------------------------
Jack H. King
President and Director
Chief Executive Officer
4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
4.1 Form of Convertible Subordinated Debenture
4.2 Form of Common Stock Purchase Warrant
4.3 Registration Rights Agreement
4.4 Securities Purchase Agreement
4.5 Placement Agency Agreement
</TABLE>
5
<PAGE>
EXHIBIT 1.1A
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR OFFERED FOR SALE
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
No. ---- $---------
ZITEL CORPORATION
3% CONVERTIBLE SUBORDINATED DEBENTURE DUE JUNE 15, 1999
THIS DEBENTURE ("Debenture") is one of a duly authorized issue of
Debentures of ZITEL CORPORATION, a corporation duly organized and existing
under the laws of the State of California (the "Company"), designated as the
Company's 3% Convertible Subordinated Debentures Due June 15, 1999, in an
aggregate principal amount not exceeding TEN MILLION U.S. DOLLARS
(U.S.$10,000,000) (the "Debenture").
FOR VALUE RECEIVED, the Company promises to pay to --------------------,
the initial holder hereof, or its order (including successors-in-interest, the
"Holder"), the principal sum of ---------------- U.S. DOLLARS (U.S.$--------)
on June 15, 1999 (the "Maturity Date") in the manner and amount and subject to
the terms and conditions of Section 6 hereof and to pay interest on the
principal sum outstanding under this Debenture ("Outstanding Principal
Amount"), at the rate of 3% per annum due and payable quarterly in arrears on
the first day of September, December, March and June of each year (each an
"Interest Payment Date"), with the first such payment due on September 1, 1998.
Interest shall accrue daily and compound quarterly commencing on the date
hereof and shall continue until payment in full of all amounts due under this
Debenture. The interest so payable will be paid to the person in whose name
this Debenture is registered on the records of the Company regarding
registration and transfers of the Debenture (the "Debenture Register").
Capitalized terms used herein and not otherwise defined shall have the meanings
set forth in the Convertible Subordinated Debenture Purchase Agreement dated as
of June 16, 1998 between the Company and the Holder and the other parties
thereto (the "Purchase Agreement") or the Registration Rights Agreement dated
as of June 16, 1998 between the Company and the Holder and the other parties
thereto (the "Registration Rights Agreement").
The principal of, interest on, and default payments (referred to below)
in respect of this Debenture are payable in such coin or currency of the United
States as of the time of payment is legal tender for payment of public and
private debts, at the address last appearing on the Debenture Register of the
Company as designated in writing by the Holder hereof from time to time;
PROVIDED, HOWEVER, that, in lieu of paying such interest in coin or currency,
the Company may, at its option (provided it gives at least fifteen (15)
business days notice prior to an Interest Payment Date), pay interest on this
Debenture for any Interest Payment Date in registered Common Stock of the
Company, if and only if such stock is subject to Effective Registration (as
defined in the Purchase Agreement), with the number of shares of Common Stock
determined by dividing (x) the amount of interest due for such payment period
by (y) the Conversion Price determined as if the Interest Payment Date were a
Holder Conversion Date ("Common Stock Interest"), pursuant to a revocable
statement in the form of Exhibit 2 hereto ("Common Stock Statement") delivered
at least fifteen (15) business days prior
<PAGE>
to the Interest Payment Date on which the Company plans to pay such Common
Stock Interest and effective for such Interest Payment Date only. If neither
the cash interest due hereunder is paid, nor the Common Stock Statement
delivered, to the Holder as provided above, the Company shall no longer have
the right to choose the Common Stock Interest option on that Interest Payment
Date or any future Interest Payment Dates and the Holder may elect either cash
interest or Common Stock Interest hereunder at its option, or may choose to add
such amounts to the Outstanding Principal Amount. Any Common Stock Interest or
cash interest when so added to the Outstanding Principal Amount due under this
Debenture shall, for all purposes of this Debenture, be deemed to have been
part of the principal indebtedness originally evidenced by this Debenture
including, without limitation, for purposes of determining interest payable
hereunder after the applicable Interest Payment Date for which such Common
Stock Statement is delivered by the Company and amounts convertible into Common
Shares hereunder after the applicable Interest Payment Date for which such
Common Stock Statement is delivered by the Company.
The Company will pay any principal due and all accrued and unpaid
interest due upon this Debenture to the person that is the Holder of this
Debenture on the records of the Company as of the applicable Interest Payment
Date and addressed to such Holder at the last address appearing on the
Debenture Register.
The Outstanding Principal Amount and interest due hereunder shall bear
interest, from and after the 31st day following the occurrence and during the
continuance of an Event of Default hereunder, at the rate equal to the lower of
the Citibank Prime Rate per annum plus 7% or the highest rate permitted by law.
Additional cash payments (referred to as "default payments") may be
required pursuant to the Registration Rights Agreement if there occurs an
"Interfering Event" (as defined therein). Such default payments, if not paid
in cash when due, may be treated by the Holder in its sole discretion as being
added to the Outstanding Principal Amount due under this Debenture.
Subject to applicable law, any interest otherwise payable that is not
paid for any applicable period because it would exceed the highest rate
permitted by law shall become payable whenever the payment thereof, together
with other interest due for any such subsequent period would not exceed such
highest legal rate.
The Holder of this Debenture is entitled to certain rights and remedies
pursuant to the Purchase Agreement and Registration Rights Agreement, including
without limitation provisions requiring mandatory redemption of the Debenture.
This Debenture does not provide voting rights to the Holder.
This Debenture is subject to the following additional provisions:
1. DENOMINATION. The Debentures are exchangeable for an equal
aggregate principal amount of Debentures of different denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration or transfer or exchange.
2. TRANSFERS. This Debenture may be transferred or exchanged in the
United States only in compliance with the Securities Act of 1933, as amended
(the "Act") and applicable state securities laws, or applicable exemptions
therefrom. Prior to due presentment for transfer of this Debenture, the
Company may treat the person in whose name this Debenture is duly registered on
the Company's Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided, whether or not this Debenture is overdue.
<PAGE>
3. DEFINITIONS. For purposes hereof the following definitions shall
apply:
"CHANGE IN CONTROL TRANSACTION" shall mean the occurrence of (x)
any consolidation or merger of the Company with or into any other corporation
or other entity or person (whether or not the Company is the surviving
corporation), or any other corporate reorganization or transaction or series of
related transactions in which in excess of 50% of the Company's voting power is
transferred through a merger, consolidation, tender offer or similar
transaction, or (y) any person (as defined in Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), together with its
affiliates and associates (as such terms are defined in Rule 405 under the
Securities Act of 1933, as amended (the "Act")), beneficially owns or is deemed
to beneficially own (as described in Rule 13d-3 under the Exchange Act without
regard to the 60-day exercise period) in excess of 50% of the Company's voting
power.
"CLOSING BID PRICE" shall mean the last closing bid price on the
principal Approved Market (as defined in the Purchase Agreement) as reported by
Bloomberg Financial Market or an equivalent reliable reporting service selected
by the Holder and the Company.
"CLOSING DATE" shall mean the date of original issuance of this
Debenture.
"COMMON STOCK" shall mean the common stock, no par value, of the
Company.
"CONVERSION NOTICE" shall have the meaning set forth in Paragraph
5(g).
"CONVERSION PRICE" shall have the meaning set forth in Paragraph
5(c).
"CONVERSION RATE" shall have the meaning set forth in Paragraph
5(b).
"FORCED CONVERSION DATE" shall mean the Maturity Date, without
taking into consideration any acceleration thereof by reason of default,
required redemption, or otherwise. The Forced Conversion Date shall be subject
to deferral as provided for herein and in the Registration Rights Agreement.
"HOLDER CONVERSION DATE" shall have the meaning set forth in
Paragraph 5(g).
"MARKET PRICE FOR SHARES OF COMMON STOCK" shall mean the price of
one share of Common Stock determined as follows:
(i) If the Common Stock is listed on an Approved
Market, the Closing Bid Price;
(ii) If (i) does not apply but the Common Stock is
quoted in the over-the-counter market, another recognized
exchange, on the pink sheets or bulletin board, the lesser of
(A) the lowest sales price or (B) the mean between the last
reported "bid" and "asked" prices thereof on the date of
valuation; and
(iii) If neither clause (i) nor (ii) above applies, the
market value as determined by a nationally recognized investment
banking firm or other nationally recognized financial advisor
retained by the Company for such purpose, taking into
consideration, among other factors, the earnings history, book
value and prospects for the Company, and the prices at which
shares of Common Stock recently have been traded. Such
determination shall be conclusive and binding on all persons.
<PAGE>
"TRADING DAY" shall mean a day on which the Common Stock is traded
on the NASDAQ or principal exchange on which the Common Stock has been listed
(or any similar organization or agency succeeding such market or exchange's
functions of reporting prices).
4. CHANGE IN CONTROL, ETC. If a Change in Control Transaction occurs
before 30 days have elapsed after the date that the Registrable Securities (as
defined in the Registration Rights Agreement) have been registered as
contemplated therein (the "Effectiveness Date") (such 30 days to be extended
one (1) day for each day after such date on which there is a lack of Effective
Registration), or if the provisions of Section 7 have not been complied with,
then the Holder shall be entitled to have the Company redeem this Debenture in
whole or in part at a redemption price equal to 120% of the Outstanding
Principal Amount of this Debenture plus all accrued but unpaid interest and
penalties on this Debenture. Such Holder shall be entitled to make such
election at any time after commencement and up to 10 days after the effective
date of the Change in Control Transaction. For purposes of this Paragraph 4,
the commencement date shall be the day upon which the Change in Control
Transaction was publicly announced.
5. CONVERSION AT THE OPTION OF THE HOLDER. The Holder of this
Debenture shall have the following conversion rights.
(a) HOLDER'S RIGHT TO CONVERT. This Debenture shall be
convertible at any time, in whole or in part, at the option of the Holder
hereof, into fully paid, validly issued and nonassessable shares of Common
Stock. If this Debenture is converted in part, the remaining portion of this
Debenture not so converted shall remain entitled to the conversion rights
provided herein.
(b) CONVERSION PRICE FOR HOLDER CONVERTED SHARES. The
Outstanding Principal Amount of this Debenture that is converted into shares of
Common Stock at the option of the Holder shall be convertible into the number
of shares of Common Stock which results from application of the following
formula:
P + I + D
--------------------------------
Conversion Price
P = Outstanding Principal Amount of this Debenture submitted for
conversion
I = accrued but unpaid interest (not previously added to
principal) on P as of the Holder Conversion Date
D = default payments (not previously added to principal) as of the
Holder Conversion Date
The number of shares of Common Stock into which each $1,000
principal amount of this Debenture hereto may be converted pursuant to this
paragraph hereof is hereafter referred to as the "Conversion Rate."
(c) INITIAL CONVERSION PRICE. Subject to adjustments pursuant to
Sections 5 and 7, this Debenture will have a conversion price (the "Conversion
Price") equal to 90.0% of the average of the Closing Bid Price for each of the
five (5) Trading Days immediately following, but not including, the Closing
Date (such five (5) Trading Day average being referred to as the "Closing
Price"). The Holder shall deliver a notice
<PAGE>
to the Company on the sixth Trading Day immediately following the Closing Date
setting forth the calculation of the Conversion Price, which calculation shall
be binding upon the Company absent manifest error in such calculation.
(d) PERIODIC ADJUSTMENTS TO THE CONVERSION PRICE. If, at any
time prior to the later of (x) the Registration Statement being declared
effective by the SEC or (y) the 45 day anniversary of the Closing Date, the
Closing Bid Price is for five (5) consecutive Trading Days (the fifth of such
five (5) consecutive Trading Days being the "Periodic Reset Date") less than
50% of the Closing Price (such Closing Bid Price, multiplied by 90%, being
known as the "Periodic Reset Price"), THEN the Company will deliver into the
Holder's possession within three (3) Trading Days ("T+3") of the Periodic Reset
Date, such number of additional shares of Common Stock as, together with such
other shares of Common Stock as the Holder previously acquired as a result of
the conversion of this Debenture, would result in such Holder having acquired
in the aggregate a number of shares of Common Stock equal to the number that
would have been acquired if all prior conversions had been at the Periodic
Reset Price as the Conversion Price. Adjustments pursuant to this Section 5(d)
may occur multiple times. If at the Single Reset Date (defined below) the
Single Reset Price is greater than the Periodic Reset Price pursuant to which
shares of Common Stock were delivered to the Holder under this paragraph (d),
then the Holder will be required to return a portion of the shares previously
delivered, so that the number of shares delivered pursuant to paragraphs (d)
and (e) would be as determined at the Single Reset Price.
(e) ONE-TIME ADJUSTMENT TO THE CONVERSION PRICE. If the lesser
of (i) the average of the Closing Bid Prices of the Common Stock for the ten
(10) consecutive Trading Days prior to but excluding the day on which the
Registration Statement is declared effective by the SEC and (ii) the average of
the Closing Bid Prices of the Common Stock for the ten (10) consecutive Trading
Days prior to but excluding the 45 day anniversary of the Closing Date (such
lesser price, multiplied by 90%, being known as the "Single Reset Price" and
the date from which the Single Reset Price is calculated being known as the
"Single Reset Date"), is less than the Closing Price, THEN if and only if such
Single Reset Price is lower than the Conversion Price, (x) such Single Reset
Price will automatically become the Conversion Price (subject to further
adjustment) for all purposes of this Debenture, and (y) the Company will
deliver into the Holder's possession within T+3 of the Single Reset Date, such
number of additional shares of Common Stock (if any) as, together with such
other shares of Common Stock as the Holder previously acquired as a result of
the conversion of this Debenture would result in such Holder having acquired in
the aggregate a number of shares of Common Stock equal to the number that would
have been acquired if all prior Conversions had been at the Single Reset Price
as the Conversion Price. Adjustments pursuant to this Section 5(e) may occur
only once.
(f) ADJUSTMENTS TO CLOSING PRICE. In the event that subsequent
to the Closing Date and prior to or during any period of consecutive trading
days provided for above, the Company shall pay any dividend on the Common Stock
payable in Common Stock or in rights to acquire Common Stock, or shall effect a
stock split or reverse stock split, then the Closing Price shall be
proportionately decreased or increased, as appropriate, to give effect to such
event.
(g) MECHANICS OF CONVERSION. In order to convert this Debenture
(in whole or in part) into full shares of Common Stock, the Holder shall
surrender this Debenture, duly endorsed, by either overnight courier or 2-day
courier, to the principal office of the Company, and shall give written notice
in the form of EXHIBIT 1 hereto (the "Conversion Notice") by facsimile (with
the original of such notice forwarded with the foregoing courier) to the
Company at such office that the Holder elects to convert the principal amount
(plus accrued but unpaid interest and default payments) specified therein,
which such notice and
<PAGE>
election shall be revocable by the Holder at any time prior to its receipt of
the Common Stock upon conversion; PROVIDED, HOWEVER, that the Company shall not
be obligated to issue certificates evidencing the shares of the Common Stock
issuable upon such conversion unless either the Debenture evidencing the
principal amount is delivered to the Company as provided above, or the Holder
notifies the Company that such Debenture(s) have been lost, stolen or destroyed
and promptly executes an agreement reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection with such
lost, stolen or destroyed Debentures.
The Company shall issue and deliver within T+3 after delivery
to the Company of such Conversion Notice, to such Holder of Debenture(s) at the
address of the Holder, or to its designee, a certificate or certificates for
the number of shares of Common Stock to which the Holder shall be entitled as
aforesaid, together with a calculation of the Conversion Rate and a Debenture
or Debentures for the principal amount of Debentures not submitted for
conversion. The date on which the Conversion Notice is given (the "Holder
Conversion Date") shall be deemed to be the date the Company received by
facsimile the Conversion Notice, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock on
such date.
In lieu of delivering physical certificates representing the
Common Shares issuable upon conversion of Debentures or the Warrant Shares (as
defined in the Purchase Agreement) deliverable upon exercise of Warrants (as
defined in the Purchase Agreement), provided the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the holder, the Company shall use
its best efforts to cause its transfer agent to electronically transmit the
Common Shares and Warrant Shares issuable upon conversion or exercise to the
Holder, by crediting the account of Holder's prime broker with DTC through its
Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for
delivery described above shall apply to the electronic transmittals through the
DWAC system. The parties agree to coordinate with DTC to accomplish this
objective. The conversions pursuant to Sections 5 and 6 shall be deemed to
have been made immediately prior to the close of business on the Holder
Conversion Date. The person or persons entitled to receive the Common Shares
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such Common Shares at the close of business on the Holder
Conversion Date.
6. CONVERSION UPON MATURITY.
(a) At the Forced Conversion Date, all Debentures outstanding at
such time shall be automatically converted into Common Stock of the Company in
accordance with the terms of this Debenture, the Purchase Agreement and the
Registration Rights Agreement, without notice; PROVIDED, however, that such
conversion will be subject to the limitations on a Holder's right to convert as
set forth in paragraph 12 below, and, provided further that the Forced
Conversion Date shall be deferred for such number of days as is equal to 1.5
times the number of days (A) there is not Effective Registration (as defined in
the Purchase Agreement), but not including the first 90 days after the Closing;
(B) there is not a sufficient amount of Common Shares available for conversion
of all outstanding Debentures; or (C) for any other reason there is a default
in, or failure of performance of, the obligations of the Company under this
Debenture, the Purchase Agreement or the Registration Rights Agreement which
interferes with the ability of the Holder to convert this Debenture or to
freely sell without restriction the shares of Common Stock available upon
conversion thereof. The portion of the Outstanding Principal Amount of the
Debenture that may not be converted by reason of such paragraph 12 limitation
will be paid to the Holder by the Company in cash in an amount equal to 110% of
the sum of (i)
<PAGE>
the Outstanding Principal Amount and (ii) accrued but unpaid interest and
default payments ("Cash Payment").
The Company shall issue and deliver within T+3 after delivery to
the Company of this Debenture, or after receipt of the agreement and
indemnification described in paragraph 5(c) above, to the Holder of the
Debenture at the address of the Holder, or to its designee, a certificate or
certificates for the number of shares of Common Stock to which the Holder shall
be entitled hereunder, together with the Cash Payment and a calculation of the
Conversion Rate. The person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock on the Forced
Conversion Date. The Forced Conversion Date shall be a "Holder Conversion
Date" for purposes of this Debenture.
(b) Notwithstanding the preceding subparagraph (6)(a), no holder
of Debentures shall be obligated to convert any Debentures held by such Holder
on the Forced Conversion Date unless and until each of the following conditions
has been satisfied or exists, each of which shall be a condition precedent to
any such automatic conversion:
(i) no material default or breach exists, and no event
shall have occurred which constitutes (or would constitute with
notice or the passage of time or both) a material default or breach
of the Purchase Agreement, the Registration Rights Agreement, any
Warrant or this Debenture (for purposes of this clause (i),
"material" shall mean materially affecting the business, affairs or
prospects of the Company or the market for its securities, or
having a material effect on the rights and benefits sought to be
obtained by the Holders in acquiring the Debentures).
(ii) none of the events described in clauses (i) through
(iv) of Section 2(b) of the Registration Rights Agreement shall
have occurred and be continuing;
(iii) Effective Registration (as defined in the Purchase
Agreement) has occurred and is continuing and has continuously
existed for the prior 60 consecutive trading days;
(iv) the Company and its direct and indirect subsidiaries on
a consolidated basis has assets with a net realizable fair market
value exceeding its liabilities and is able to pay all its debts as
they become due in the ordinary course of business, and the Company
is not and has not been subject to any liquidation, dissolution or
winding up of its affairs; and
(v) each Holder of Debentures shall have received a
certificate from an appropriate executive officer of the Company
certifying that each of the foregoing conditions precedent exist or
have been satisfied.
The Company shall be given the opportunity after the Forced
Conversion Date to cure the above conditions, and shall after effecting such
cure give each Holder of Debentures ten (10) Trading Days' notice prior to an
automatic conversion of such Holder's Debentures. Such automatic conversion
shall be subject to and governed by all the provisions relating to voluntary
conversion of the Debentures contained herein.
If the Company is not able to cure the above conditions, then (i)
the Company has the right
<PAGE>
upon 60 days' prior written notice to the Holders, provided that such notice
shall be effective if and only if the Company has had unrestricted freely
trading Common Stock available for conversion by the Holders for the duration
of the 60-day notice period and the Holders shall have had the opportunity to
convert their Debentures during that period, and (ii) each Holder has the right
to cause the Company, to redeem all Debentures outstanding at such time at a
redemption price per Debenture equal to 120% of the sum of the Outstanding
Principal Amount of the Debenture plus accrued but unpaid interest and default
payments on the Debenture.
(c) The Company has no right to prepay this Debenture in whole or
in part, or to pay this Debenture, except as set forth in this Section 6.
7. STOCK SPLITS; DIVIDENDS; ADJUSTMENTS; REORGANIZATIONS;
PAYMENTS IN LIEU OF CONVERSIONS.
(a) If the Company, at any time while the Debentures are
outstanding, (i) shall pay a stock dividend or otherwise make a distribution or
distributions on any equity securities (including investments or securities
convertible into or exchangeable for such equity securities) in shares of
Common Stock, (ii) issue any securities payable in shares of Common Stock,
(iii) subdivide outstanding Common Shares into a larger number of shares, (iv)
combine outstanding Common Stock into a smaller number of shares, the
Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding before such event and of
which the denominator shall be the number of shares of Common Stock outstanding
after such event. Any adjustment made pursuant to this Section 7(a) shall
become effective immediately after the record date for the determination of
shareholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision or
combination.
(b) In the event that the Company issues or sells any Common
Stock or securities which are convertible into or exchangeable for its Common
Stock or any convertible or exchangeable securities, or any warrants or other
rights to subscribe for or to purchase or any options for the purchase of its
Common Stock or any such convertible or exchangeable securities (other than
shares or options issued pursuant to the Company's current employee or director
option plans or stock purchase plans as amended consistent with the practice in
the high-technology sector, at prices consistent with past practice or shares
issued upon exercise of options, warrants or rights outstanding on the date of
the Purchase Agreement and listed in Section 2.1(c) of the Disclosure Schedule)
at an effective purchase price per share which is less than the greater of the
Conversion Price then in effect or the Market Price for Shares of the Common
Stock on the trading day next preceding such issue or sale, then in each such
case, the Conversion Price in effect immediately prior to such issue or sale
shall be reduced effective concurrently with such issue or sale to an amount
determined by multiplying the Conversion Price then in effect by a fraction,
(x) the numerator of which shall be the sum of (1) the number of shares of
Common Stock outstanding immediately prior to such issue or sale, plus (2) the
number of shares of Common Stock which the aggregate consideration received by
the Company for such additional shares would purchase at such Market Price for
shares of Common Stock or Conversion Price, as the case may be, then in effect;
and (y) the denominator of which shall be the number of shares of Common Stock
of the Company outstanding immediately after such issue or sale.
For the purposes of the foregoing adjustment, in the case of the
issuance of any convertible or exchangeable securities, warrants, options or
other rights to subscribe for or to purchase or exchange for, shares of Common
Stock ("Exchangeable Securities"), the maximum number of shares of Common Stock
<PAGE>
issuable upon exercise, conversion or exchange of such Exchangeable Securities
shall be deemed to be outstanding, provided that no further adjustment shall be
made upon the actual issuance of Common Stock upon exercise, exchange or
conversion of such Exchangeable Securities.
In the event of any such issuance for a consideration which is less
than such Market Price for Shares of Common Stock and also less than the
Conversion Price then in effect, than there shall be only one such adjustment
by reason of such issuance, such adjustment to be that which results in the
greatest reduction of the Purchase Price computed as aforesaid.
(c) If the Company, at any time while the Debentures are
outstanding, shall distribute to all holders of Common Shares evidences of its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security (excluding those referred to in Section 7(b) above) then in each such
case the Conversion Price at which the Debenture shall thereafter be
convertible shall be determined by multiplying the Conversion Price in effect
immediately prior to the record date fixed for determination of shareholders
entitled to receive such distribution by a fraction of which the denominator
shall be the Market Price for Shares of Common Stock determined as of the
record date mentioned above, and of which the numerator shall be such Market
Price for Shares of Common Stock on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding Common Stock as
determined by the Board of Directors in good faith; provided, however that in
the event of a distribution exceeding 25% of the net assets of the Company,
such fair market value shall be determined at the Company's expense by a
nationally recognized or major regional investment banking firm or firm of
independent chartered accountants of recognized standing (which may be the
firm that regularly examines the financial statements of the Company)
(an ?Appraiser?) selected in good faith by the Board of Directors and Holders
of a majority in interest of the Debentures. In either case the adjustments
shall be described in a statement provided to all holders of Debentures of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one Common Share. Such adjustment shall be
made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(d)(1) In the event that at any time or from time to time
after the Closing Date, the Common Stock issuable upon the conversion of the
Debentures is changed into the same or a different number of shares of any
class or classes of stock, whether by merger, consolidation, recapitalization,
reclassification or otherwise (other than a subdivision or combination of
shares or stock dividend or reorganization provided for elsewhere in this
Paragraph 7), then and as a condition to each such event provision shall be
made so that each Holder of Debentures shall have the right thereafter to
convert such Debenture into the kind of stock receivable upon such
recapitalization, reclassification or other change by holders of shares of
Common Stock, all subject to further adjustment as provided herein. In such
event, the formulae set forth herein for conversion and redemption shall be
equitably adjusted to reflect such change in number of shares or, if shares of
a new class of stock are issued, to reflect the market price of the class or
classes of stock (applying the same factors used in determining the Conversion
Price) issued in connection with the above described transaction.
(2) If at any time or from time to time after the Closing Date
there is a capital reorganization of the Common Stock, including by way of a
sale of all or substantially all of the assets of the Company (other than a
recapitalization, subdivision, combination, reclassification or exchange of
shares provided for elsewhere in this Paragraph 7), then, as a part of and a
condition to such reorganization, provision shall be made in a manner
reasonably acceptable to the Holders of the Debentures so that the Holders of
the Debentures shall thereafter be entitled to receive upon conversion of the
Debentures the number of shares of
<PAGE>
stock or other securities or property to which a holder of the number of shares
of Common Stock deliverable upon conversion would have been entitled on such
capital reorganization. In any such case, appropriate adjustment shall be made
in the application of the provisions of this Paragraph 7 with respect to the
rights of the Holders of the Debentures after the reorganization to the end
that the provisions of this Paragraph 7 shall be applicable after that event
and be as nearly equivalent as may be practicable, including, by way of
illustration and not limitation, by equitably adjusting the formulae set forth
herein for conversion and redemption to reflect the market price of the
securities or property (applying the same factors used in determining the
Market Price for Shares of Common Stock) issued in connection with the above
described transaction.
(e) Whenever the Conversion Price is adjusted pursuant to Section
7(a), (b), (c) or (d), the Company shall promptly mail to each Holder of the
Debentures, a notice setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment.
(f) In the event of any taking by the Company of a record date of
the holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend or other distribution,
any security or right convertible or exchangeable into or entitling the holder
thereof to receive additional Common Shares, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Company shall
deliver to each Holder of Debentures at least 20 days prior to the date
specified therein, a notice specifying the date on which any such record is to
be taken for the purpose of such dividend, distribution, security or right and
the amount and character of such dividend, distribution, security or right.
(g) In no event shall the Company issue more than the Maximum
Share Amount (as defined below and subject to adjustment as provided herein)
upon conversion of this Debenture, unless the Company shall have obtained
Stockholder Approval (as defined below) or a waiver of such requirement by
NASDAQ. As used herein, Stockholder Approval means approval by the
stockholders of the Company in accordance with Rule 4460(i) of the rules of
NASDAQ. Once the Maximum Share Amount has been issued (the date of which is
ereinafter referred to as the "Maximum Conversion Date"), unless the Company
shall have obtained Stockholder Approval or a waiver of such requirement by
NASDAQ, in lieu of any further right to convert this Debenture, and in full
satisfaction of the Company's obligations under this Debenture, the Company
shall pay to the Holder, within three (3) business days of the Maximum
Conversion Date, an amount equal to the greater of (i) 120% TIMES the sum of
(a) 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 payments and
interest, if any, PLUS (d) any optional amounts that may 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
Bid Price of the Common Stock on the Approved Market on the Trading Day
immediately preceding the date of payment. The Maximum Share Amount shall mean
an aggregate of 3,381,575 shares of Common Stock (19.9% of the Company's
outstanding shares of Common Stock as of June 10, 1998 minus 150,000 shares
reserved for issuance upon exercise of the Warrants), subject to equitable
adjustments 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.
In the event that the Company obtains Stockholder Approval, the approval of
NASDAQ or otherwise
<PAGE>
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 Closing Date represents at least fifty percent (50%) of the
Maximum Share Amount and (b) the sum of (x) the aggregate number of share of
Common Stock issued pursuant to this Debenture and the other Debentures issued
on the Closing Date PLUS (y) the aggregate number of shares of Common Stock
that remain issuable pursuant to this Debenture and the otherDebentures issued
on the Closing Date and Warrants issued pursuant to the Purchase Agreement,
represents at least one hundred percent (100%) of the Maximum Share Amount
(the "Triggering Event"), the Company 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.
8. FRACTIONAL SHARES. No fractional shares of Common Stock or scrip
representing fractional shares of Common Stock shall be issuable hereunder.
The number of shares of Common Stock that are issuable upon any conversion
shall be rounded up to the nearest whole share.
9. RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
(a) Reservation Requirement. So long as any Debentures remain
outstanding the Company agrees to reserve and at all times keep available
solely for purposes of conversion of Debentures such number of authorized but
unissued shares of Common Stock that is set forth in Section 3.10 of the
Purchase Agreement.
(b) DEFICIENCY. If the Company does not have a sufficient number
of shares of Common Stock available to satisfy the Company's obligations to a
Holder of Debentures upon receipt of a Conversion Notice or is otherwise unable
to issue such shares of Common Stock in accordance with the terms of this
Agreement such Holder shall be entitled to the rights and remedies set forth in
the Registration Rights Agreement.
10. NO REISSUANCE OF THE DEBENTURE. No Debentures acquired by the
Company by reason of redemption, purchase, exchange or otherwise shall be
reissued, and all such Debentures shall be retired.
11. NO IMPAIRMENT. The Company shall not intentionally take any action
which would impair the rights and privileges of the Debentures set forth herein
or the Holders thereof.
12. LIMITATIONS ON HOLDER'S RIGHT TO CONVERT.
(a) Notwithstanding anything to the contrary contained herein, no
Debenture may be converted to the extent that, after giving effect to Common
Shares to be issued pursuant to a Conversion Notice, the total number of shares
of Common Stock deemed beneficially owned by such Holder (other than by virtue
of the ownership of Debentures or ownership of other securities that have
limitations on a Holder's
<PAGE>
rights to exchange, convert or exercise similar to those limitations set forth
herein), together with all shares of Common Stock deemed beneficially owned by
the holder's "affiliates" (as defined in Rule 144 of the Act) that would be
aggregated for purposes of determining whether a group under Section 13(d) of
the Securities Exchange Act of 1934, as amended, exists, would exceed 4.9%
(the "Restricted Ownership Percentage") of the total issued and outstanding
shares of the Company's Common Stock; provided that (w) each holder shall have
the right at any time and from time to time to reduce its Restricted Ownership
Percentage immediately upon notice to the Company, (x) each Holder shall have
the right at any time and from time to time, to increase its Restricted
Ownership Percentage and otherwise waive in whole or in part the restrictions
of this Section 12(a) upon 61 days' prior notice to the Company or immediately
in the event of the announcement of a pending or proposed Change in Control
Transaction, (y) each holder can make subsequent adjustments pursuant to (w) or
(x) any number of times from time to time (which adjustment shall be effective
immediately if it results in a decrease in the percentage or shall be effective
upon 61 days' prior written notice or immediately in the event of the
announcement of a pending or proposed Change in Control Transaction if it
results in an increase in the percentage) and (z) each Holder may eliminate
or reinstate this limitation at any time and from time to time (which
elimination will be effective upon 61 days' prior notice and which
reinstatement will be effective immediately). Without limiting the foregoing,
in the event of the announcement of a pending or proposed Change in Control
Transaction, any Holder may reinstate immediately (in whole or in part) the
requirement that any increase in its Restricted Ownership Percentage be subject
to 61 days' prior written notice, notwithstanding such Change in Control
Transaction, without imposing such requirement on, or otherwise changing such
Holder's rights with respect to, any other Change in Control Transaction. For
this purpose, any material modification of the terms of a Change in Control
Transaction will be deemed to result in a new Change in Control Transaction.
The term "deemed beneficially owned" as used in this Debenture shall exclude
shares that might otherwise be deemed beneficially owned by reason of the
convertibility of the Debentures. The Company shall provide all Holders with
the earlier of (i) 20 days' prior written notice of any such Change in Control
Transaction, to the extent the Company has prior knowledge of a Change in
Control Transaction; or (ii) notice on the day immediately following the
Company's learning of any such transaction, but only after, in the case of (i)
and (ii), such Change in Control Transaction has been publicly disclosed.
(b) Under certain circumstances specified in Section 3.15 of the
Purchase Agreement, certain Debentures that are the subject of a Conversion
Notice must be converted for cash.
13. SUBORDINATION.
(a) AGREEMENT TO SUBORDINATE. Notwithstanding anything in this
Debenture to the contrary, the Company agrees, and by accepting this Debenture
the Holder agrees, that the indebtedness evidenced by this Debenture, solely to
the extent that same is payable in cash and not in shares of Common Stock, is
subordinate and subject in right of payment, to the extent and in the manner
expressly provided in this Section 13, 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
senior to all other present and future obligations of the Company (other than
trade debt), and only Senior Debt shall rank senior to this Debenture.
(b) INSOLVENCY, BANKRUPTCY, DISSOLUTION OF COMPANY. Upon any
payment or distribution (whether in cash, securities or other property) to
creditors of the Company upon any Insolvency Event:
(i) 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
<PAGE>
(ii) 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 Section 13 shall be made to holders of Senior
Debt as their interests may appear, except that the Holder may
receive shares of the Company as reorganized or readjusted or
securities of the Company 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.
(c) Default on Senior Debt. i) The Company may not pay the
principal of, premium, if any, or interest on, this Debenture or make any
deposit in respect of this Debenture (not including any reservation of Common
Stock for purposes of the conversion of Debentures) 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 (ii) 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) and (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 Company may not pay this Debenture for a
period (a "Payment Blockage Period") commencing upon the receipt by the Company
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 Company 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 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 Company 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 Section 13. 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.
ii) The failure to make a payment or distribution on this
Debenture by reason of this Section 13 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.
(d) SUBORDINATED ACCELERATION; STANDSTILL. The Holder agrees to
give the Company not less than 5 days' prior written notice of its intention to
accelerate the maturity of this Debenture pursuant to Section 4 hereof. The
Company will promptly notify holders of Senior Debt of any obligation to make
payments to be made under Section 7.
(e) PERMITTED PAYMENTS. So as to eliminate any doubt, except (as
to cash payments) as provided in Sections 13(b) and 13(c), payments under this
Debenture, and payments under the Registration Rights Agreement (whether in
cash or Common Stock (as applicable)) (collectively, "Permitted Payments")
<PAGE>
shall be made by the Company on the terms of this Debenture and Registration
Rights Agreement, as the case may be.
(f) TURNOVER. If the Holder receives any cash payment or other
cash distribution on this Debenture (other than pursuant to a conversion) at a
time when such payment or distribution should not have been made to the Holder
by reason of this Section 13, 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.
(g) RELATIVE RIGHTS. This Section 13 defines the relative rights
of the Holder and the holders of Senior Debt. Nothing herein shall:
(i) impair, as between the Company and the Holder, the
obligation of the Company, 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
(ii) 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.
(h) AGREEMENT TO COOPERATE. In the event that a payment may not
be made on the Debentures as a result of the provisions of this Section 13,
including without limitation, as a result of an Insolvency Event or a default
on any Senior Debt, the Company 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 13(h) shall obligate the Holder to purchase such Senior Debt or to
attempt to cure any such default.
(i) CONVERSION. Notwithstanding anything to the contrary
contained in this Section 13, nothing in this Section 13 shall restrict the
rights of the Holder (i) to convert the Debenture in accordance with its terms,
including, without limitation, after an Insolvency Event and during the pendency
of a default on Senior Debt or (ii) to receive shares of Common Stock on account
of interest payments due under this Debenture.
(j) DEFINITIONS.
(i) "Bank Credit Agreement" shall mean that certain credit
agreement by and between the Company 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 Company and Comerica Bank or another financial institution
that replaces Comerica Bank as the Company's primary commercial
bank or lending institution.
(ii) "Bankruptcy Code" means the Bankruptcy Reform Act of
1978, 11 U.S.C. Section 101 ET SEQ., or any successor statute
thereto.
(iii) "Insolvency Event" means (i) any winding-up,
insolvency, bankruptcy,
<PAGE>
liquidation or reorganization of the Company, whether voluntary or
involuntary, (ii) any proceeding or case for reorganization,
liquidation, bankruptcy, dissolution or other winding-up of the
Company or its assets, whether or not involving insolvency or
bankruptcy, (iii) any assignment by the Company for the benefit of
creditors or (iv) any receivership or other similar proceeding or
any marshalling of assets of the Company.
(iv) "Senior Debt" means all obligations and liabilities of
the Company, 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, not to exceed $4,000,000 in the aggregate,
provided that in the event of a Change in Control Transaction such
amount may be increased to $7,500,000.
14. WAIVERS OF DEMAND, ETC. The Company hereby expressly and
irrevocably waives demand and presentment for payment, notice of nonpayment,
protest, notice of protest, notice of dishonor, notice of acceleration or
intent to accelerate, bringing of suit and diligence in taking any action to
collect amounts called for hereunder and will be directly and primarily liable
for the payment of all sums owing and to be owing hereon, regardless of and
without any notice, diligence, act or omission as or with respect to the
collection of any amount called for hereunder.
15. REPLACEMENT DEBENTURE. In the event that any Holder notifies the
Company that its Debenture(s) have been lost, stolen or destroyed, replacement
Debenture(s) identical in all respects to the original Debenture(s) (except for
registration number and Outstanding Principal Amount, if different than that
shown on the original Debenture(s)), shall be issued to the Holder, provided
that the Holder executes and delivers to the Company an agreement reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such Debenture.
16. PAYMENT OF EXPENSES; ISSUE TAXES. The prevailing party in any
litigation with respect to this Debenture shall be reimbursed by the losing
party for all debts and expenses, including attorneys' fees, which may be
incurred by such prevailing party in enforcing the provisions of this Debenture
and/or collecting any amount due under this Debenture, the Purchase Agreement,
any Warrant or the Registration Rights Agreement. The Company shall pay any
and all issue and other taxes (excluding any income, franchise or similar
taxes) that maybe payable in respect of any issue or delivery of Common Shares
on conversion of any Debenture pursuant hereto.
17. DEFAULTS. If one or more of the following described "Events of
Default" shall occur:
(a) The Company shall default in the payment of (i) interest on
this Debenture (subject to the Company's option to pay Common Stock Interest),
and such default shall continue for three (3) business days after the due date
thereof, or (ii) the principal of this Debenture; or
(b) Any of the representations or warranties made by the Company
herein, in the Purchase Agreement, the Registration Rights Agreement, any
Warrant or in any certificate or financial or other statements heretofore or
hereafter furnished by or on behalf of the Company in connection with the
execution and delivery of this Debenture or such other documents shall be false
or
<PAGE>
misleading in any material respect at the time 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 or such effect substantially diminishes the
value of the Holder's investment in the Company; or
(c) The Company shall fail in any material respect to perform or
observe any covenant or agreement in the Purchase Agreement, or any other
covenant, term, provision, condition, agreement or obligation of the Company
under this Debenture and such failure shall continue uncured for a period of
three (3) business days after notice from the Holder of such failure; or
(d) The Company shall (1) become insolvent; (2) admit in writing
its inability to pay its debts generally as they mature; (3) make an assignment
for the benefit of creditors or commence proceedings for its dissolution; or
(4) apply for or consent to the appointment of a trustee, liquidator or
receiver for it or for a substantial part of its property or business; or
(e) A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business without its
consent and shall not be discharged within thirty (30) days after such
appointment; or
(f) Any governmental agency or any court of competent jurisdiction
at the instance of any governmental agency shall assume custody or control of
the whole or any substantial portion of the properties or assets of the Company
and shall not be dismissed within thirty (30) days thereafter; or
(g) The Company shall sell or otherwise transfer all or
substantially all of its assets, if such sale or transfer is effected before
thirty (30) days have elapsed after the Effectiveness Date, such 30 days to be
extended one (1) day for each day after such date on which there is not
Effective Registration; or
(h) Bankruptcy, insolvency or liquidation proceedings or other
proceedings, under any bankruptcy law or any law for the relief of debt shall
be instituted by or against the Company and, if instituted against the Company
shall not be dismissed within thirty (30) days after such institution, or the
Company shall by any action or answer approve of, consent to, or acquiesce in
any such proceedings or admit to any material allegations of, or default in
answering a petition filed in any such proceeding; or
(i) The Company shall be in default of any of its indebtedness
that gives the holder thereof the right to accelerate $500,000 or more in such
indebtedness; or
(j) A "going private" transaction under Rule 13e-3 promulgated
pursuant to
<PAGE>
the Exchange Act shall have been announced; or
(k) A tender offer by the Company under Rule 13e-4 promulgated
pursuant to the Exchange Act shall have been announced;
THEN, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider the
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived, anything herein
or in any other instruments contained to the contrary notwithstanding, and the
Holder may immediately, and without expiration of any period of grace, enforce
any and all of the Holder's rights and remedies provided herein or any other
rights or remedies afforded by law. In such event, the Debenture shall be
redeemed at a redemption price per Debenture equal to 120% of the Outstanding
Principal Amount of the Debenture, plus accrued but unpaid interest and default
payments on the Debenture.
18. SAVINGS CLAUSE. In case any provision of this Debenture is held by
a court of competent jurisdiction to be excessive in scope or otherwise invalid
or unenforceable, such provision shall be adjusted rather than voided, if
possible, so that it is enforceable to the maximum extent possible, and the
validity and enforceability of the remaining provisions of this Debenture will
not in any way be affected or impaired thereby, and such provision shall remain
effective in all other jurisdictions.
19. ENTIRE AGREEMENT. This Debenture and the agreements referred to in
this Debenture constitute the full and entire understanding and agreement
between the Company and the Holder with respect to the subject hereof. Neither
this Debenture nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the Company and the
Holder.
20. ASSIGNMENT, ETC. The Holder may transfer or assign this Debenture
or any interest herein and may mortgage, encumber or transfer any of its rights
or interest in and to this Debenture or any part hereof upon the consent of the
Company (such consent not to be unreasonably withheld), and, without
limitation, each assignee, transferee and mortgagee (which may include any
affiliate of the Holder) shall have the right to transfer or assign its
interest. No such consent of the Company will be required for any transfer or
assignment to (i) an affiliate or affiliates of the Holder or (ii) any person
or entity whose investments are managed by an investment adviser that is the
same as, or an affiliate of, the investment manager of the Holder. Each such
assignee, transferee and mortgagee shall have all of the rights of the Holder
under this Debenture. The Company agrees that, subject to compliance with the
Purchase Agreement, after receipt by the Company of written notice of
assignment from the Holder or from the Holder's assignee, all principal,
interest and other amounts which are then and thereafter become due under this
Debenture shall be paid to such assignee at the place of payment designated in
such notice. This Debenture shall be binding upon the Company and its
successors and affiliates and shall inure to the benefit of the Holder and its
successors and assigns.
21. NO WAIVER. No failure on the part of the Holder to exercise, and
no delay in exercising any right, remedy or power hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by the Holder of any
right, remedy or power hereunder preclude any other or future exercise of any
other right, remedy or power. Each and every right, remedy or power hereby
granted to the Holder or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.
<PAGE>
22. CERTIFICATE FOR CONVERSION PRICE ADJUSTMENT. The Company shall,
upon the written request at any time of any Holder of Debentures, furnish or
cause to be furnished to such Holder a certificate prepared by the chief
financial officer of Company setting forth any adjustments or readjustments of
the Conversion Price pursuant to this Debenture.
23. NOTICES. The Company shall distribute to the Holders of Debentures
copies of all notices, materials, annual and quarterly reports, proxy
statements, information statements and any other documents distributed
generally to the holders of shares of Common Stock of the Company, at such
times and by such method as such documents are distributed to such holders of
such Common Stock, but shall not directly or indirectly provide material
non-public information to the Holder without such Holder's prior written
consent.
24. SPECIFIC ENFORCEMENT. The Company agrees that irreparable damage
would occur in the event that any of the provisions of this Debenture were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the Holders of Debentures shall be entitled to
swift specific performance, injunctive relief or other equitable remedies to
prevent or cure breaches of the provisions of this Debenture and to enforce
specifically the terms and provisions hereof, this being in addition to any
other remedy to which any of them may be entitled under agreement, at law or in
equity.
25. MISCELLANEOUS. Unless otherwise provided herein, any notice or
other communication to a party hereunder shall be sufficiently given if in
writing and personally delivered, facsimiled or mailed to said party by
certified mail, return receipt requested, at its address set forth herein or
such other address as either may designate for itself in such notice to the
other and communications shall be deemed to have been received when delivered
personally or, if sent by mail or facsimile, then when actually received by the
party to whom it is addressed. Whenever the sense of this Debenture requires,
words in the singular shall be deemed to include the plural and words in the
plural shall be deemed to include the singular. Paragraph headings are for
convenience only and shall not affect the meaning of this document.
26. GOVERNING LAW; CONSENT TO JURISDICTION. THIS DEBENTURE SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO CONTRACTS TO BE EXECUTED AND PERFORMED ENTIRELY
WITHIN SUCH STATE. THE COMPANY (I) HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURT LOCATED IN NEW YORK COUNTY, NEW
YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATED TO THIS DEBENTURE AND (II) HEREBY WAIVES, AND AGREES NOT TO ASSERT IN
ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY
SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION OR PROCEEDING
IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF THE SUIT, ACTION OR
PROCEEDING IS IMPROPER. THE COMPANY CONSENTS TO PROCESS BEING SERVED IN ANY
SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AS
PROVIDED IN AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT
SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING IN THIS PARAGRAPH SHALL AFFECT
OR LIMIT ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
DATED: ---------------------------------------
ZITEL CORPORATION
By: ------------------------------------------
Name:
Title:
Address: 47211 Bayside Parkway
Fremont, California 94538
[SIGNATURE PAGE TO 3% CONVERTIBLE SUBORDINATED DEBENTURE OF
ZITEL CORPORATION]
<PAGE>
EXHIBIT 1
(To be Executed by Registered Holder
in order to Convert Debenture)
CONVERSION NOTICE
FOR
3% CONVERTIBLE SUBORDINATED DEBENTURE DUE JUNE 15, 1999
The undersigned, as Holder of the 3% Convertible Subordinated Debenture Due
June 15, 1999 of ZITEL CORPORATION (the "Company"), in the outstanding
principal amount of U.S.$------------- (the "Debenture"), hereby irrevocably
elects to convert that portion of the outstanding principal amount of the
Debenture shown on the next page into shares of Common Stock, no par value per
share (the "Common Stock"), of the Company according to the conditions of the
Debenture, as of the date written below. The undersigned hereby requests that
share certificates for the Common Stock to be issued to the undersigned
pursuant to this Conversion Notice be issued in the name of, and delivered to,
the undersigned or its designee as indicated below. If shares are to be issued
in the name of a person other than the undersigned, the undersigned will pay
all transfer taxes payable with respect thereto. No fee will be charged to the
Holder for any conversion, except for transfer taxes, if any.
Holder acknowledges and confirms 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 Securities Act of 1933, if applicable, or pursuant
to an exemption under such Act.
Conversion Information: NAME OF HOLDER:---------------------------
By: ---------------------------------------
Print Name: -------------------------------
Print Title: ------------------------------
Print Address of Holder:
-------------------------------------------
-------------------------------------------
Issue Common Stock to: --------------------
at: --------------------------------------
Electronically transmit and credit Common Stock
to: ---------------------------------------
at: ---------------------------------------
-------------------------------------------
Date of Conversion
-------------------------------------------
Applicable Conversion Rate
THE COMPUTATION OF THE NUMBER OF COMMON SHARES TO
BE RECEIVED IS SET FORTH ON THE ATTACHED PAGE
<PAGE>
PAGE 2 TO CONVERSION NOTICE FOR: ---------------------------------------
(NAME OF HOLDER)
COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED
A. Outstanding Principal Amount converted: $----------
B. Accrued, unpaid interest on Outstanding
Principal Amount converted: $----------
C. Default payments due Holder: $----------
-----------------
TOTAL DOLLAR AMOUNT CONVERTED (TOTAL OF A + B + C) $----------
-----------------
-----------------
EXCHANGE PRICE $----------
Number of Shares of Common Stock = TOTAL DOLLAR AMOUNT CONVERTED = $-----------
Conversion Price $-----------
NUMBER OF SHARES OF COMMON STOCK = -------------
If the conversion is not being settled by DTC, please issue and deliver ----
certificate(s) for shares of Common Stock in the following amount(s):
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Please issue and deliver ------ new Debenture(s) in the following amounts:
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
EXHIBIT 2
COMMON STOCK STATEMENT
Date:-------------
To: [NAME OF HOLDER OF DEBENTURE] ("Holder")
RE: 3% CONVERTIBLE SUBORDINATED DEBENTURE DUE JUNE 15, 1999 ("DEBENTURE") OF
ZITEL CORPORATION (THE "COMPANY"), IN THE FACE PRINCIPAL AMOUNT OF US$--------.
In lieu of paying interest on the above-referenced Debenture in
coin or currency, the Company hereby elects to pay interest on the Debenture,
for the Interest Payment Date indicated below, by issuing to the Holder
registered Common Stock of the Company, no par value per share. The Company
will issue certificates for the Common Stock to be issued pursuant to this
Common Stock Statement in the name of, and will deliver the same to, the Holder
or its designee. If shares are to be issued in the name of a person other than
the Holder, the Holder will pay all transfer taxes payable with respect
thereto. No other fee will be charged to Holder. The Company hereby certifies
to the Holder, its successors and assigns that the Common Shares due pursuant
to this Common Stock Statement equals the amount indicated below. Capitalized
terms used in this Common Stock Statement and not otherwise defined shall have
the meaning ascribed thereto in the Debenture.
Interest Payment Date: -------------------
Interest Due to Holder on
Number of Shares of Common Stock = Interest Payment $------------
--------------------------
Conversion Price $------------
(determined as if Interest Payment Date were a Holder Conversion Date)
NUMBER OF SHARES OF COMMON STOCK = -------------------------
IN WITNESS WHEREOF, this Common Stock Statement has been duly executed
and delivered on the date first written above.
ZITEL CORPORATION
By: ------------------------------------
Print Name:
Print Title:
<PAGE>
EXHIBIT 1.1B
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR OFFERED FOR SALE
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
-----------------------------
June 16, 1998
ZITEL CORPORATION
-----------------------------
Common Stock Purchase Warrant
Zitel Corporation, a California corporation (the "COMPANY"), hereby
certifies that for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, [___________________________________________
_____________________________], having an address at [________________________
__________________________________________] ("PURCHASER") or any other Warrant
Holder is entitled, on the terms and conditions set forth below, to purchase
from the Company at any time beginning on the date hereof and ending on the
fifth anniversary of the Closing Date, as extended 1.5 times the number of days
between the 90th day following the Closing Date and such anniversary on which
there had been no Effective Registration, [150,000 IN THE AGGREGATE] fully paid
and nonassessable shares of Common Stock, no par value, of the Company (the
"COMMON STOCK"), at a purchase price per share of Common Stock equal to 130% of
the Conversion Price, as such term is defined in the Debenture and as such
Conversion Price may from time to time be adjusted pursuant to the terms of the
Debenture and the Agreement (the "PURCHASE PRICE"), as the same may be adjusted
pursuant to Section 5 herein.
1. DEFINITIONS.
(a) The term "AGREEMENT" shall mean the Convertible Debenture
Purchase Agreement dated as of June 16, 1998, between the Company and the
Investors signatory thereto.
(b) The term "APPROVED MARKET" shall mean the Nasdaq National
Market System, the American Stock Exchange or the New York Stock Exchange.
(c) The term "CLOSING BID PRICE" shall mean the last closing bid
price on the principal Approved Market as reported by Bloomberg Financial Market
or an equivalent reliable reporting service selected by the Warrant Holder and
the Company.
(d) The term "DEBENTURE" shall mean any of the Company's 3%
Convertible Subordinated Debentures due June 15, 1999.
(e) The term "EFFECTIVE REGISTRATION" shall have the meaning
specified in the Agreement.
<PAGE>
(f) The term "CLOSING DATE" shall mean the Closing Date as defined
in Section 1.1 under the Agreement OR the date of the Section 3.14 closing under
the Agreement, as relevant.
(g) The term "REGISTRATION RIGHTS AGREEMENT" shall mean the
Registration Rights Agreement, dated as of June 16, 1998, between the Company
and the Investors signatory thereto.
(h) The term "WARRANT HOLDER" shall mean the Purchaser or any
assignee of all or any portion of this Warrant.
(i) The term "WARRANT SHARES" shall mean the Shares of Common
Stock or other securities issuable upon exercise of this Warrant.
Capitalized terms used but not defined in this Warrant shall have the
meanings specified in the Agreement or the Debentures.
2. EXERCISE OF WARRANT.
This Warrant may be exercised by the Warrant Holder, in whole or in part,
at any time and from time to time by either of the following methods:
(a) The Warrant Holder may surrender this Warrant, together with the
form of subscription at the end hereof duly executed by Warrant Holder
("SUBSCRIPTION NOTICE"), at the offices of the Company or any transfer agent for
the Common Stock; or
(b) The Warrant Holder may also exercise this Warrant, in whole or in
part, in a "cashless" or "net-issue" exercise by delivering to the offices of
the Company or any transfer agent for the Common Stock this Warrant, together
with a Subscription Notice specifying the number of Warrant Shares to be
delivered to such Warrant Holder ("DELIVERABLE SHARES") and the number of
Warrant Shares with respect to which this Warrant is being surrendered in
payment of the aggregate Purchase Price for the Deliverable Shares ("SURRENDERED
SHARES"); provided that the Purchase Price multiplied by the number of
Deliverable Shares shall not exceed the value of the Surrendered Shares; and
provided further that the sum of the number of Deliverable Shares and the number
of Surrendered Shares so specified shall not exceed the aggregate number of
Warrant Shares represented by this Warrant. For the purposes of this provision,
each Warrant Share as to which this Warrant is surrendered will be attributed a
value equal to the fair market value (as defined below) of the Warrant Share
minus the Purchase Price of the Warrant Share.
In the event that the Warrant is not exercised in full, the number of
Warrant Shares shall be reduced by the number of such Warrant Shares for which
this Warrant is exercised and/or surrendered, and the Company, at its expense,
shall within three (3) Trading Days (as defined below) issue and deliver or upon
the order of Warrant Holder a new Warrant of like tenor in the name of Warrant
Holder or as Warrant Holder (upon payment by Warrant Holder of any applicable
transfer taxes) may request, reflecting such adjusted Warrant Shares.
3. DELIVERY OF STOCK CERTIFICATES.
(a) Subject to the terms and conditions of this Warrant, as soon
as practicable after the exercise of this Warrant in full or in part, and in any
event within three (3) Trading Days thereafter, the
<PAGE>
Company shall transmit the certificates (together with any other stock or
other securities or property to which Warrant Holder is entitled upon
exercise) by messenger or overnight delivery service to reach the address
designated by such holder within three (3) Trading Days after the receipt of
the Subscription Notice ("T+3"). If such certificates are not received by
the Warrant Holder within T+3, then the Warrant Holder will be entitled to
revoke and withdraw its exercise of its Warrant at any time prior to its
receipt of those certificates.
In lieu of delivering physical certificates representing
the Warrant Shares deliverable upon exercise of Warrants, provided the
Company's transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of
the Warrant Holder, the Company shall use its best efforts to cause its
transfer agent to electronically transmit the Warrant Shares issuable upon
exercise to the Warrant Holder, by crediting the account of Warrant Holder's
prime broker with DTC through its Deposit Withdrawal Agent Commission
("DWAC") system. The time periods for delivery described above shall apply
to the electronic transmittals through the DWAC system. The parties agree to
coordinate with DTC to accomplish this objective. The exchange pursuant to
Section 3 shall be deemed to have been made immediately prior to the close of
business on the date of the Subscription Notice. The person or persons
entitled to receive the Warrant Shares issuable upon such exercise shall be
treated for all purposes as the record holder or holders of such Common
Shares at the close of business on the date of the Subscription Notice.
The term Trading Day means (x) if the Common Stock is listed
on the New York Stock Exchange or the American Stock Exchange, a day on which
there is trading on such stock exchange, (y) if the Common Stock is not listed
on either of such stock exchanges but sale prices of the Common Stock are
reported on an automated quotation system, a day on which trading is reported on
the principal automated quotation system on which sales of the Common Stock are
reported, or (z) if the foregoing provisions are inapplicable, a day on which
quotations are reported by National Quotation Bureau Incorporated.
(b) This Warrant may not be exercised as to fractional shares of
Common Stock. In the event that the exercise of this Warrant, in full or in
part, would result in the issuance of any fractional share of Common Stock, then
in such event the Warrant Holder shall be entitled to cash equal to the fair
market value of such fractional share. For purposes of this Warrant, "FAIR
MARKET VALUE" shall equal the Closing Bid Price on the Approved Market which is
the principal trading exchange or market for the Common Stock (the "PRINCIPAL
MARKET") on the date of determination or, if the Common Stock is not listed or
admitted to trading on any Approved Market, the average of the closing bid and
asked prices on the over-the-counter market as furnished by any New York Stock
Exchange member firm reasonably selected from time to time by the Company for
that purpose and reasonably acceptable to the Warrant Holder, or, if the Common
Stock is not listed or admitted to trading on any Approved Market or traded
over-the-counter and the average price cannot be determined a contemplated
above, the fair market value of the Common Stock shall be as reasonably
determined in good faith by the Company's Board of Directors with the
concurrence of the Warrant Holder.
4. (A) REPRESENTATIONS AND COVENANTS OF THE COMPANY.
(a) The Company shall comply with its obligations under the
Registration Rights Agreement with respect to the Warrant Shares, including,
without limitation, the Company's obligation to have filed and declared and
maintained effective a registration statement registering the Warrant Shares
under the Securities Act of 1933, as amended (the "ACT").
(b) The Company shall take all necessary action and proceedings as
may be required and permitted by applicable law, rule and regulation, including,
without limitation, the notification of the Principal
<PAGE>
Market, for the legal and valid issuance of this Warrant and the Warrant
Shares to the Warrant Holder under this Warrant.
(c) From the date hereof through the last date on which this
Warrant is exercisable, the Company shall take all steps necessary to insure
that the Common Stock remains listed on the Principal Market.
(d) The Warrant Shares, when issued in accordance with the terms
hereof, will be duly authorized and, when paid for or issued in accordance with
the terms hereof, shall be validly issued, fully paid and non-assessable. The
Company has authorized and reserved for issuance to Warrant Holder the requisite
number of shares of Common Stock to be issued pursuant to this Warrant.
(e) The Company shall at all times reserve and keep available,
solely for issuance and delivery as Warrant Shares hereunder the number of
shares specified in Section 3.10 of the Purchase Agreement.
(f) With a view to making available to the Warrant Holder the
benefits of Rule 144 promulgated under the Act and any other rule or regulation
of the Securities and Exchange Commission ("SEC") that may at any time permit
Warrant Holder to sell securities of the Company to the public without
registration, the Company agrees to use its best efforts to:
i) make and keep public information available, as
those terms are understood and defined in Rule 144, at all times;
ii) file with the SEC in a timely manner all reports
and other documents required of the Company under the Act and the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT");
and
iii) furnish to any Warrant Holder forthwith upon
request a written statement by the Company that it has complied
with the reporting requirements of Rule 144 and of the Act and
the Exchange Act, a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents so
filed by the Company as may be reasonably requested to permit
any such Warrant Holder to take advantage of any rule or
regulation of the SEC permitting the selling of any such
securities without registration.
(B) REPRESENTATIONS AND COVENANTS OF THE PURCHASER.
The Purchaser shall not resell this Warrant or the Warrant Shares,
unless such resale is pursuant to an effective registration statement under the
Act or pursuant to an applicable exemption from such registration requirements.
5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number of
and kind of securities purchasable upon exercise of this Warrant and the
Purchase Price shall be subject to adjustment from time to time as follows:
(a) SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the
Company shall at any time after the date hereof but prior to the expiration of
this Warrant subdivide its outstanding securities as to which
<PAGE>
purchase rights under this Warrant exist, by split-up, spin-off, or
otherwise, or combine its outstanding securities as to which purchase rights
under this Warrant exist, the number of Warrant Shares as to which this
Warrant is exercisable as of the date of such subdivision, split-up, spin-off
or combination shall forthwith be proportionately increased in the case of a
subdivision, or proportionately decreased in the case of a combination.
Appropriate proportional adjustments (decrease in the case of subdivision,
increase in the case of combination) shall also be made to the Purchase Price
payable per share, so that the aggregate Purchase Price payable for the total
number of Warrant Shares purchasable under this Warrant as of such date shall
remain the same as it would have been before such subdivision or combination.
(b) STOCK DIVIDEND. If at any time after the date hereof the
Company declares a dividend or other distribution on Common Stock payable in
Common Stock or other securities or rights convertible into or exchangeable for
Common Stock ("COMMON STOCK EQUIVALENTS") without payment of any consideration
by holders of Common Stock for the additional shares of Common Stock or the
Common Stock Equivalents (including the additional shares of Common Stock
issuable upon exercise or conversion thereof), then the number of shares of
Common Stock for which this Warrant may be exercised shall be increased as of
the record date (or the date of such dividend distribution if no record date is
set) for determining which holders of Common Stock shall be entitled to receive
such dividends, in proportion to the increase in the number of outstanding
shares (and shares of Common Stock issuable upon conversion of all such
securities convertible into Common Stock) of Common Stock as a result of such
dividend, and the Purchase Price shall be proportionately reduced so that the
aggregate Purchase Price for all the Warrant Shares issuable hereunder
immediately after the record date (or on the date of such distribution, if
applicable), for such dividend shall equal the aggregate Purchase Price so
payable immediately before such record date (or on the date of such
distribution, if applicable).
(c) OTHER DISTRIBUTIONS. If at any time after the date hereof the
Company distributes to holders of its Common Stock, other than as part of its
dissolution, liquidation or the winding up of its affairs, any shares of its
capital stock, any evidence of indebtedness or any of its assets (other than
Common Stock), then the number of Warrant Shares for which this Warrant is
exercisable shall be increased to equal: (i) the number of Warrant Shares for
which this Warrant is exercisable immediately prior to such event, (ii)
multiplied by a fraction, (A) the numerator of which shall be the fair market
value per share of Common Stock on the record date for the dividend or
distribution, and (B) the denominator of which shall be the fair market value
per share of Common Stock on the record date for the dividend or distribution
minus the amount allocable to one share of Common Stock of the value (as
determined in good faith by the Board of Directors of the Company) of any and
all such evidences of indebtedness, shares of capital stock, other securities or
property, so distributed. If the value of the distribution exceeds 10% of the
value of the outstanding Common Stock, at the request of Warrant Holders holding
an aggregate of at least 100,000 Warrants , the valuation described in the
preceding sentence shall be determined, at the Company's expense, by a
nationally recognized investment banking firm or other nationally recognized
financial advisor retained by the Company with the approval of the Warrant
Holder. The Purchase Price shall be reduced to equal: (i) the Purchase Price in
effect immediately before the occurrence of any event (ii) multiplied by a
fraction, (A) the numerator of which is the number of Warrant Shares for which
this Warrant is exercisable immediately before the adjustment, and (B) the
denominator of which is the number of Warrant Shares for which this Warrant is
exercisable immediately after the adjustment.
(d) MERGER, ETC. If at any time after the date hereof there shall
be a merger or consolidation of the Company with or into or a transfer of all or
substantially all of the assets of the Company to another entity, then the
Warrant Holder shall be entitled to receive upon or after such transfer, merger
or consolidation becoming effective, and upon payment of the Purchase Price then
in effect, the number of shares
<PAGE>
or other securities or property of the Company or of the successor
corporation resulting from such merger or consolidation, which would have
been received by Warrant Holder for the shares of stock subject to this
Warrant had this Warrant been exercised just prior to such transfer, merger
or consolidation becoming effective or to the applicable record date thereof,
as the case may be. The Company will not merge or consolidate with or into
any other corporation, or sell or otherwise transfer its property, assets and
business substantially as an entirety to another corporation, unless the
corporation resulting from such merger or consolidation (if not the Company),
or such transferee corporation, as the case may be, shall expressly assume,
by supplemental agreement, the due and punctual performance and observance of
each and every covenant and condition of this Warrant to be performed and
observed by the Company, as adjusted to preserve the economic benefits
receivable by the Warrant Holder upon exercise.
(e) RECLASSIFICATION, ETC. If at any time after the date hereof
there shall be a reorganization or reclassification of the securities as to
which purchase rights under this Warrant exist into the same or a different
number of securities of any other class or classes, then the Warrant Holder
shall thereafter be entitled to receive upon exercise of this Warrant, during
the period specified herein and upon payment of the Purchase Price then in
effect, the number of shares or other securities or property resulting from such
reorganization or reclassification, which would have been received by the
Warrant Holder for the shares of stock subject to this Warrant had this Warrant
at such time been exercised.
(f) PURCHASE PRICE ADJUSTMENT. In the event that within twelve
(12) months of the Closing Date the Company issues or sells any Common Stock or
securities which are convertible into or exchangeable for its Common Stock or
any convertible securities, or any warrants or other rights to subscribe for or
to purchase or any options for the purchase of its Common Stock or any such
convertible securities (other than shares or options issued or which may be
issued pursuant to the Company's current employee or director option plans or
stock purchase plans, at prices consistent with past practice, or shares issued
upon exercise of options, warrants or rights outstanding on the date of the
Agreement and listed in Section 2(c) of the Company's Disclosure Schedule) at an
effective purchase price per share which is less than the greater of the
Purchase Price then in effect or the fair market value (as defined in Section
3(b) above) of the Common Stock on the trading day next preceding such issue or
sale, then in each such case, the Purchase Price in effect immediately prior to
such issue or sale shall be reduced effective concurrently with such issue or
sale to an amount determined by multiplying the Purchase Price then in effect by
a fraction, (x) the numerator of which shall be the sum of (1) the number of
shares of Common Stock outstanding immediately prior to such issue or sale, plus
(2) the number of shares of Common Stock which the aggregate consideration
received by the Company for such additional shares would purchase at such fair
market value or, Purchase Price as the case may be, then in effect; and (y) the
denominator of which shall be the number of shares of Common Stock of the
Company outstanding immediately after such issue or sale.
For the purposes of the foregoing adjustment, in the case of the
issuance of any convertible securities, warrants, options or other rights to
subscribe for or to purchase or exchange for, shares of Common Stock
("CONVERTIBLE SECURITIES"), the maximum number of shares of Common Stock
issuable upon exercise, exchange or conversion of such Convertible Securities
shall be deemed to be outstanding, provided that no further adjustment shall
be made upon the actual issuance of Common Stock upon exercise, exchange or
conversion of such Convertible Securities.
The number of shares which may be purchased hereunder shall be
increased proportionately to any reduction in Purchase Price pursuant to this
paragraph 5(f), so that after such adjustments the aggregate Purchase Price
payable hereunder for the increased number of shares shall be the same as the
aggregate Purchase Price in effect just prior to such adjustments.
<PAGE>
In the event of any such issuance for a consideration which is less
than such fair market value and also less than the Purchase Price then in
effect, than there shall be only one such adjustment by reason of such issuance,
such adjustment to be that which results in the greatest reduction of the
Purchase Price computed as aforesaid.
6. NO IMPAIRMENT. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Warrant Holder
against impairment. Without limiting the generality of the foregoing, the
Company (a) will not increase the par value of any Warrant Shares above the
amount payable therefor on such exercise, and (b) will take all such action as
may be reasonably necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable Warrant Shares on the exercise of
this Warrant.
7. NOTICE OF ADJUSTMENTS. Whenever the Purchase Price or number of
Shares purchasable hereunder shall be adjusted pursuant to Section 5 hereof, the
Company shall execute and deliver to the Warrant Holder a certificate setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated and the
Purchase Price and number of shares purchasable hereunder after giving effect to
such adjustment, and shall cause a copy of such certificate to be mailed (by
first class mail, postage prepaid) to the Warrant Holder.
8. RIGHTS AS STOCKHOLDER. Prior to exercise of this Warrant, the
Warrant Holder shall not be entitled to any rights as a stockholder of the
Company with respect to the Warrant Shares, including (without limitation) the
right to vote such shares, receive dividends or other distributions thereon or
be notified of stockholder meetings. However, in the event of any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Company shall mail to
each Warrant Holder, at least 10 Trading Days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
9. LIMITATION ON EXERCISE. Notwithstanding anything to the contrary
contained herein, this Warrant may not be exercised by the Warrant Holder to the
extent that, after giving effect to Warrant Shares to be issued pursuant to a
Subscription Notice, the total number of shares of Common Stock deemed
beneficially owned by such holder (other than by virtue of ownership of this
Warrant, or ownership of other securities that have limitations on the holder's
rights to convert or exercise similar to the limitations set forth herein),
together with all shares of Common Stock deemed beneficially owned by the
holder's "affiliates" (as defined in Rule 144 of the Act) that would be
aggregated for purposes of determining whether a group under Section 13(d) of
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") exists,
would exceed the Warrant Holder's Restricted Ownership Percentage specified on
Schedule I to the Agreement; PROVIDED that (w) each Warrant Holder shall have
the right at any time and from time to time to reduce its Restricted Ownership
Percentage immediately upon notice to the Company or in the event of a Change in
Control Transaction, (x) each Warrant Holder shall have the right at any time
and from time to time to increase its Restricted Ownership Percentage or
otherwise waive in whole or in part the restrictions of this Section 9 upon 61
days' prior notice to the Company or immediately in the event of a Change in
Control Transaction, (y) each Warrant Holder can
<PAGE>
make subsequent adjustments pursuant to (w) or (x) any number of times from
time to time (which adjustment shall be effective immediately if it results
in a decrease in the Restricted Ownership Percentage or shall be effective
upon 61 days' prior written notice or immediately in the event of a Change in
Control Transaction if it results in an increase in the Restricted Ownership
Percentage) and (z) each Warrant Holder may eliminate or reinstate this
limitation at any time and from time to time (which elimination will be
effective upon 61 days' prior notice and which reinstatement will be
effective immediately). Without limiting the foregoing, in the event of a
Change in Control Transaction, any holder may reinstate immediately (in whole
or in part) the requirement that any increase in its Restricted Ownership
Percentage be subject to 61 days' prior written notice, notwithstanding such
Change in Control Transaction, without imposing such requirement on, or
otherwise changing such holder's rights with respect to, any other Change in
Control Transaction. For this purpose, any material modification of the
terms of a Change in Control Transaction will be deemed to create a new
Change in Control Transaction. The term "DEEMED BENEFICIALLY OWNED" as used
in this Warrant shall exclude shares that might otherwise be deemed
beneficially owned by reason of the convertibility of the Preferred Shares.
A "CHANGE IN CONTROL TRANSACTION" will be deemed to have occurred upon the
earlier of the announcement or consummation of a transaction or series of
transactions (other than the Merger) involving (x) any consolidation or
merger of the Company with or into any other corporation or other entity or
person (whether or not the Company is the surviving corporation), or any
other corporate reorganization or transaction or series of related
transactions in which in excess of 50% of the Company's voting power is
transferred through a merger, consolidation, tender offer or similar
transaction, or (y) in excess of 50% of the Corporation's Board of Directors
consists of directors not nominated by the prior Board of Directors of the
Company, or (z) any person (as defined in Section 13(d) of the Exchange Act,
together with its affiliates and associates (as such terms are defined in
Rule 405 under the Act), beneficially owns or is deemed to beneficially own
(as described in Rule 13d-3 under the Exchange Act without regard to the
60-day exercise period) in excess of 50% of the Company's voting power. The
delivery of a Subscription Notice by the Warrant Holder shall be deemed a
representation by such holder that it is in compliance with this paragraph.
10. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of such Warrant, the Company at its
expense promptly will execute and deliver, in lieu thereof a new Warrant of like
tenor.
11. SPECIFIC PERFORMANCE; CONSENT TO JURISDICTION; CHOICE OF LAW
(a) The Company and the Warrant Holder acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Warrant were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall he entitled
to an injunction or injunctions to prevent or cure breaches of the provisions of
this Warrant and to enforce specifically the terms and provisions hereof, this
being in addition to any other remedy to which either of them may be entitled by
law or equity.
<PAGE>
(b) EACH OF THE COMPANY AND THE WARRANT HOLDER (I) HEREBY
IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL
COURTS LOCATED IN NEW YORK COUNTY, NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION
OR PROCEEDING ARISING OUT OF OR RELATING TO THIS WARRANT AND (II) HEREBY WAIVES,
AND AGREES NOT TO ASSERT IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT
IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE SUIT,
ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF
THE SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH OF THE COMPANY AND THE WARRANT
HOLDER CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING
BY MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO
IT UNDER THIS WARRANT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND
SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING IN THIS PARAGRAPH
SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED
BY APPLICABLE LAW.
(c) THE COMPANY AND THE WARRANT HOLDER IRREVOCABLY WAIVE THEIR
RIGHT TO TRIAL BY JURY.
(d) THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS EXECUTED AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE.
12. ENTIRE AGREEMENT; AMENDMENTS. This Warrant, the Exhibits hereto and
the provisions contained in the Agreement or the Registration Rights Agreement
or the Debentures contain the entire understanding of the parties with respect
to the matters covered hereby and thereby and, except as specifically set forth
herein and therein, neither the Company nor the Warrant Holder 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 a written
instrument signed by the party against whom enforcement of any such amendment or
waiver is sought.
13. NOTICES. Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be effective (a) upon hand
delivery or delivery by telex (with correct answer back received), telecopy or
facsimile at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be:
to the Company:
Zitel Corporation
47211 Bayside Parkway
Fremont, California 94538
Attention: Chief Financial Officer
Facsimile: (510) 440-8526
<PAGE>
to the Warrant Holder:
Attention:
Facsimile:
with copies to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue, 18th Floor
New York, New York 10176
Attention: Stephen M. Schultz, Esq.
Facsimile: (212) 986-8866
Either party hereto may from time to time change its address for notices under
this Section 13 by giving at least 10 days' prior written notice of such changed
address to the other party hereto.
14. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. The headings in this Warrant are for purposes of reference only, and
shall not limit or otherwise affect any of the terms hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or
enforceability of any other provision.
15. ASSIGNMENT. This Warrant may be transferred or assigned, in whole
or in part, at any time and from time to time by the then Warrant Holder upon
the consent of the Company (which consent shall not be unreasonably withheld) by
submitting this Warrant to the Company together with a duly executed Assignment
in substantially the form and substance of the Form of Assignment which
accompanies this Warrant and, upon the Company's receipt hereof, and in any
event, within three (3) business days thereafter, the Company shall issue a
Warrant to the Warrant Holder to evidence that portion of this Warrant, if any
as shall not have been so transferred or assigned. No consent of the Company
will be required for any transfer or assignment by the Warrant Holder to (i) an
affiliate or affiliates of the Warrant Holder or (ii) any person or entity whose
investments are managed by an investment adviser that is the same as, or an
affiliate of, the investment manager of the Warrant Holder.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
Dated: ZITEL CORPORATION
By:
------------------------------------
Name:
Title:
[CORPORATE SEAL]
Attest:
By:
-----------------------------------
Its
(SIGNATURE PAGE OF ZITEL CORPORATION COMMON STOCK PURCHASE WARRANT)
<PAGE>
(SUBSCRIPTION NOTICE)
FORM OF WARRANT EXERCISE
(TO BE SIGNED ONLY ON EXERCISE OF WARRANT)
TO: ZITEL CORPORATION
ATTN: SECRETARY
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant:
_____ (A) for, and to purchase thereunder, __________ shares of Common
Stock of Zitel Corporation, a California corporation (the
"COMMON STOCK"), and herewith, or by wire transfer, makes
payment of $_____________ therefor; or
_____ (B) in a "cashless" or "net-issue exercise" for, and to purchase
thereunder , ______ shares of Common Stock, and herewith
makes payment therefor with ___________ Surrendered
Warrant Shares.
The undersigned requests that the certificates for such shares be issued
in the name of, and
_____ (A) delivered to ______________, whose address is ______________
_________________________________; or
_____ (B) electronically transmitted and credited to the account of
_________________, undersigned's prime broker (Account No.
____________________) with Depository Trust Company through
its Deposit Withdrawal Agent Commission system.
The undersigned acknowledges and confirms that the Common Stock issued
pursuant to this notice of exercise has been sold or will be sold in accordance
with the prospectus delivery requirements of the Securities Act of 1933, as
amended, if applicable, or pursuant to an exemption under such Act.
Dated:
----------------
-----------------------------------------
(Signature must conform to name of holder
as specified on the face of the Warrant)
-----------------------------------------
(Address)
Tax Identification Number:
--------------
<PAGE>
-----------------------------
FORM OF ASSIGNMENT
(TO BE SIGNED ONLY ON TRANSFER OF WARRANT)
For value received, the undersigned hereby sells, assigns, and transfers unto
__________________ the right represented by the within Warrant to purchase
_________ shares of Common Stock of ZITEL CORPORATION, a California
corporation, to which the within Warrant relates, and appoints _______________
Attorney to transfer such right on the books of ZITEL CORPORATION, a
California corporation, with full power of substitution of premises.
Dated:
-------------------
-----------------------------------------
(Signature must conform to name of holder
as specified on the face of the Warrant)
-----------------------------------------
(Address)
Signed in the presence of:
- ---------------------------------------
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of
June 16, 1998 between ZITEL CORPORATION, a California corporation with
offices at 47211 Bayside Parkway, Fremont, California 94538 (the "Company")
and each of the entities listed under "Investors" on the signature page
hereto (each an "Investor" and collectively the "Investors"), each with
offices at the address listed under such Investor's name on Schedule I hereto.
W I T N E S S E T H:
WHEREAS, pursuant to that certain Convertible Subordinated Debenture
Purchase Agreement by and between the Company and the Investors (the
"Purchase Agreement"), the Company initially has agreed to sell and issue to
the Investors, and the Investors have agreed to purchase from the Company, an
aggregate of $10 million principal amount of the Company's 3% Convertible
Subordinated Debentures (the "Initial Debentures" and, together with the Put
Debentures, the "Debentures") on the terms and conditions set forth therein;
WHEREAS, the Purchase Agreement contemplates that, subject to certain
terms and conditions, the Company shall have the right to sell to the
Investors an aggregate of $10 million principal amount of additional
debentures (the "Put Debentures") and the Company shall issue to the
Investors an aggregate of 150,000 additional Warrants; and
WHEREAS, the Purchase Agreement contemplates that the Debentures will
be convertible into shares (the "Common Shares") of common stock, no par
value, of the Company ("Common Stock") pursuant to the terms and conditions
set forth in the Debentures; and
WHEREAS, pursuant to the terms of, and in partial consideration for,
the Investors' agreement to enter into the Purchase Agreement, the Company
has agreed to issue the Warrants exercisable for Warrant Shares and to
provide the Investors with certain registration rights with respect to the
Common Shares and Warrant Shares and certain other rights and remedies with
respect to the Debentures as set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in the
Purchase Agreement and this Agreement, the Company and the Investors agree as
follows:
1. CERTAIN DEFINITIONS. Capitalized terms used herein and not
otherwise defined shall have the meaning ascribed thereto in the Purchase
Agreement, Warrants or the Debentures. As used in this Agreement, the
following terms shall have the following respective meanings:
"CLOSING" and "CLOSING DATE" shall have the meanings ascribed to such
terms in the Purchase
<PAGE>
Agreement.
"COMMISSION" or "SEC" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
"OUTSTANDING PRINCIPAL AMOUNT" shall have the meaning ascribed to such
term in the Debentures.
"REGISTRABLE SECURITIES" shall mean: (i) the Common Shares and
Warrants Shares issued to each Holder or its permitted transferee or designee
upon conversion of the Debentures or exercise of the Warrants, as applicable,
or upon any stock split, stock dividend, recapitalization or similar event
with respect to such Common Shares or Warrant Shares; (ii) any securities
issued or issuable to each Holder upon the conversion, exercise or exchange
of any Debentures, Warrants, Warrant Shares, or Common Shares; and (iii) any
other security of the Company issued as a dividend or other distribution with
respect to, conversion or exchange of or in replacement of Registrable
Securities.
The terms "REGISTER", "REGISTEREDTM" and "REGISTRATION" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the effectiveness
of such registration statement.
"REGISTRATION EXPENSES" shall mean all expenses to be incurred by the
Company in connection with each Holder's registration rights under this
Agreement, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, blue
sky fees and expenses, reasonable fees and disbursements of counsel to
Holders (using a single counsel selected by a majority in interest of the
Holders) for a "due diligence" examination of the Company and review of the
Registration Statement and related documents, and the expense of any special
audits incident to or required by any such registration (but excluding the
compensation of regular employees of the Company, which shall be paid in any
event by the Company).
"SELLING EXPENSES" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and all fees and
disbursements of counsel for Holders not included within "Registration
Expenses".
"HOLDER" and "HOLDERS" shall include an Investor or the Investors,
respectively, and any transferee of the Debentures, Warrants, Warrant Shares or
Common Shares or Registrable Securities which have not been sold to the public
to whom the registration rights conferred by this Agreement have been
transferred in compliance with this Agreement.
"REGISTRATION STATEMENT" shall have the meaning set forth in Section 2(a)
herein.
"REGULATION D" shall mean Regulation D as promulgated pursuant to the
Securities Act, and as subsequently amended.
"SECURITIES ACT" or "ACT" shall mean the Securities Act of 1933, as
amended.
"WARRANTS" shall mean the warrants in form and substance of EXHIBIT 1.1B
to the Purchase Agreement between the Company and the Investors, dated as of the
date hereof.
<PAGE>
"WARRANT SHARES" shall mean shares of Common Stock of the Company
issued and issuable upon exercise of the Warrant.
2. REGISTRATION REQUIREMENTS. The Company shall use its best
efforts to effect the registration of the Registrable Securities (including
without limitation the execution of an undertaking to file post-effective
amendments, appropriate qualification under applicable blue sky or other
state securities laws and appropriate compliance with applicable regulations
issued under the Securities Act) as would permit or facilitate the sale or
distribution of all the Registrable Securities in the manner (including
manner of sale) and in all states reasonably requested by the Holder. Such
best efforts by the Company shall include the following:
(a) The Company shall, as expeditiously as reasonably
possible after the Closing Date:
(i) But in any event within 30 days thereafter, prepare
and file a registration statement with the Commission pursuant to
Rule 415 under the Securities Act on Form S-3 under the Securities
Act (or in the event that the Company is ineligible to use such
form, such other form as the Company is eligible to use under the
Securities Act) covering the Registrable Securities ("Registration
Statement"). Such Registration Statement shall, in addition and
without limitation, register (pursuant to Rule 416 under the
Securities Act, or otherwise) such additional indeterminate number
of Registrable Securities as shall be necessary to permit the
conversion in full of the Debentures and the issuance of
additional shares of Common Stock to Holders pursuant to the
various reset provisions of the Debentures. Thereafter, the
Company shall use its best efforts to cause such Registration
Statement and other filings to be declared effective as soon as
possible, and in any event prior to 90 days following the Closing
Date. The Company shall provide Holders and their legal counsel
reasonable opportunity to review any such Registration Statement
or amendment or supplement thereto prior to filing.
(ii) Prepare and file with the SEC such amendments and
supplements to such Registration Statement and the prospectus used
in connection with such Registration Statement as may be necessary
to comply with the provisions of the Act with respect to the
disposition of all securities covered by such Registration
Statement and notify the Holders of the filing and effectiveness
of such Registration Statement and any amendments or supplements.
(iii) Furnish to each Holder such numbers of copies of a
current prospectus conforming with the requirements of the Act,
copies of the Registration Statement, any amendment or supplement
thereto and any documents incorporated by reference therein and
such other documents as such Holder may reasonably require in
order to facilitate the disposition of Registrable Securities
owned by such Holder.
(iv) Use its best efforts to register and qualify the
securities covered by such Registration Statement under such other
securities or
<PAGE>
"Blue Sky" laws of such jurisdictions as shall be reasonably
requested by each Holder; provided that the Company shall not
be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service
of process in any such states or jurisdictions.
(v) Notify each Holder immediately of the happening of
any event as a result of which the prospectus (including any
supplements thereto or thereof) included in such Registration
Statement, as then in effect, includes an untrue statement of
material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing, and use
its best efforts to promptly update and/or correct such
prospectus.
(vi) Notify each Holder immediately of the issuance by
the Commission or any state securities commission or agency of any
stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose.
The Company shall use its best efforts to prevent the issuance of
any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible time.
(vii) Permit a single firm of counsel, designated as
Holders' counsel by a majority of the Registrable Securities
included in the Registration Statement, to review the Registration
Statement and all amendments and supplements thereto within a
reasonable period of time prior to each filing, and shall not file
any document in a form to which such counsel reasonably objects.
(viii) Use its best efforts to list the Registrable
Securities covered by such Registration Statement with all
securities exchange(s) and/or markets on which the Common Stock is
then listed and prepare and file any required filings with the
National Association of Securities Dealers, Inc. or any exchange
or market where the Common Shares are traded.
(ix) Take all steps necessary to enable Holders to avail
themselves of the prospectus delivery mechanism set forth in Rule
153 (or successor thereto) under the Act.
(b) Set forth below in this Section 2(b) are (I) events that
may arise that the Investors consider will interfere with the full enjoyment
of their rights under the Debentures, the Purchase Agreement and this
Agreement (the "Interfering Events"), and (II) certain remedies applicable in
each of these events.
Paragraphs (i) through (iv) of this Section 2(b)
describe the Interfering Events, provide a remedy to the Investors if an
Interfering Event occurs and provide that the Investors may require that the
Company redeem outstanding Debentures at a specified price if certain
Interfering Events are not timely cured.
<PAGE>
Paragraph (v) provides, INTER ALIA, that if cash
payments required as the remedy in the case of certain of the Interfering
Events are not paid when due, the Company may be required by the Investors to
redeem outstanding Debentures at a specified price.
Paragraph (vi) provides, INTER ALIA, that the Investors
have the right to specific performance.
The preceding paragraphs in this Section 2(b) are meant
to serve only as an introduction to this Section 2(b), are for convenience
only, and are not to be considered in applying, construing or interpreting
this Section 2(b).
(i) DELAY IN EFFECTIVENESS OF REGISTRATION STATEMENT.
The Company agrees that it shall file the Registration Statement
complying with the requirements of this Agreement promptly and in
any event within 30 days following the date of the initial closing
of the Purchase Agreement (the "Closing Date") and shall use its
best efforts to cause such Registration Statement to become
effective as soon as possible and in any event within 90 days from
the Closing Date. In the event that such Registration Statement
has not been declared effective within 90 days from the Closing
Date, then the percentage (initially 90%) employed to determine
the "Conversion Price" pursuant to Section 5(c) of the Debentures
and all Conversion Price resets pursuant to Sections 5(d) and 5(e)
of the Debentures (the "Agreed Percentage") shall be reduced by 1%
during and after the 30-day period ("Default Period") from and
after the 90th day following the Closing Date during any part of
which such Registration Statement is not effective, and such
Agreed Percentage shall be further reduced by an additional 1.5%
during and after each Default Period thereafter. For example, if
the Registration Statement does not become effective until 120
days from the Closing Date, the Agreed Percentage from and after
day 91 shall be equal to 89%. If the Registration Statement is
not effective until the 150th day after the Closing Date, the
Agreed Percentage from and after day 121 from the Closing Date
shall be 87.5%. In each case, the Agreed Percentage and the
Conversion Price shall be subject to further adjustment as set
forth in the Debenture and the Purchase Agreement. If the
Registration Statement has not been declared effective within 120
days after the Closing Date, then each Holder shall have the right
in its sole discretion to sell its Debentures, Common Shares
and/or Warrant Shares to the Company (in whole or in part) at a
price in immediately available funds (the "Premium Redemption
Price") equal to (A) as to the Debentures, 1.3 times (i.e., 130%
of) the Outstanding Principal Amount of the Debentures plus any
accrued but unpaid or unrecognized interest or default payments
and (B) as to the Common Shares and/or Warrant Shares, 1.3 times
the dollar amount which is the product of (x) the number of shares
so to be redeemed pursuant to this paragraph, and (y) the fair
market value of such shares (as defined in the Debentures) at the
time such shares were received pursuant to conversion of
Debentures or exercise of Warrants. Payment of such amount shall
be
<PAGE>
due and payable within 3 business days of demand therefor,
which demand shall be revocable by the Holder at any time prior to
its actual receipt of the Premium Redemption Price.
(ii) NO LISTING; PREMIUM PRICE REDEMPTION FOR DELISTING
OF CLASS OF SHARES.
(A) In the event that the Company fails, refuses
or is unable to cause the Registrable Securities covered by the
Registration Statement to be listed with the Approved Market and
each other securities exchange and market on which the Common
Stock is then traded at all times during the period ("Listing
Period") commencing the earlier of the effective date of the
Registration Statement or the 90th day following the Closing Date,
and continuing thereafter for so long as the Debentures are
outstanding, then the Company shall pay in cash to each Holder a
default payment at a rate (the "Default Payment Rate") equal to
two percent (2%) of the sum of (x) the Outstanding Principal
Amount of, (y) the accrued but unpaid interest on, plus (z) the
accrued but unpaid or unrecognized default payments on the
Debentures (the "Debenture Amount") held by such Holder for each
30-day period (or portion thereof) during the Listing Period from
and after such failure, refusal or inability to so list the
Registrable Securities until the Registrable Securities are so
listed.
(B) In the event that shares of Common Stock of
the Company are delisted from the Approved Market at any time
following the Closing Date and remain delisted for 5 consecutive
days, then at the option of each Holder and to the extent such
Holder so elects, the Company shall on 2 business days notice
redeem the Debentures and/or Common Shares and/or Warrant Shares
held by such Holder, in whole or in part, at a redemption price
equal to the Premium Redemption Price (as defined above);
provided, however, that such Holder may revoke such request at any
time prior to receipt of such payment of such redemption price.
Default payments shall no longer accrue on Debentures after such
shares have been redeemed by the Company pursuant to the foregoing
provision.
(iii) BLACKOUT PERIODS. In the event any Holder's ability
to sell Registrable Securities under the Registration Statement is
suspended:
(A) for more than (i) five (5) consecutive days or
(ii) ten (10) days in any calendar year ("Suspension Grace
Period"), including without limitation by reason of a suspension
of trading of the Common Stock on the Approved Market, any
suspension or stop order with respect to the Registration
Statement or the fact that an event has occurred as a result of
which the prospectus (including any supplements thereto) included
in such Registration Statement then in effect includes an untrue
statement of material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then
existing; or
(B) for more than (i) fifteen (15) consecutive days
or (ii) twenty (20) days in
<PAGE>
any calendar year ("Corporate Event Suspension Grace Period"),
by reason of any corporate event, including, without limitation,
a merger, acquisition or disposition;
then the Company shall pay in cash to each Holder a default
payment at the Default Payment Rate of the Debenture Amount for
the Debentures held by such Holder for each 30-day period (or
portion thereof) from and after the expiration of the Suspension
Grace Period or Corporate Event Suspension Grace Period.
Alternatively, a Holder shall have the right but not the
obligation to have the Company redeem its Debentures and Common
Shares and Warrant Shares at the price and on the terms (and
subject to the right to revoke) set forth in Section 2(b)(i)
above.
(iv) CONVERSION DEFICIENCY; PREMIUM PRICE REDEMPTION FOR
CONVERSION DEFICIENCY. In the event that the Company does not
have a sufficient number of Common Shares available to satisfy the
Company's obligations to any Holder upon receipt of a Conversion
Notice (as defined in the Debenture) or is otherwise unable or
unwilling to issue such Common Shares (including without
limitation by reason of the limit described in Section 10 below)
in accordance with the terms of the Debenture for any reason after
receipt of a Conversion Notice, then:
(A) The Company shall pay in cash to each Holder
a default payment at the Default Payment Rate on the Debenture
Amount for the Debentures held by such Holder for each 30-day
period (or portion thereof) that the Company fails or refuses to
issue Common Shares in accordance with the Debenture terms; and
(B) At any time five days after the commencement
of the running of the first 30-day period described above in
clause (A) of this paragraph (iv), at the request of any Holder
pursuant to a redemption notice, the Company promptly (1) shall
purchase from such Holder, at a purchase price equal to the
Premium Redemption Price, the Debenture Amount of Debentures equal
to such Holder's pro rata share of the "Deficiency", as such terms
are defined below, if the failure to issue Common Shares results
from the lack of a sufficient number thereof and (2) shall
purchase all (or such portion as such Holder may elect) of such
Holder's Debentures at such Premium Redemption Price if the
failure to issue Common Shares results from any other cause. The
"Deficiency" shall be equal to the Debenture Amount of Debentures
that would not be able to be converted for Common Shares, due to
an insufficient number of Common Shares available, if all the
outstanding Debentures were submitted for conversion at the
Conversion Price set forth in the Debentures as of the date such
Deficiency is determined. Any request by a Holder pursuant to
this paragraph (iv)(B) shall be revocable by that Holder at any
time prior to its receipt of the Premium Redemption Price.
(v) PREMIUM PRICE REDEMPTION FOR CASH PAYMENT DEFAULTS.
<PAGE>
(A) the Company acknowledges that any failure,
refusal or inability by the Company described in the foregoing
paragraphs (i) through (iv) will cause the Holders to suffer
damages in an amount that will be difficult to ascertain,
including without limitation damages resulting from the loss of
liquidity in the Registrable Securities and the additional
investment risk in holding the Registrable Securities.
Accordingly, the parties agree that it is appropriate to include
in this Agreement the foregoing provisions for default payments,
discounts and mandatory redemptions in order to compensate the
Holders for such damages. The parties acknowledge and agree that
the default payments, discounts and mandatory redemptions set
forth above represent the parties' good faith effort to quantify
such damages and, as such, agree that the form and amount of such
default payments, discounts and mandatory redemptions are
reasonable and will not constitute a penalty.
(B) Each default payment provided for in the
foregoing paragraphs (ii) through (iv) shall be in addition to
each other default payment; provided, however, that in no event
shall the Company be obligated to pay to any Holder default
payments in an aggregate amount greater than the Default Payment
Rate of the Debenture Amount of the Debentures held by such Holder
for any 30-day period (or portion thereof). All default payments
(which payments shall be pro rata on a per diem basis for any
period of less than 30 days) required to be made in connection
with the above provisions shall be paid in cash at any time upon
demand, and whether or not a demand is made, by the tenth (10th)
day of each calendar month for each partial or full 30-day period
occurring prior to that date. Until paid as required in this
Agreement, default payments shall be deemed added to, and a part
of, the Outstanding Principal Amount of a Holder's Debentures.
(C) In the event that the Company fails or refuses
to pay any default payment or honor any default adjustments of the
Agreed Percentage when due, at any Holder's request and option the
Company shall purchase all or a portion of the Debentures, Common
Shares and/or Warrant Shares held by such Holder (with default
payments accruing through the date of such purchase), within five
(5) days of such request, at a purchase price equal to the Premium
Redemption Price (as defined above), provided that such Holder may
revoke such request at any time prior to receipt of such payment
of such purchase price. Until such time as the Company purchases
such Debentures at the request of such Holder pursuant to the
preceding sentence, at any Holder's request and option the Company
shall as to such Holder pay such amount by adding and including
the amount of such default payment to the Outstanding Principal
Amount of a Holder's Debentures.
(vi) CUMULATIVE REMEDIES. The default payments and
mandatory redemptions provided for above are in addition to and
not in lieu
<PAGE>
or limitation of any other rights the Holders may have at law,
in equity or under the terms of the Debentures, the Purchase
Agreement, the Warrants or this Agreement, including without
limitation the right to specific performance. Each Holder
shall be entitled to specific performance of any and all
obligations of the Company in connection with the registration
rights of the Holders hereunder.
(c) If the Holder(s) intend to distribute the Registrable
Securities by means of an underwriting, the Holder(s) shall so advise the
Company. Any such underwriting may only be administered by investment
bankers reasonably satisfactory to the Company. The Company shall only be
obligated to permit one underwritten offering, which offering shall be
determined by a majority-in-interest of the Holders.
(d) The Company shall enter into such customary agreements
for secondary offerings (including a customary underwriting agreement with
the underwriter or underwriters, if any) and take all such other reasonable
actions reasonably requested by the Holders in connection therewith in order
to expedite or facilitate the disposition of such Registrable Securities.
When Registrable Securities are to be sold in an underwritten offering the
Company shall:
(i) make such representations and warranties to the
Holders and the underwriter or underwriters, if any, in form,
substance and scope as are customarily made by issuers to
underwriters and holders in secondary offerings;
(ii) cause to be delivered to the sellers of Registrable
Securities and the underwriter or underwriters, if any, opinions
of independent counsel to the Company, on and dated as of the
Effectiveness Date, which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the Holders and the
underwriter(s), if any, and their counsel and covering, without
limitation, such matters as are customarily given to underwriters
and holders in underwritten offerings, addressed to the Holders
and each underwriter, if any;
(iii) cause to be delivered, immediately prior to the
effectiveness of the Registration Statement (and at the time of
delivery of any Registrable Securities sold pursuant thereto), a
"comfort" letter from the Company's independent certified public
accountants addressed to the Holders and each underwriter, if any,
stating that such accountants are independent public accountants
within the meaning of the Securities Act and the applicable
published rules and regulations thereunder, and otherwise in
customary form and covering such financial and accounting matters
as are customarily covered by letters of the independent certified
public accountants delivered in connection with registered
offerings;
(iv) the underwriting agreement shall include customary
indemnification and contribution provisions to and from the
underwriters and procedures for secondary underwritten offerings;
and
<PAGE>
(v) deliver such documents and certificates as may be
reasonably requested by the Holders of the Registrable Securities
being sold or the managing underwriter or underwriters, if any, to
evidence compliance with clause (i) above and with any customary
conditions contained in the underwriting agreement, if any.
(e) The Company shall make available for inspection by the
Holders, representative(s) of all the Holders together, any underwriter
participating in any disposition pursuant to a Registration Statement, and
any attorney or accountant retained by any Holder or underwriter, all
financial and other records customary for purposes of the Holders' due
diligence examination of the Company and review of any Registration
Statement, all SEC Documents (as defined in the Purchase Agreement) filed
subsequent to the Closing, pertinent corporate documents and properties of
the Company, and cause the Company's officers, directors and employees to
supply all information reasonably requested by any such representative,
underwriter, attorney or accountant in connection with such Registration
Statement, provided that such parties agree to keep such information
confidential.
(f) Subject to Section 2(b) above, the Company may suspend
the use of any prospectus used in connection with the Registration Statement
only in the event, and for such period of time as, such a suspension is
required by the rules and regulations of the Commission. The Company will
use its best efforts to cause such suspension to terminate at the earliest
possible date.
(g) The Company shall file a Registration Statement with
respect to any newly authorized and/or reserved shares within five (5)
business days of any shareholders meeting authorizing same and shall use its
best efforts to cause such Registration Statement to become effective within
sixty (60) days of such shareholders meeting. If the Holders become
entitled, pursuant to an event described in clause (iii) of the definition of
Registrable Securities, to receive any securities in respect of Registrable
Securities that were already included in a Registration Statement, subsequent
to the date such Registration Statement is declared effective, and the
Company is unable under the securities laws to add such securities to the
then effective Registration Statement, the Company shall promptly file, in
accordance with the procedures set forth herein, an additional Registration
Statement with respect to such newly Registrable Securities. The Company
shall use its best efforts to (i) cause any such additional Registration
Statement, when filed, to become effective under the Securities Act, and (ii)
keep such additional Registration Statement effective during the period
described in Section 5 below. All of the registration rights and remedies
under this Agreement shall apply to the registration of such newly reserved
shares and such new Registrable Securities, including without limitation the
provisions providing for default payments contained herein.
3. EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration, qualification or compliance with registration
pursuant to this Agreement shall be borne by the Company, and all Selling
Expenses of a Holder shall be borne by such Holder.
4. REGISTRATION ON FORM S-3. The Company shall use its best efforts
to qualify for registration on Form S-3 or any comparable or successor form or
forms, or in the event that the Company is ineligible to use such form, such
form as the Company is eligible to use under the Securities Act.
5. REGISTRATION PERIOD. In the case of the registration effected by
the Company pursuant to this Agreement, the Company will use its best efforts to
keep such registration effective until the later of (a) the first anniversary of
the issue of the Debenture and Warrant and (b) the date upon which all shares of
Common
<PAGE>
Stock issuable upon conversion of the Debentures have been sold freely
without restriction.
6. INDEMNIFICATION.
(a) THE COMPANY INDEMNITY. The Company will indemnify each
Holder, each of its officers, directors and partners, and each person
controlling each Holder, within the meaning of Section 15 of the Securities
Act and the rules and regulations thereunder with respect to which
registration, qualification or compliance has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls, within
the meaning of Section 15 of the Securities Act and the rules and regulations
thereunder, any underwriter, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained
in any prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by the Company of the Securities Act or any state securities law or
in either case, any rule or regulation thereunder applicable to the Company
and relating to action or inaction required of the Company in connection with
any such registration, qualification or compliance, and will reimburse each
Holder, each of its officers, directors and partners, and each person
controlling such Holder, each such underwriter and each person who controls
any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating and defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in
any such case to a Holder to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by such
Holder or the underwriter (if any) therefor and stated to be specifically for
use therein. The indemnity agreement contained in this Section 6(a) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent will not be unreasonably withheld).
(b) HOLDER INDEMNITY. Each Holder will, severally and not
jointly, if Registrable Securities held by it are included in the securities
as to which such registration, qualification or compliance is being effected,
indemnify the Company, each of its directors, officers, partners, and each
underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act and the
rules and regulations thereunder, each other Holder (if any), and each of
their officers, directors and partners, and each person controlling such
other Holder(s) against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any such
registration statement, prospectus, offering circular or other document, or
any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statement therein not
misleading, and will reimburse the Company and such other Holder(s) and their
directors, officers and partners, underwriters or control persons for any
legal or any other expenses reasonably incurred in connection with
investigating and defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information
furnished to the Company by such Holder and stated to be specifically for use
therein, and provided that the maximum amount for which such Holder shall be
liable under this indemnity shall not exceed the net proceeds received by
such Holder from the sale of the Registrable Securities. The indemnity
agreement contained in this Section 6(b) shall not apply to amounts paid in
settlement of any such claims, losses, damages or liabilities if such
settlement is effected without the consent of
<PAGE>
such Holder (which consent shall not be unreasonably withheld).
(c) PROCEDURE. Each party entitled to indemnification under
this Article (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly after
such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to assume
the defense of any such claim in any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or any litigation resulting therefrom, shall be approved by the
Indemnified Party (whose approval shall not be unreasonably withheld), and
the Indemnified Party may participate in such defense at such party's
expense, and provided further that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Article except to the extent that the Indemnifying
Party is materially and adversely affected by such failure to provide notice.
No Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party, consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably
request in writing and as shall be reasonably required in connection with the
defense of such claim and litigation resulting therefrom.
7. CONTRIBUTION. If the indemnification provided for in Section 6
herein is unavailable to the Indemnified Parties in respect of any losses,
claims, damages or liabilities referred to herein (other than by reason of
the exceptions provided therein), then each such Indemnifying Party, in lieu
of indemnifying such Indemnified Party, shall contribute to the amount paid
or payable by such Indemnified Party as a result of such losses, claims,
damages or liabilities as between the Company on the one hand and any Holder
on the other, in such proportion as is appropriate to reflect the relative
fault of the Company and of such Holder in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative fault of
the Company on the one hand and of any Holder on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state
a material fact relates to information supplied by the Company or by such
Holder.
In no event shall the obligation of any Indemnifying Party to
contribute under this Section 7 exceed the amount that such Indemnifying
Party would have been obligated to pay by way of indemnification if the
indemnification provided for under Section 6(a) or 6(b) hereof had been
available under the circumstances.
The Company and the Holders agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Holders or the underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraphs. The amount paid or payable by an Indemnified Party as
a result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraphs shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred
by such Indemnified Party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this section, no
Holder or underwriter shall be required to contribute any amount in excess of
the amount by which (i) in the case of any Holder, the net proceeds received
by such Holder from the sale of Registrable Securities or (ii) in the case of
an underwriter, the total price at which the Registrable Securities purchased
by it and distributed to the public were offered to the public exceeds, in
any such case, the amount of any damages that such Holder or underwriter has
otherwise been
<PAGE>
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
8. SURVIVAl. The indemnity and contribution agreements contained
in Sections 6 and 7 and the representations and warranties of the Company
referred to in Section 2(d)(i) shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement or the Purchase
Agreement or any underwriting agreement, (ii) any investigation made by or on
behalf of any Indemnified Party or by or on behalf of the Company, and (iii)
the consummation of the sale or successive resales of the Registrable
Securities.
9. INFORMATION BY HOLDERS. Each Holder shall furnish to the
Company such information regarding such Holder and the distribution and/or
sale proposed by such Holder as the Company may reasonably request in writing
and as shall be reasonably required in connection with any registration,
qualification or compliance referred to in this Agreement. The intended
method or methods of disposition and/or sale (Plan of Distribution) of such
securities as so provided by such Investor shall be included without
alteration in the Registration Statement covering the Registrable Securities
and shall not be changed without written consent of such Holder.
10. NASDAQ LIMIT ON STOCK ISSUANCES. Section 7(g) of the Debenture
shall govern limits imposed by NASDAQ rules on the conversion of Debentures
or the exercise of Warrants.
11. REPLACEMENT CERTIFICATES. The certificate(s) representing the
Common Shares or Warrant Shares held by any Investor (or then Holder) may be
exchanged by such Investor (or such Holder) at any time and from time to time
for certificates with different denominations representing an equal aggregate
number of Common Shares or Warrant Shares, as reasonably requested by such
Investor (or such Holder) upon surrendering the same. No service charge will
be made for such registration or transfer or exchange.
12. TRANSFER OR ASSIGNMENT. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties
and their successors and permitted assigns. The rights granted to the
Investors by the Company under this Agreement to cause the Company to
register Registrable Securities may be transferred or assigned (in whole or
in part) to a transferee or assignee of Debentures or Warrants, and all other
rights granted to the Investors by the Company hereunder may be transferred
or assigned to any transferee or assignee of any Debentures or Warrants;
provided in each case that the Company must be given written notice by the
such Investor at the time of or within a reasonable time after said transfer
or assignment, stating the name and address of said transferee or assignee
and identifying the securities with respect to which such registration rights
are being transferred or assigned; and provided further that the transferee
or assignee of such rights agrees in writing to be bound by the registration
provisions of this Agreement.
<PAGE>
13. MISCELLANEOUS.
(a) REMEDIES. The Company and the Investors acknowledge and
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent or cure
breaches of the provisions of this Agreement and to enforce specifically the
terms and provisions hereof, this being in addition to any other remedy to
which any of them may be entitled by law or equity.
(b) JURISDICTION. THE COMPANY AND EACH OF THE INVESTORS (I)
HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES
DISTRICT COURT, THE NEW YORK STATE COURTS AND OTHER COURTS OF THE UNITED
STATES SITTING IN NEW YORK COUNTY, NEW YORK FOR THE PURPOSES OF ANY SUIT,
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND (II)
HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH SUIT ACTION OR
PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION
OF SUCH COURT, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN
INCONVENIENT FORUM OR THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS
IMPROPER. THE COMPANY AND EACH OF THE INVESTORS CONSENTS TO PROCESS BEING
SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO
SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT
AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF
PROCESS AND NOTICE THEREOF. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR LIMIT
ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
(c) NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing by facsimile, mail or
personal delivery and shall be effective upon actual receipt of such notice.
The addresses for such communications shall be:
to the Company:
Zitel Corporation
47211 Bayside Parkway
Fremont, California 94538
Attention: Chief Financial Officer
Facsimile: (510) 440-8526
to the Investors:
To each Investor at the address and/or fax number set forth
on Schedule I of this Agreement.
with copies to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Facsimile: (212) 986-8866
<PAGE>
Attention: Stephen M. Schultz, Esq.
Any party hereto may from time to time change its address for notices by
giving at least 10 days' written notice of such changed address to the other
parties hereto.
(d) INDEMNITY. Each party shall indemnify each other party
against any loss, cost or damages (including reasonable attorney's fees)
incurred as a result of such parties' breach of any representation, warranty,
covenant or agreement in this Agreement.
(e) WAIVERS. No waiver by any party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission
of any party to exercise any right hereunder in any manner impair the
exercise of any such right accruing to it thereafter. The representations
and warranties and the agreements and covenants of the Company and each
Investor contained herein shall survive the Closing.
(f) EXECUTION. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same
agreement, it being understood that all parties need not sign the same
counterpart.
(g) PUBLICITY. The Company agrees that it will not
disclose, and will not include in any public announcement, the name of any
Investor without its consent, unless and until such disclosure is required by
law or applicable regulation, and then only to the extent of such
requirement. The Company agrees that a copy of any public announcement
(other than the filing of the Purchase Agreement as an Exhibit on Form 8-K)
regarding the matters covered by this Agreement or any agreement or document
executed herewith and any public announcement including the name of an
Investor will be approved by each Investor, prior to the publication of such
announcements. Notwithstanding the foregoing, on the Closing Date the
Company may issue a public announcement stating only that (a) the Company has
completed a $10,000,000 financing of convertible debentures with an
institutional investor, and that (b) the convertible debentures are subject
to a conversion price fixed pursuant to a formula which includes a 10%
discount.
(h) ENTIRE AGREEMENT. This Agreement, together with the
Purchase Agreement, the Debentures and the Warrants and the agreements and
documents contemplated hereby and thereby, contains the entire understanding
and agreement of the parties, and may not be modified or terminated except by
a written agreement signed by both parties.
(i) GOVERNING LAW; CONSENT OF JURISDICTION. THIS AGREEMENT
AND THE VALIDITY AND PERFORMANCE OF THE TERMS HEREOF SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED ENTIRELY IN
SUCH STATE.
(j) SEVERABILITY. The parties acknowledge and agree that
the Investors are not agents, affiliates or partners of each other, that all
representations, warranties, covenants and agreements of the Investors
hereunder are several and not joint, that no Investor shall have any
responsibility or liability for the representations, warrants, agreements,
acts or omissions of any other Investor, and that any rights granted to
"Investors" hereunder shall be enforceable by each Investor hereunder.
<PAGE>
(k) JURY TRIAL. EACH PARTY HERETO WAIVES THE RIGHT TO A TRIAL
BY JURY.
(l) TITLES. The titles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting
this Agreement.
[ SIGNATURE PAGES FOLLOW ]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
ZITEL CORPORATION:
By:
--------------------------
Name:
Title:
INVESTORS:
HALIFAX FUND, L.P.
By: THE PALLADIN GROUP, L.P.
Attorney-in-Fact
By:
---------------------------------
Name: Robert Chender
Title: Managing Director
PALLADIN PARTNERS I, L.P.
By: PALLADIN ASSET MANAGEMENT, L.L.C.
General Partner
By:
---------------------------------
Name:
Title:
<PAGE>
PALLADIN OVERSEAS FUND LIMITED
By: THE PALLADIN GROUP, L.P.
Attorney-in-Fact
By:
----------------------------------
Name: Robert Chender
Title: Managing Director
THE GLENEAGLES FUND COMPANY
By: THE PALLADIN GROUP, L.P.
Attorney-in-Fact
By:
---------------------------------
Name: Robert Chender
Title: Managing Director
PALLADIN SECURITIES, LLC
By:
---------------------------------
Name: Robert Chender
Title: Principal
COLONIAL PENN LIFE INSURANCE COMPANY
By: THE PALLADIN GROUP, L.P.
Attorney-in-Fact
By:
---------------------------------
Name: Robert Chender
Title: Managing Director
<PAGE>
[SIGNATURE PAGE TO ZITEL CORPORATION REGISTRATION RIGHTS AGREEMENT]
<PAGE>
SCHEDULE I
NAME OF PURCHASER NAME OF PURCHASER
- ------------------- -----------------
HALIFAX FUND, L.P. PALLADIN PARTNERS I, L.P.
c/o The Palladin Group, L.P. c/o Palladin Asset Management, LLC
Investment Manager 40 West 57th Street
40 West 57th Street New York, New York 10019
New York, New York 10019 Attn: Kevin Gerlitz
Attn: Kevin Gerlitz
Tel: (212) 698-0500
Tel: (212) 698-0500 Fax: (212) 698-0599
Fax: (212) 698-0599
PALLADIN OVERSEAS FUND LIMITED THE GLENEAGLES FUND COMPANY
c/o The Palladin Group, L.P. c/o The Palladin Group, L.P.
Investment Manager Investment Manager
40 West 57th Street 40 West 57th Street
New York, New York 10019 New York, New York 10019
Attn: Kevin Gerlitz Attn: Kevin Gerlitz
Tel: (212) 698-0500 Tel: (212) 698-0500
Fax: (212) 698-0599 Fax: (212) 698-0599
PALLADIN SECURITIES, LLC COLONIAL PENN LIFE INSURANCE COMPANY
40 West 57th Street c/o The Palladin Group, L.P.
New York, New York 10019 Investment Manager
Attn: Kevin Gerlitz 40 West 57th Street
New York, New York 10019
Tel: (212) 698-0500 Attn: Kevin Gerlitz
Fax: (212) 698-0599
Tel: (212) 698-0500
Fax: (212) 698-0599
<PAGE>
CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGREEMENT
CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGREEMENT ("AGREEMENT") dated
as of June 16, 1998 between Zitel Corporation, a California corporation (the
"COMPANY"), and each person or entity listed as an investor on SCHEDULE I
attached to this Agreement (each individually an "INVESTOR" and collectively the
"INVESTORS").
W I T N E S S E T H:
WHEREAS, the Company desires to sell and issue to the Investors, and the
Investors wish to purchase from the Company, 3% Convertible Subordinated
Debentures due June 15, 1999 (the "Debentures"), in the aggregate principal
amount of $10,000,000 at an aggregate price of $10,000,000, having the rights
and privileges set forth in the Debentures in the form of EXHIBIT 1.1A attached
hereto (the "Initial Issuance"), on the terms and conditions set forth herein;
and
WHEREAS, the Company may require the Investors to purchase additional
Debentures in the aggregate principal amount of $10,000,000 pro rata to their
investments in the Initial Issuance during the six (6) months following the
effective registration of the shares issuable upon conversion of the Debentures
and the exercise of the Warrants (as defined below) as described herein;
WHEREAS, the Debentures will be convertible into shares ("COMMON SHARES")
of common stock, no par value of the Company ("COMMON STOCK"), pursuant to the
terms of the Debentures, and the Investors will have registration rights with
respect to such Common Shares and the Warrant Shares (as defined herein),
pursuant to the terms of that certain Registration Rights Agreement to be
entered into between the Company and the Investors substantially in the form of
EXHIBIT 4.2(f) hereto ("REGISTRATION RIGHTS AGREEMENT"); and
WHEREAS, to induce the Investors to purchase the Debentures, the Company
has agreed to issue to the Investors warrants exercisable for 150,000 shares of
Common Stock, and upon purchase of the additional Debentures, the Company will
issue to the Investors warrants exercisable for 150,000 shares of Common Stock
pro rata to their investments in the Initial Issuance, in the form attached as
EXHIBIT 1.1B (the "WARRANTS");
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
<PAGE>
ARTICLE I
PURCHASE AND SALE OF DEBENTURES AND WARRANTS
Section 1.1 ISSUANCE OF DEBENTURES AND WARRANTS. Upon the following
terms and conditions, the Company shall issue and sell to each Investor
severally, and each Investor severally shall purchase from the Company, the
outstanding principal amount of Debentures indicated next to such Investor's
name on SCHEDULE I attached hereto.
(a) INITIAL ISSUANCE. Upon the following terms and conditions,
the Company shall issue and sell to each Investor severally, and each Investor
severally shall purchase from the Company, the principal amount of Debentures
and the number of Warrants indicated next to such Investor's name on SCHEDULE I
attached hereto.
(b) PURCHASE PRICE. The purchase price for the Debentures to
be acquired by each Investor (the "PURCHASE PRICE") shall be the Purchase Price
set forth next to such Investor's name on SCHEDULE I.
(c) THE CLOSING.
(i) The closing of the purchase and sale of the
Debentures and the Warrants (the "Closing"), shall take place at
10:00 am., local time on the later of the following: (x) June 16,
1998, (y) the date on which the last to be fulfilled or waived of
the conditions set forth in Article IV hereof and applicable to
the Closing shall be fulfilled or waived in accordance herewith,
or (z) such other time and place and/or on such other date as the
Investors and the Company may agree. The date on which the
Closing occurs is referred to herein as the "Closing Date".
(ii) On the Closing Date, the Company shall deliver to
each Investor (x) certificates (with the number of and outstanding
principal amount of such certificates requested by such Investor)
representing the Debentures purchased hereunder by such Investor
at the Closing registered in the name of such Investor or its
nominee and (y) the Warrants registered in the name of Investor or
its nominee in such denominations as reasonably requested by such
Investor, and such Investor shall deliver to the Company the
Purchase Price for the Debentures purchased by such Investor
hereunder by wire transfer in immediately available funds to an
account designated in writing by the Company. The delivery of
payment by each Investor of the Purchase Price applicable to it as
set forth in this paragraph shall constitute a payment delivered
to the Company in satisfaction of such Investor's obligation to
pay the Purchase Price hereunder. In addition, each party shall
deliver all documents, instruments and writings required to be
delivered by such party pursuant to this Agreement at or prior to
the applicable Closing. Notwithstanding anything to the contrary
herein, the Closing may be conducted through LaSalle National
Bank, 135 South LaSalle Street, Chicago, Illinois 60603 (the
"Escrow Agent") as set forth in that certain escrow agreement
dated as of June 15, 1998 among the Company, the Escrow Agent and
Rochon Capital
<PAGE>
Company, Ltd.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby makes the following representations and warranties to each of the
Investors as of the date hereof and on each Closing Date:
(a) ORGANIZATION AND QUALIFICATION; MATERIAL ADVERSE EFFECT.
The Company is a corporation duly incorporated and existing in good standing
under the laws of the State of California and has the requisite corporate power
to own its properties and to carry on its business as now being conducted. The
Company does not have any direct or indirect subsidiaries other than the
subsidiaries listed in Section 2.1(a) of the Company's disclosure schedule
delivered to the Investors and attached hereto (the "Disclosure Schedule").
Except where specifically indicated to the contrary, all references in this
Agreement to subsidiaries shall be deemed to refer to all direct and indirect
subsidiaries of the Company. The Company 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 or property owned by it makes such
qualification necessary other than those in which the failure so to qualify
would not have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any
adverse effect on the business, operations, properties, prospects, or financial
condition of the entity with respect to which such term is used and which is
(either alone or together with all other adverse effects) material to such
entity and other entities controlling or controlled by such entity taken as a
whole, and any material adverse effect on the transactions contemplated under
this Agreement, the Registration Rights Agreement or any other agreement or
document contemplated hereby or thereby.
(b) AUTHORIZATION; ENFORCEMENT. (i) The Company has all
requisite corporate power and authority to enter into and perform this
Agreement, the Warrants and the Registration Rights Agreement and to issue the
Debentures and Warrants in accordance with the terms hereof and thereof, (ii)
the execution and delivery of this Agreement, the Warrants and the Registration
Rights Agreement by the Company and the consummation by it of the transactions
contemplated hereby and thereby, including the issuance of the Debentures, the
Common Shares and the Warrant Shares have been duly authorized by all necessary
corporate action, and no further consent or authorization of the Company or its
Board of Directors (or any committee or subcommittee thereof) or stockholders is
required, (iii) this Agreement, the Warrants, the Debentures and the
Registration Rights Agreement have been duly executed and delivered by the
Company, and (iv) this Agreement, the Warrants, the Debentures and the
Registration Rights Agreement constitute valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of creditors' rights and remedies or by
other equitable principles of general application.
(c) CAPITALIZATION. As of June 10, 1998, the authorized
capital stock of the Company consisted of 40,000,000 shares of Common Stock and
1,000,000 shares of preferred stock; there are 17,746,606 shares of Common Stock
and no shares of preferred stock issued and outstanding; and 2,872,852
<PAGE>
shares of Common Stock and no shares of preferred stock are reserved for
issuance to persons other than the Investors and the holders of the Company's
5% Convertible Subordinated Debentures due 1999. After the Closing,
2,872,852 shares of Common Stock and no shares of preferred stock will be
reserved for issuance to persons other than the Investors and the holders of
the Company's 5% Convertible Subordinated Debentures due 1999. All of the
outstanding shares of the Company's Common Stock and preferred stock have
been validly issued and are fully paid and nonassessable. No shares of
capital stock are entitled to preemptive rights; and there are as of the date
hereof outstanding options for 2,250,726 shares of Common Stock and no
outstanding warrants for shares of Common Stock (excluding the Warrants).
Except as set forth in Section 2.1(c) of the Disclosure Schedule, there are
no other scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights exchangeable for or
convertible into, any shares of capital stock of the Company, or contracts,
commitments, understandings, or arrangements by which the Company is or may
become bound to issue additional shares of capital stock of the Company or
options, warrants, scrip, rights to subscribe to, or commitments to purchase
or acquire, any shares, or securities or rights convertible or exchangeable
into shares, of capital stock of the Company. Attached hereto as EXHIBIT
2.1(c)(i) is a true and correct copy of the Company's Articles of
Incorporation (the "CHARTER"), as in effect on the date hereof, and attached
hereto as EXHIBIT 2.1(c)(ii) is a true and correct copy of the Company's
By-Laws, as in effect on the date hereof (the "BY-LAWS").
(d) ISSUANCE OF COMMON SHARES. The Common Shares and the
shares of Common Stock issuable upon the exercise of the Warrants (the "WARRANT
SHARES") are duly authorized and reserved for issuance and, upon such conversion
in accordance with the Debentures and/or exercise in accordance with the
Warrants such Common Shares and Warrant Shares will be validly issued, fully
paid and non-assessable, free and clear of any and all liens, claims and
encumbrances, and entitled to be traded on the Nasdaq National Market System
("NASDAQ NMS") (or the American Stock Exchange or the New York Stock Exchange,
collectively with the Nasdaq NMS, the "APPROVED MARKETS"), and the holders of
such Common Shares and Warrant Shares shall be entitled to all rights and
preferences accorded to a holder of Common Stock. The outstanding shares of
Common Stock are currently listed on the Nasdaq NMS.
(e) NO CONFLICTS. The execution, delivery and performance of
this Agreement, the Registration Rights Agreement and the Warrants by the
Company and the consummation by the Company of the transactions contemplated
hereby and thereby and the issuance of the Debentures and the Warrants do not
and will not (i) result in a violation of the Company's Charter or By-Laws or
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture, patent, patent license or instrument to which the Company
or any of its subsidiaries is a party, or (iii) result in a violation of any
federal, state, local or foreign 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. The business of
the Company and its direct and indirect subsidiaries is being conducted in
material compliance with all applicable laws, ordinances or regulations of any
governmental entity. The Company is not required under Federal, state, local or
foreign law, rule or regulation to obtain any consent, authorization or order
of, or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement, the Registration Rights Agreement, the Debentures and the Warrants or
issue and sell the Debentures in accordance with the terms hereof and issue the
Common Shares upon conversion thereof and issue the Warrant Shares on exercise
of the Warrants and for the registration provisions provided in the Registration
Rights Agreement, except as specified herein and in the Registration Rights
Agreement and the Warrant.
<PAGE>
(f) SEC DOCUMENTS; NO NON-PUBLIC INFORMATION; FINANCIAL
STATEMENTS. The Common Stock of the Company is registered pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")
and the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the Securities and Exchange Commission
("SEC") pursuant to the reporting requirements of the Exchange Act, including
material filed pursuant to Section 13(a) or 15(d), in addition to one or more
registration statements and amendments thereto heretofore filed by the Company
with the SEC (all of the foregoing including filings incorporated by reference
therein being referred to herein as the "SEC DOCUMENTS"). The Company has
delivered or made available to the Investors true and complete copies of all SEC
Documents (including, without limitation, proxy information and solicitation
materials and registration statements) filed with the SEC since September 30,
1997, all annual SEC Documents filed with the SEC since September 30, 1996, and
all press releases issued by the Company since September 30, 1997 as set forth
in Section 2.1(f) of the Disclosure Schedule (the "Press Releases"). The
Company has not directly or indirectly provided to the Investor any information
that currently constitutes material non-public information or any information
which, according to applicable law, rule or regulation, should have been
disclosed publicly by the Company but which has not been so disclosed. As of
their respective dates, the SEC Documents complied in all material respects with
the requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such SEC Documents, and none of the SEC Documents
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. The SEC Documents and Press Releases contain all material
information concerning the Company, and no event or circumstance has occurred
which would require the Company to disclose such event or circumstance in order
to make the statements in the SEC Documents and the Press Releases not
misleading on the date hereof or on the Closing Date but which has not been so
disclosed. The financial statements of the Company included in the SEC
Documents comply as to form and substance in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC or other applicable rules and regulations with respect thereto. Such
financial statements have been prepared in accordance with United States
generally accepted accounting principles (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 financial position of the Company as of the dates thereof and the
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).
(g) PRINCIPAL EXCHANGE/MARKET. The principal market on which
the Common Stock is currently traded is the Nasdaq NMS.
(h) NO MATERIAL ADVERSE CHANGE. Since September 30, 1997, no
Material Adverse Effect has occurred or exists, and no event or circumstance
which has not been disclosed in the SEC Documents and Press Releases has
occurred that with notice or the passage of time or both is reasonably likely to
result in a Material Adverse Effect with respect to the Company or its
subsidiaries.
(i) NO UNDISCLOSED LIABILITIES. Except as disclosed in Section
2.1(i) of the Company Disclosure Schedule, the Company and its subsidiaries have
no liabilities or obligations not disclosed in the SEC Documents or the Press
Releases, other than those liabilities incurred in the ordinary course of the
Company's or its subsidiaries' respective businesses since September 30, 1997,
which liabilities, individually or in the aggregate, do not or would not have a
Material Adverse Effect on the Company or its direct or indirect
<PAGE>
subsidiaries.
(j) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. No event or
circumstance has occurred or exists with respect to the Company or its direct or
indirect subsidiaries or their respective businesses, properties, prospects,
operations or financial condition, which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company but which
has not been so publicly announced or disclosed.
(k) NO GENERAL SOLICITATION. Neither the Company, nor any of
its affiliates, or, to its knowledge, any person acting on its or their behalf
has engaged in any form of general solicitation or general advertising (within
the meaning of Regulation D under the Securities Act of 1933, as amended (the
"Act")) in connection with the offer or sale of the Debentures or Common Shares.
(l) NO INTEGRATED OFFERING. Neither the Company, nor any of
its affiliates, nor to its knowledge any person acting on its or their behalf
has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would require
registration of the Debentures, the Warrants or the Common Shares or Warrant
Shares under the Act.
The issuance of the Debentures, Warrants, Common Shares, or
Warrant Shares to the Investors will not be integrated with any other issuance
of the Company's securities (past, current or future) which requires stockholder
approval under the rules of the Nasdaq NMS.
(m) FORM S-3. The Company is eligible to file a Registration
Statement (as defined in the Registration Rights Agreement) on Form S-3 under
the Act and rules promulgated thereunder for transactions involving secondary
offerings, and Form S-3 is permitted to be used for the transactions
contemplated by the Registration Rights Agreement involving secondary offerings
under the Act and rules promulgated thereunder.
(n) INTELLECTUAL PROPERTY. The Company (and/or its
wholly-owned subsidiaries) owns or has licenses to use certain patents,
copyrights and trademarks ("INTELLECTUAL PROPERTY") associated with its
business. The Company and its subsidiaries have all intellectual property
rights which are material to the conduct of the business of the Company and its
subsidiaries as it is now being conducted or as proposed to be conducted as
disclosed in the SEC Documents. The Company and its subsidiaries have no reason
to believe that the intellectual property rights which it owns are invalid or
unenforceable or that the use of such intellectual property by the Company or
its subsidiaries infringes upon or conflicts with any right of any third party,
and neither the Company nor any of its subsidiaries has received notice of any
such infringement or conflict. The Company and its subsidiaries have no
knowledge of any material infringement of its intellectual property by any third
party.
(o) SHAREHOLDER RIGHTS PLAN. None of the acquisition of
Debentures, Warrants, Common Shares or Warrant Shares nor the deemed beneficial
ownership of shares of Common Stock prior to, or the acquisition of such shares
pursuant to, the conversion of Debentures or the exercise of the Warrants will
trigger the poison pill provisions of any stockholders' rights or similar
agreements, or a substantially similar occurrence under any successor or similar
plan.
(p) NO LITIGATION. Except as set forth in Section 2.1(p) of
the Disclosure Schedule, no litigation or claim (including those for unpaid
taxes) against the Company or any of its subsidiaries is pending or, to the
Company's knowledge, threatened, and no other event has occurred, which if
determined adversely
<PAGE>
could reasonably be expected to have a Material Adverse Effect on the Company
or could reasonably be expected to materially and adversely effect the
transactions contemplated hereby. The legal proceedings described in the
Disclosure Schedule will not have an effect on the transactions contemplated
hereby, and will not have a Material Adverse Effect on the Company.
(q) 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 by the Company or any Investor relating to this Agreement or
the transactions contemplated hereby, except for amounts owing to Rochon Capital
Group, Ltd. which amounts shall be paid exclusively by the Company, pursuant to
a separate agreement.
(r) ACKNOWLEDGEMENT OF DILUTION. The number of shares of
Common Stock constituting Common Shares or Warrant Shares may increase
substantially in certain circumstances, including the circumstance where the
trading price of the Common Stock declines. The Company acknowledges that its
obligation to issue Common Shares upon conversion of Debentures and Warrant
Shares upon exercise of the Warrants is absolute and unconditional (except as
limited by NASD Rule 4460(i) and any similar rule of any other Approved Market
on which the Common Stock may then be trading, Section 12 of the Debentures and
Section 9 of the Warrants), regardless of the dilution that such issuance may
have on other shareholders of the Company.
(s) OTHER INVESTORS. Except as set forth in Section 2.1(s) of
the Disclosure Schedule, there are no outstanding securities issued by the
Company that are entitled to registration rights under the Act. Except as set
forth in SCHEDULE 2.1(s), there are no outstanding securities issued by the
Company that are directly or indirectly convertible into, exercisable into, or
exchangeable for, shares of Common Stock of the Company, that have anti-dilution
or similar rights that would be affected by the issuance of the Debentures, the
Common Shares, the Warrant Shares or the Warrants.
(t) CERTAIN TRANSACTIONS. Except as disclosed in the SEC
Documents and Section 2.1(t) of the Disclosure Schedule, none of the officers,
directors, or employees of the Company is presently a party to any material
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.
(u) PERMITS; COMPLIANCE. The Company and each of its
subsidiaries is in possession of all material 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 except for such Company Permits the failure of which to
possess, or the cancellation or suspension of which, would not, individually or
in the aggregate, have a material effect on the Company. Neither the Company
nor any of its subsidiaries is in material conflict with, or in material default
or material violation of, any of the Company Permits. Since September 30, 1996,
neither the Company nor any of its subsidiaries has received any notification
with respect to possible material conflicts, material defaults or material
violations of applicable laws.
<PAGE>
(v) 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 direct and
indirect 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
without a significant increase in cost.
(w) INTERNAL ACCOUNTING CONTROLS. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's board of directors, to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(x) ENVIRONMENTAL MATTERS. Except as otherwise disclosed in
the SEC Documents, the Company and each of its subsidiaries is in compliance in
all material respects with all applicable state and federal environmental laws
and no event or condition has occurred that may interfere with the compliance by
the Company or any of its subsidiaries with any environmental law or that may
give rise to any liability under any environmental law that, individually or in
the aggregate, would have a Material Adverse Effect.
(y) SOLVENCY.
(i) The Company's fair saleable value of its assets
exceeds the amount that will be required to be paid on or in
respect of the Company's existing debts and other liabilities
(including contingent liabilities) as they mature.
(ii) The Company's assets do not constitute unreasonably
small capital to carry out its business as now conducted and as
proposed to be conducted including the Company's capital needs
taking into account the particular capital requirements of the
business conducted by the Company, and projected capital
requirements and capital availability thereof.
(iii) The Company does not intend to incur debts beyond
its ability to pay such debts as they mature (taking into account
the timing and amounts of cash to be payable on or in respect of
its debt).
(iv) The Company does not intend, and does not believe,
that final judgments against the Company in actions for money
damages will be rendered at a time when, or in an amount such
that, the Company will be unable to satisfy any such judgments
promptly in accordance with their terms (taking into account the
maximum reasonable amount of such judgments in any such actions
and the earliest reasonable time at which such judgments might be
rendered. The Company's cash flow, after taking into account all
other anticipated uses of the cash (including the payments on or
in respect of debt referred to in paragraph (iii) above), will at
all times be sufficient to pay all such judgments promptly in
accordance with their terms.
<PAGE>
Neither the Company nor any of its subsidiaries is subject
to any bankruptcy, insolvency or similar proceeding.
(z) TAXES. All federal, state, city and other tax returns,
reports and declarations required to be filed by or on behalf of the Company
have been filed and such returns are complete and accurate and disclose all
taxes (whether based upon income, operations, purchases, sales, payroll,
licenses, compensation, business, capital, properties or assets or otherwise)
required to be paid in the periods covered thereby. All taxes shown on such
returns and any deficiency assessments, penalties and interest have been paid.
All taxes required to be withheld by or on behalf of the Company in connection
with amounts paid or owing to any employees, independent contractor, creditor or
other party have been withheld, and such withheld taxes have either been duly
and timely paid to the proper governmental authorities or set aside in accounts
for such purposes.
Section 2.2 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each of
the Investors, severally (as to itself) and not jointly, hereby makes the
following representations and warranties to the Company as of the date hereof
and on the Closing Date:
(a) AUTHORIZATION; ENFORCEMENT. (i) Such Investor has the
requisite power and authority to enter into and perform this Agreement and the
Registration Rights Agreement and to purchase the Debentures being sold
hereunder and to acquire the Warrant, (ii) the execution and delivery of this
Agreement and the Registration Rights Agreement by such Investor and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate or partnership action, and (iii) this
Agreement and the Registration Rights Agreement constitute valid and binding
obligations of such Investor enforceable against such Investor in accordance
with their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of creditors' rights and
remedies or by other equitable principles of general application.
(b) NO CONFLICTS. The execution, delivery and performance of
this Agreement and the Registration Rights Agreement and the performance under
the Debentures and Warrants and the consummation by such Investor of the
transactions contemplated hereby and thereby do not and will not (i) result in a
violation of such Investor's organizational documents, or (ii) conflict with any
agreement, indenture or instrument to which such Investor is a party, or (iii)
result in a material violation of any law, rule, or regulation, or any order,
judgment or decree of any court or governmental agency applicable to such
Investor. Such Investor is not required to obtain any consent or authorization
of any governmental agency in order for it to perform its obligations under this
Agreement, the Registration Rights Agreement, the Warrants or the Debentures.
(c) INVESTMENT REPRESENTATION. Such Investor is purchasing the
Debentures and the Warrants for its own account and not with a view to
distribution in violation of any securities laws. Such Investor has no present
intention to sell the Debentures, Warrants, Common Shares, or Warrant Shares in
violation of Federal or state securities laws and such Investor has no present
arrangement (whether or not legally binding) to sell the Debentures, Warrants,
Common Shares or Warrant Shares to or through any person or entity; PROVIDED,
however, that by making the representations herein, such Investor does not agree
to hold the Debentures, Warrants, Common Shares or Warrant Shares for any
minimum or other specific term and reserves the right to dispose of the
Debentures, Warrants, Common Shares or Warrant Shares at any time in
<PAGE>
accordance with Federal and state securities laws applicable to such
disposition.
(d) ACCREDITED INVESTOR. Such Investor is an "accredited
investor" as defined in Rule 501 promulgated under the Act. The Investor has
such knowledge and experience in financial and business matters in general and
investments in particular, so that such Investor is able to evaluate the merits
and risks of an investment in the Debentures and to protect its own interests in
connection with such investment. In addition (but without limiting the effect
of the Company's representations and warranties contained herein), such Investor
has received such information as it considers necessary or appropriate for
deciding whether to purchase the Debentures pursuant hereto.
(e) RULE 144. Such Investor understands that there is no
public trading market for the Debentures or Warrants, that none is expected to
develop, and that the Debentures and Warrants and the Common Shares and Warrant
Shares must be held indefinitely unless the Common Shares and Warrant Shares are
registered under the Act or an exemption from registration is available. Such
Investor has been advised or is aware of the provisions of Rule 144 promulgated
under the Act.
(f) BROKERS. Such Investor has taken no action which would
give rise to any claim by any person for brokerage commissions, finder's fees or
similar payments by the Company relating to this Agreement or the transactions
contemplated hereby, except for amounts owing to Rochon Capital Group, Ltd.,
which amounts will be paid exclusively by the Company, pursuant to a separate
agreement.
(g) RELIANCE BY THE COMPANY. Such Investor understands that
the Debentures and Warrant are being offered and sold in reliance on a
transactional exemption from the registration requirements of Federal and state
securities laws and that the Company is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgments and understandings
of such Investor set forth herein in order to determine the applicability of
such exemptions and the suitability of such Investor to acquire the Debentures
and Warrants.
ARTICLE III
COVENANTS
<PAGE>
Section 3.1 REGISTRATION AND LISTING; EFFECTIVE REGISTRATION. Until
such time as no Debentures or Warrants are outstanding, the Company will cause
the Common Stock to continue at all times to be registered under Section 12(g)
of the Exchange Act, will comply in all respects with its reporting and filing
obligations under the Exchange Act, and will not take any action or file any
document (whether or not permitted by the Exchange Act or the rules thereunder)
to terminate or suspend such reporting and filing obligations. Until such time
as no Debentures or Warrants are outstanding, the Company shall continue the
listing or trading of the Common Stock on the Nasdaq NMS or one of the other
Approved Markets and comply in all respects with the Company's reporting, filing
and other obligations under the bylaws or rules of the Approved Market on which
the Common Stock is listed. The Company shall cause the Common Shares and the
Warrant Shares to be listed on the Nasdaq NMS no later than the registration of
the Common Shares or the Warrant Shares under the Act, and at all times shall
continue such listing(s) on one of the Approved Markets. As used herein and in
the Registration Rights Agreement, the Debenture and the Warrants, the term
"EFFECTIVE REGISTRATION" shall mean that all registration obligations of the
Company pursuant to the Registration Rights Agreement and this Agreement have
been satisfied, all Registrable Securities (as defined in the Registration
Rights Agreement) have been registered for resale by the Investors, such
registration is not subject to any suspension or stop order, the prospectus for
the Common Shares issuable upon conversion of the Debentures and the Warrant
Shares issuable upon exercise of the Warrants is current and such Common Shares
and Warrant Shares are listed for trading on one of the Approved Markets and
such trading has not been suspended for any reason, none of the Company or any
direct or indirect subsidiary of the Company is subject to any bankruptcy,
insolvency or similar proceeding, and no Interfering Event (as defined in
Section 2(b) of the Registration Rights Agreement) exists.
Section 3.2 DEBENTURES ON CONVERSION AND WARRANTS ON EXERCISE.
(a) Upon any conversion by an Investor (or then holder of
Debentures) of the Debentures pursuant to the terms thereof, the Company shall
issue and deliver to such Investor (or holder) within three (3) Trading Days of
the Conversion Date (as defined in the Debenture) a new certificate or
certificates for the number of Debentures which such Investor (or holder) has
not yet elected to convert but which are evidenced in part by the certificate(s)
submitted to the Company in connection with such conversion (with the number of
and denomination of such new certificate(s) designated by such Investor or
holder).
(b) Upon any partial exercise by an Investor (or then holder of
the Warrants) of the Warrants, the Company shall issue and deliver to such
Investor (or holder) within three (3) days of the date on which such Warrants
are exercised, a new Warrant or Warrants representing the number of adjusted
Warrant Shares, in accordance with the terms of Section 2 of the Warrants.
Section 3.3 REPLACEMENT DEBENTURES AND WARRANTS.
(a) The certificate(s) representing the Debentures held by any
Investor (or then holder) may be exchanged by such Investor (or such holder) at
any time and from time to time for certificates with different denominations
representing an equal aggregate number of Debentures, as requested by such
Investor (or such holder) upon surrendering the same. No service charge will be
made for such registration or transfer or exchange.
(b) The Warrants will be exchangeable at the option of the
Investor (or then holder of the Warrants) at the office of the Company for other
Warrants of different denominations entitling the holder thereof to purchase in
the aggregate the same number of Warrant Shares as are purchasable under such
<PAGE>
Warrants. No service charge will be made for such transfer or exchange.
Section 3.4 EXPENSES. The Company shall pay in immediately available
funds, at the Closing and promptly upon receipt of any further invoices relating
to same, all reasonable due diligence fees and expenses and attorneys' fees and
expenses of Kleinberg, Kaplan, Wolff & Cohen, P.C. ("Investors' Counsel"), up to
a maximum amount of $30,000, incurred by the Investors in connection with the
preparation, negotiation, execution and delivery of this Agreement, the
Registration Rights Agreement, the Debentures, the Warrants and the related
agreements and documents and the transactions contemplated hereunder and
thereunder. At Closing, the Company shall pay the amount due for such fees and
expenses (which may include fees and expenses estimated to be incurred for
completion of the transaction including post-closing matters). In the event
such amount is ultimately less than the actual fees and expenses, the Company
shall promptly pay such deficiency upon receipt of an invoice regarding same.
Section 3.5 SECURITIES COMPLIANCE. The Company shall notify the SEC and
the Nasdaq NMS, in accordance with their requirements, of the transactions
contemplated by this Agreement, the Debenture, the Registration Rights Agreement
and the Warrants, and shall take all other necessary action and proceedings as
may be required and permitted by applicable law, rule and regulation, for the
legal and valid issuance of the Debentures hereunder, the Common Shares issuable
upon conversion thereof, the Warrants and the Warrant Shares issuable upon
exercise of the Warrants.
Section 3.6 DIVIDENDS OR DISTRIBUTIONS. So long as any Debentures
remain outstanding, the Company agrees that it shall not (a) declare or pay any
dividends or make any distributions to any holder or holders of Common Stock, or
(b) purchase or otherwise acquire for value, directly or indirectly, any Common
Stock or other equity security of the Company.
Section 3.7 NOTICES. The Company agrees to provide all holders of
Debentures and Warrants with copies of all notices and information, including
without limitation notices and proxy statements in connection with any meetings,
that are provided to the holders of shares of Common Stock, contemporaneously
with the delivery of such notices or information to such Common Stock holders.
Section 3.8 USE OF PROCEEDS. The Company agrees that the proceeds
received by the Company from the sale of the Debentures hereunder shall be used
for working capital purposes and a possible investment in Matridigm Corporation
in an amount consistent with past investment practices.
Section 3.9 RIGHT OF FIRST REFUSAL; ADJUSTMENTS.
(a) Until the expiration of twelve (12) months from the Closing
Date, the Company shall not (i) sell or otherwise issue or deliver any shares of
Common Stock or other equity securities or any securities which are convertible
into or exchangeable for shares of its Common Stock or other equity securities
or any convertible or exchangeable security, or any warrants or other rights to
subscribe for or to purchase or any options for the purchase of shares of Common
Stock or other equity securities to any party other than the Investors or their
affiliates (a "THIRD PARTY") (other than in a bona-fide public offering
conducted on the basis of a firm commitment underwriting with a price to the
public of at least $10,000,000 and other than shares or options issued or which
may be issued pursuant to the Company's currently existing employee or director
option plans and employee stock purchase plans as such plans may be amended from
time to time consistent with practices of other companies in the high-technology
sector, or shares issued upon exercise of options, warrants or rights
outstanding on the Closing Date listed in Section 2.1(c) of the Disclosure
Schedule, or (ii)
<PAGE>
obtain any equity or equity related financing from any Third Party, unless
such offer, sale, issuance or financing ("FINANCING TRANSACTION") is first
offered to the Investors. The Company shall make such offer by providing
each Investor with written notice of the Company's intention to enter into
the Financing Transaction with such Third Party together with a term sheet
identifying all such Third Parties and containing all the economic terms and
significant provisions of the Financing Transaction (the "OFFER"). Such
Offer shall be given with respect to each Financing Transaction negotiated by
the Company with any Third Party. The Investors shall have ten (10) business
days from receipt of the Offer to deliver a written notice to the Company
that the Investors wish to accept the Offer in whole but not in part (subject
to satisfactory due diligence and reasonably acceptable definitive
documentation) for the Financing Transaction. If certain Investors choose
not to participate, the other Investors may increase their participation on a
proportional basis. If the Investors reject the Offer entirely or fail to
respond within such ten (10) business day period, then the Company shall be
permitted to complete such Financing Transaction with the Third Party within
thirty (30) days on terms and conditions identical to those contained in the
Offer. If any Financing Transaction is contemplated on terms and conditions
not identical to those contained in the Offer or with definitive
documentation not identical to that proposed by the Company with respect to
the Offer or if such Financing Transaction is not consummated with such Third
Party within 30 days, then such Financing Transaction shall be deemed a new
Financing Transaction and the Investors shall again be entitled to receive an
Offer for such Financing Transaction on such new terms and conditions (and/or
with such new definitive documentation if applicable) or upon the same terms
if the Third Party fails to consummate the Financing Transaction in the
period specified in this sentence. The rights of the Investors under this
paragraph 3.9 (a) as to any securities, instruments or rights issued which
are exercisable or exchangeable for, or convertible into, shares of Common
Stock, where (i) the exercise, exchange or conversion price is at a discount
of 10% or greater from the then market price of the Common Stock, or (ii)
holders of such securities, instruments or rights may acquire additional
shares of Common Stock as a result of a one-time or periodic adjustments to
the exercise, exchange or conversion price, shall survive a Change of Control
Transaction, as defined in the Debenture.
(b) If at any time within twelve (12) months from the Closing
Date the Company issues Common Stock (or securities or rights exercisable or
exchangeable for, or convertible into, Common Stock) in a private placement at a
discount greater than the discount specified in Section 5(c) of the Debentures
or at a ceiling, conversion, exercise or exchange price less than the Conversion
Price (as defined in the Debentures and as adjusted pursuant to the terms
thereof), then the Debentures will automatically (at the Investor's request) be
adjusted to provide for such greater discount or lower or more favorable
conversion, exercise or exchange price, as applicable. This paragraph 3.9 (b)
shall not apply to issuances pursuant to currently existing employee or director
option or stock purchase plans as such plans may be amended from time to time
consistent with practices of other companies in the high-technology sector or
with respect to the items listed in Section 2.1(c) of the Disclosure Schedule.
Section 3.10 RESERVATION OF STOCK ISSUABLE UPON CONVERSION AND UPON
EXERCISE OF THE WARRANTS. The Company shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the Debentures and the exercise of
the Warrants, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding Debentures and
the full exercise of the Warrants and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of all the then outstanding Debentures, the full exercise of the
Warrants, the Company will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose,
including without limitation engaging in best efforts to obtain the requisite
shareholder approval. Without in any way limiting the foregoing, the Company
agrees to
<PAGE>
reserve and at all times keep available solely for purposes of conversion of
Debentures and the exercise of the Warrants such number of authorized but
unissued shares of Common Stock that is at least equal to 200% of the
aggregate shares issuable upon conversion of Debentures, and 200% of the
aggregate shares issuable on exercise of Warrants, which number may be
reduced by the number of Common Shares or Warrant Shares actually delivered
pursuant to conversion of Debentures or exercise of the Warrants and shall be
appropriately adjusted for any stock split, reverse split, stock dividend or
reclassification of the Common Stock. When the adjustments to the Conversion
Price (as defined in the Debenture) pursuant to Sections 5(d) and 5(e) of the
Debenture have been completed, the percentages set forth in the preceding
sentence shall be reduced from "200%" to "103%". If the Company falls below
the reserves specified in the immediately preceding sentence and does not
cure such non-compliance within 30 days of its start, then the Investors will
be entitled to the discount adjustments specified in Section 2(b)(i) of the
Registration Rights Agreement. If at any time the number of authorized but
unissued shares of Common Stock is not sufficient to effect the conversion of
all the then outstanding Debentures or the full exercise of the Warrants, the
Investors shall be entitled to, inter alia, the premium price redemption
rights provided in the Registration Rights Agreement. The Company shall not
be permitted to engage in any transaction if, after giving effect thereto,
the Company would not be in compliance with the reservation requirements of
this Section 3.10.
Section 3.11 BEST EFFORTS. The parties shall use their best efforts to
satisfy timely each of the conditions described in Article IV of this Agreement.
Section 3.12 FORM D; BLUE SKY LAWS. The Company agrees to file a Form D
with respect to the Debentures, Warrants, Common Shares and Warrant Shares, as
required under Regulation D and to provide a copy thereof to each Investor
promptly after such filing. The Company shall, on or before each Closing Date,
take such action as the Company shall have reasonably determined is necessary to
qualify the Debentures, Warrants, Common Shares and Warrant Shares for sale to
the Investors 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 Investor on or prior to the Closing Date.
Section 3.13 NO SENIOR INDEBTEDNESS; LIMITATIONS ON ISSUANCE OF EQUITY.
(a) So long as any Debentures remain outstanding, the Company
agrees that neither the Company nor any direct or indirect subsidiary of the
Company shall create, incur, assume, guarantee, secure or in any manner become
liable in respect of any indebtedness, except for Senior Debt as defined in the
Debenture, debt owed to a financial institution which debt is unsecured other
than by accounts receivable or trade payables incurred in the ordinary course of
business consistent with past practices, unless junior to the Debentures in all
respects. For purposes of this Section 3.13, "financial institution" excludes,
without limitation, any investment company, or any entity that would be an
investment company, but for the exclusions provided by Section 3(c)(1) or
Section 3(c)(7) of the Investment Company Act of 1940, as amended.
(b) Until the Registration Statement (as defined in the
Registration Rights Agreement) has been declared effective by the SEC and the
Common Shares are subject to Effective Registration, neither the Company nor any
of its subsidiaries will issue any equity securities or instruments or rights
convertible into or exchangeable or exercisable for any equity securities except
pursuant to current employee and director option and stock purchase plans in
amounts and at prices consistent with past practice and with respect to items
listed in Section 2.1(c) of the Disclosure Schedule.
<PAGE>
Section 3.14 ADDITIONAL ISSUANCE. In the event that:
(i) the closing bid price of a share of Common Stock on
the principal Approved Market has been $6.00 (such $6.00 price being
subject to the same adjustments as may from time to time be made to
the Conversion Price) or more for each of the preceding 30 Trading
Days, and
(ii) there is, and has been for each of the preceding 30
Trading Days, Effective Registration, and
(iii) there are not, and have not been in any of the
preceding 30 Trading Days, any Interfering Events (as such term is
defined in the Registration Rights Agreement), and
(iv) no Event of Default (as defined in the Debentures)
shall have occurred, be likely to occur or be threatened, and
(v) the average of the aggregate market value of all the
shares of Common Stock trading on the principal Approved Market for
each of the 30 preceding Trading Days (exclusive of "block trades",
which shall mean trades in excess of 20,000 shares of Common Stock)
shall be in excess of $3,500,000, and
(vi) the Company shall have a net worth of at least
$27,000,000 and a market capitalization of at least $100,000,000, as
certified in writing to the Investors by the chief financial officer
of the Company, and
(vii) there have been no breaches by the Company that have
not been fully cured under this Agreement, the Registration Rights
Agreement, the Debentures or the Warrants, and
(viii) all the Company's representations and warranties
contained in this Agreement, the Registration Rights Agreement, the
Debentures and the Warrants shall continue to be true, and all the
Company's covenants contained in this Agreement, the Registration
Rights Agreement, the Debentures and the Warrants shall have been
performed when and as required, all as certified in writing by the
chief financial officer of the Company, and
(ix) 200% of the number of shares of Common Stock into
which the Debentures (whether already issued and outstanding or
issuable pursuant to this Section 3.14) could be converted and 200%
of the number of Warrant Shares for which the Warrants could be
exercised shall be authorized, available, reserved for such
conversion or exercise and subject to an effective registration
statement under the Securities Act, and
(x) the issuance of all Common Shares and Warrant Shares
issuable upon conversion of the Debentures (including the Debentures
issuable pursuant to this Section 3.14) have been approved by the
shareholders of the Company pursuant to NASD Rule 4460(i);
THEN the Company may compel the Investors upon written notice (assuming the
conditions specified in (i) through (x) above were also satisfied as of the date
of such notice and as the date of the closing described
<PAGE>
below) thereto to purchase, for immediately available funds $1.00 principal
amount of additional Debenture for each $1.00 principal amount of Debenture
purchased by the Investors at the Closing of the Initial Issuance, and the
Company will issue to the Investors an aggregate of 150,000 Warrants pro rata
to the Warrants issued at such Closing; PROVIDED that such mandatory purchase
may not be consummated until the Registration Statement has been declared
effective by the SEC and must be consummated within 180 days of the date on
which the Registration Statement is so declared effective or else the
Company's rights under this Section 3.14 will expire; PROVIDED FURTHER that
such closing will take place no earlier than 5 Trading Days after receipt by
the Investors of the written notice hereunder unless the Investors agree
otherwise in writing; PROVIDED ADDITIONALLY that such additional Debenture
will be purchased by the Investors in proportion to their purchases of the
initial Debentures at the Closing and the obligations of such Investors under
this Section 3.14 shall be in all respects several and not joint; and
PROVIDED FINALLY that (x) all the closing conditions contained in Section 4.2
shall be satisfied again at the time additional Debentures are issued under
this Section 3.14, and (y) the Common Shares underlying the Debentures to be
purchased and Warrants to be issued pursuant to this Section 3.14 will be
subject to Effective Registration on the date of closing pursuant to this
Section 3.14.
ARTICLE IV
CONDITIONS TO CLOSINGS
Section 4.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO
SELL THE DEBENTURES. The obligation hereunder of the Company to issue and/or
sell the Debentures to the Investors at the Closing (unless otherwise specified)
is subject to the satisfaction, at or before the Closing, of each of the
applicable conditions set forth below. These conditions are for the Company's
sole benefit and may be waived by the Company at any time in its sole
discretion.
(a) ACCURACY OF THE INVESTORS' REPRESENTATIONS AND WARRANTIES.
The representations and warranties of each Investor will 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 as of an
earlier date, which shall have been true and correct in all material respects as
of such date).
(b) PERFORMANCE BY THE INVESTORS. Each Investor shall have
performed all agreements and satisfied all conditions required to be performed
or satisfied by such Investor at or prior to the Closing.
(c) NO INJUNCTION. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement or the Registration Rights Agreement or the
Debentures or the Warrants.
Section 4.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE INVESTORS TO
PURCHASE THE DEBENTURES. The obligation hereunder of each Investor to acquire
and pay for the Debentures at the Closing (unless otherwise specified) is
subject to the satisfaction, at or before the Closing, of each of the applicable
conditions set forth below. These conditions are for each Investor's benefit
and may be waived by each Investor at any time in its sole discretion.
(a) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES.
The representations and
<PAGE>
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 that
time (except for representations and warranties as of an earlier date, which
shall have been true and correct in all material respects as of such date).
(b) PERFORMANCE BY THE COMPANY. The Company shall have
performed all agreements and satisfied all conditions required to be performed
or satisfied by the Company at or prior to the Closing.
(c) NASDAQ NMS. From the date hereof to the Closing Date,
trading in the Company's Common Stock shall not have been suspended by the SEC
or the Nasdaq NMS (or other Approved Market), and trading in securities
generally as reported by the Nasdaq NMS (or other Approved Market) shall not
have been suspended or limited, and the Common Stock shall not have been
delisted from the Nasdaq NMS (or any other Approved Market where they are
currently listed).
(d) NO INJUNCTION. No statute, rule, regulation, executive,
judicial or administrative order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental authority
of competent jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement or the Registration Rights Agreement
or the Debenture or the Warrants.
(e) OPINION OF COUNSEL. At the Closing, the Investors shall
have received an opinion of counsel to the Company in the form attached hereto
as EXHIBIT 4.2(e) and such other opinions, certificates and documents as the
Investors or their counsel shall reasonably require incident to the Closing.
(f) REGISTRATION RIGHTS AGREEMENT. The Company and the
Investors shall have executed and delivered the Registration Rights Agreement in
the form and substance of Exhibit 4.2(f) attached hereto.
(g) ADVERSE CHANGES. Since December 31, 1997, no event which
had or is likely to have, in the reasonable judgment of the Investors, a
Material Adverse Effect on the Company or any of its direct or indirect
subsidiaries shall have occurred.
(h) OFFICER'S CERTIFICATE. The Company shall have delivered to
the Investors a certificate in form and substance satisfactory to the Investors
and the Investors' Counsel, executed by an officer of the Company, certifying as
to satisfaction of closing conditions, incumbency of signing officers, and the
true, correct and complete nature of the Charter, By-Laws, good standing and
authorizing resolutions of the Company.
(i) DEBENTURES AND WARRANTS. The Investors shall have received
certificates representing the Debentures and Warrants in the form and substance
of EXHIBIT 1.1A and EXHIBIT 1.1B hereto.
(j) DUE DILIGENCE. Each Investor shall have completed its
financial, accounting, operational and legal due diligence in a manner
satisfactory to such Investor in its sole discretion.
ARTICLE V
LEGEND AND STOCK
<PAGE>
The Company will issue one or more certificates representing the
Debentures and the Warrants in the name of the Investor and in such
denominations to be specified by the Investor prior to (or from time to time
subsequent to) Closing. Each certificate representing the Debentures and the
Warrants and any shares of Common Stock issued upon conversion or exercise
thereof initially shall be stamped or otherwise imprinted with a legend
substantially in the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY
NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
The Company agrees to reissue Debentures and Warrants without the legend
set forth above at such time as (i) the holder thereof is permitted to dispose
of such Debentures and/or Warrants and Common Stock issuable upon conversion or
exercise thereof pursuant to Rule 144(k) under the Act, or (ii) such Debentures
and/or Warrants are sold to a purchaser or purchasers who (in the opinion of
counsel to the seller or such purchaser(s), in form and substance reasonably
satisfactory to the Company and its counsel) are able to dispose of such shares
publicly without registration under the Act.
Prior to the Registration Statement (as defined in the Registration
Rights Agreement) being declared effective, any Common Shares issued pursuant to
conversion of Debentures or Warrant Shares issued upon exercise of the Warrants
shall bear a legend in the same form as the legend indicated above. Upon such
Registration Statement becoming effective, the Company agrees to promptly, but
no later than three (3) business days thereafter, issue new certificates
representing such Common Shares and Warrant Shares without such legend. Any
Common Shares issued pursuant to conversion of Debentures or Warrant Shares
issued upon exercise of the Warrants after the Registration Statement has become
effective shall be free and clear of any legends, transfer restrictions and stop
orders. Notwithstanding the removal of such legend, each Investor agrees to
sell the Common Shares and Warrant Shares represented by the new certificates in
accordance with the applicable prospectus delivery requirements or in accordance
with an exemption from the registration requirements of the Act.
Nothing herein shall limit the right of any holder to pledge these
securities pursuant to a bona fide margin account or lending arrangement.
ARTICLE VI
TERMINATION
Section 6.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated at any time prior to the Closing by the mutual written consent of the
Company and each of the Investors.
Section 6.2 OTHER TERMINATION. This Agreement may be terminated by
action of the Board of Directors of the Company or by any of the Investors at
any time if the Closing shall not have been consummated by the fifth business
day following the date of this Agreement; provided, however, that the party (or
parties) prepared to close shall retain its (or their) right to sue for any
breach by the other party (or parties).
<PAGE>
ARTICLE VII
MISCELLANEOUS
Section 7.1 STAMP TAXES. The Company shall pay all stamp and other
taxes and duties levied in connection with the issuance of the Debentures
pursuant hereto, the Common Shares issued upon conversion thereof, and the
Warrant Shares issued upon exercise of the Warrants.
Section 7.2 SPECIFIC PERFORMANCE; CONSENT TO JURISDICTION; JURY TRIAL.
(a) The Company and the Investors acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent or cure breaches of the provisions of
this Agreement and to enforce specifically the terms and provisions hereof, this
being in addition to any other remedy to which any of them may be entitled by
law or equity.
(b) THE COMPANY AND EACH OF THE INVESTORS (I) HEREBY
IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT
COURT, THE NEW YORK STATE COURTS AND OTHER COURTS OF THE UNITED STATES SITTING
IN NEW YORK COUNTY, NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT AND (II) HEREBY WAIVES, AND AGREES
NOT TO ASSERT IN ANY SUCH SUIT ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT
PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF THE SUIT,
ACTION OR PROCEEDING IS IMPROPER. THE COMPANY AND EACH OF THE INVESTORS
CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY
MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT
UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND
SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING IN THIS PARAGRAPH
SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED
BY APPLICABLE LAW.
(c) THE COMPANY AND EACH INVESTOR HEREBY WAIVES ALL RIGHTS TO A
TRIAL BY JURY.
Section 7.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement, together with
the Registration Rights Agreement, the Warrants, the Debenture and the
agreements and documents executed in connection herewith and therewith, contains
the entire understanding of the parties with respect to the matters covered
hereby and thereby and, except as specifically set forth herein or therein,
neither the Company nor any Investor 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 a written instrument signed by
the party against whom enforcement of any such amendment or waiver is sought.
Section 7.4 NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing by mail, facsimile or
personal delivery and shall be effective upon actual receipt of such notice.
The addresses for such communications shall be:
to the Company:
<PAGE>
Zitel Corporation
47211 Bayside Parkway
Fremont, California 94538
Attention: Chief Financial Officer
Facsimile: (510) 440-8526
with copies to:
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, California 94111
Attention: John L. Cardoza, Esq.
Facsimile: (415) 951-3699
<PAGE>
to the Investors:
To each Investor at the address and/or fax
number set forth on SCHEDULE I of this Agreement.
with copies to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue, 18th Floor
New York, New York 10176
Attention: Stephen M. Schultz, Esq.
Facsimile: (212) 986-8866
Any party hereto may from time to time change its address for notices by giving
at least 10 days' written notice of such changed address to the other parties
hereto.
Section 7.5 INDEMNITY. Each party shall indemnify each other party
against any loss, cost or damages (including reasonable attorney's fees but
excluding consequential damages) incurred as a result of such parties' breach of
any representation, warranty, covenant or agreement in this Agreement.
Section 7.6 WAIVERS. No waiver by any party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.
Section 7.7 HEADINGS. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
Section 7.8 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties and their successors and permitted assigns. The parties hereto may
amend this Agreement without notice to or the consent of any third party. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of all Investors, except that the Company may
assign this Agreement in connection with a Change of Control Transaction
occurring in excess of thirty (30) days after the Effectiveness Date (as defined
in the Debenture) (such 30 days to be extended one day for every day after that
date on which there is not Effective Registration), so long as such assignment
places the Investors in a position economically equivalent to that in which they
would have been but for such assignment, in accordance with the terms of the
Debentures and the Warrants. Any Investor may assign this Agreement (in whole
or in part) or any rights or obligations hereunder subject to the consent of the
Company (such consent not to be unreasonably withheld) in connection with any
sale or transfer of all or any portion of the Debentures or Warrants held by
such Investor, provided that no consent of the Company will be required for any
transfer or assignment by the Investor to (i) an affiliate or affiliates of the
Investor or (ii) any person or entity whose investments are managed by an
investment adviser that is the same as, or an affiliate of, the investment
manager of the Investor.
Section 7.9 NO 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
<PAGE>
be enforced by, any other person.
Section 7.10 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS EXECUTED AND TO BE PERFORMED ENTIRELY WITHIN SUCH
STATE.
Section 7.11 SURVIVAL. The representations and warranties and the
agreements and covenants of the Company and each Investor contained herein shall
survive the Closing.
Section 7.12 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement, it
being understood that all parties need not sign the same counterpart.
Section 7.13 PUBLICITY. The Company agrees that it will not disclose,
and will not include in any public announcement, the name of any Investor
without its consent, unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement. The
Company agrees that a copy of any public announcement regarding the matters
covered by this Agreement or any agreement and document executed herewith and
any public announcement (other than the filing of this Agreement as an exhibit
on Form 8-K), including the name of an Investor will be approved by each
Investor in advance of the release of such announcements. Notwithstanding the
foregoing, on the Closing Date the Company may issue a public announcement
stating only that (a) the Company had completed a $10,000,000 financing of
convertible debentures with an institutional investor, and that (b) the
convertible debentures are subject to a conversion price fixed pursuant to a
formula which includes a 10% discount.
Section 7.14 SEVERABILITY. The parties acknowledge and agree that the
Investors are not agents, affiliates or partners of each other, that all
representations, warranties, covenants and agreements of the Investors hereunder
are several and not joint, that no Investor shall have any responsibility or
liability for the representations, warrants, agreements, acts or omissions of
any other Investor, and that any rights granted to "Investors" hereunder shall
be enforceable by each Investor hereunder.
Section 7.15 LIKE TREATMENT OF HOLDERS; REDEMPTION. Neither the Company
nor any of its affiliates shall, directly or indirectly, pay or cause to be paid
any consideration (immediate or contingent), whether by way of interest, fee,
payment for the redemption or conversion of Debentures or exercise of the
Warrants, or otherwise, to any holder of Debentures or Warrants, for or as an
inducement to, or in connection with the solicitation of, any consent, waiver or
amendment of any terms or provisions of the Debenture or this Agreement or the
Registration Rights Agreement or the Warrants, unless such consideration is
required to be paid to all holders of Debentures and Warrants bound by such
consent, waiver or amendment whether or not such holders so consent, waive or
agree to amend and whether or not such holders tender their Debentures or
Warrants for redemption, conversion or exercise. The Company shall not,
directly or indirectly, redeem any Debentures unless such offer of redemption is
made pro rata to all holders of Debentures on identical terms.
Section 7.16 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.
[SIGNATURE PAGES FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
ZITEL CORPORATION
By:
------------------------------------
Name:
Title:
INVESTORS:
HALIFAX FUND, L.P.
By: THE PALLADIN GROUP, L.P.
Attorney-in-Fact
By:
----------------------------
Name: Robert Chender
Title: Managing Director
PALLADIN PARTNERS I, L.P.
By: PALLADIN ASSET MANAGEMENT, L.L.C.
General Partner
By:
----------------------------
Name:
Title:
<PAGE>
PALLADIN OVERSEAS FUND LIMITED
By: THE PALLADIN GROUP L.P.
Attorney-in-Fact
By:
----------------------------
Name: Robert Chender
Title: Managing Director
THE GLENEAGLES FUND COMPANY
By: THE PALLADIN GROUP L.P.
Attorney-in-Fact
By:
----------------------------
Name: Robert Chender
Title: Managing Director
PALLADIN SECURITIES, LLC
By:
------------------------------------
Name: Robert Chender
Title: Principal
COLONIAL PENN LIFE INSURANCE COMPANY
By: THE PALLADIN GROUP L.P.
Attorney-in-Fact
By:
----------------------------
Name: Robert Chender
Title: Managing Director
[SIGNATURE PAGE TO ZITEL CORPORATION CONVERTIBLE
SUBORDINATED DEBENTURE PURCHASE AGREEMENT]
<PAGE>
EXHIBITS AND SCHEDULES
Schedule I List of Investors
Exhibit 1.1A Form of Debenture
Exhibit 1.1B Form of Warrant
Disclosure Schedule:
Section 2.1(a) Subsidiaries
Section 2.1(c) Capitalization
Section 2.1(f) Press Releases
Section 2.1(i) Liabilities
Section 2.1(p) Litigation
Section 2.1(s) Outstanding Securities with Registration Rights, etc.
Section 2.1(t) Officers, Directors and Employee's Transactions with
Company
Exhibit 2.1(c)(i) Articles of Incorporation of the Company
Exhibit 2.1(c)(ii) By-Laws of the Company
Exhibit 4.2(e) Opinion of Company Counsel
Exhibit 4.2(f) Registration Rights Agreement
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
OUTSTANDING NUMBER RESTRICTED
PRINCIPAL AMOUNT OF OWNERSHIP
INVESTOR OF DEBENTURES WARRANTS PURCHASE PRICE PERCENTAGE
- -------- ---------------- -------- -------------- ----------
<S> <C> <C> <C> <C>
Halifax Fund, L.P. $2,500,000 37,500 $2,500,000 4.9%
c/o The Palladin Group, L.P.
Investment Manager
40 West 57th Street
New York, New York 10019
Attn: Kevin Gerlitz
Telephone: (212) 698-0500
Facsimile: (212) 698-0599
Palladin Partners I, L.P. $1,500,000 22,500 $1,500,000 4.9%
c/o Palladin Asset Management
40 West 57th Street
New York, New York 10019
Attn: Kevin Gerlitz
Telephone: (212) 698-0500
Facsimile: (212) 698-0599
Palladin Overseas Fund Limited $1,500,000 22,500 $1,500,000 4.9%
c/o The Palladin Group, L.P.
Investment Manager
40 West 57th Street
New York, New York 10019
Attn: Kevin Gerlitz
Telephone: (212) 698-0500
Facsimile: (212) 698-0599
The Gleneagles Fund Company $1,500,000 22,500 $1,500,000 4.9%
c/o The Palladin Group, L.P.
Investment Manager
40 West 57th Street
New York, New York 10019
Attn: Kevin Gerlitz
Telephone: (212) 698-0500
Facsimile: (212) 698-0599
Palladin Securities, LLC $1,500,000 22,500 $1,500,000 4.9%
40 West 57th Street
New York, New York 10019
Attn: Kevin Gerlitz
Telephone: (212) 698-0500
Facsimile: (212) 698-0599
Colonial Penn Life Insurance
Company $1,500,000 22,500 $1,500,000 4.9%
c/o The Palladin Group, L.P.
Investment Manager
40 West 57th Street
New York, New York 10019
Attn: Kevin Gerlitz
Telephone: (212) 698-0500
Facsimile: (212) 698-0599
TOTAL
---------------- -------- --------------
$10,000,000 150,000 $10,000,000
</TABLE>
<PAGE>
DISCLOSURE SCHEDULE
This Disclosure Schedule has been prepared by Zitel Corporation ("Zitel" or
the "Company") in connection with that certain Convertible Debenture Purchase
Agreement (the "Agreement") dated as of June 16, 1998 by and between Zitel and
the investors identified on Schedule I of the Agreement (the "Investors") and is
provided by Zitel to the Investors on a confidential basis. Unless indicated
otherwise below, the information contained herein is current as of June 10,
1998. Section headings are intended for ease of reference only.
Section 2.1(a) - SUBSIDIARIES
(a) Zitel International Corporation
(b) Zitel SARL
(c) Zitel Export Corporation
(d) Zitel World Trade (d/b/a Datametrics Systems Corporation)
(e) Datametrics Systems Limited
(f) Datametrics Systems Nederland B.V.
Section 2.1(c) - CAPITALIZATION
1. 5% Convertible Subordinated Debentures Due 1999: $5,454,000 aggregate
principal amount
2. 1984 Employee Stock Purchase Plan (as of 6/10/98)
Issued: 888,789
Available for Issuance: 111,211
3. 1990 Employee Stock Option Plan (as of 6/10/98)
Outstanding: 2,169,726
Available for Issuance: 412,915
4. 1995 Non-Employee Director Plan (as of 6/10/98)
Outstanding: 81,000
Available for Issuance: 98,000
5. Series A Junior Participating Preferred Stock (see Form 8-K filed June
1996)
Section 2.1(f) - PRESS RELEASES
Date Title
- ---- -----
10/13/97 Global One Uses Zitel's CASE-II/Enterprise in Cross-Platform Oracle
Application-Experiences 400% Productivity Gain
10/20/97 Datametrics Launches Automated Workload Analyzer for ViewPoint
10/30/97 Zitel Reports Year-End Results
11/3/97 Datametrics and ICL Raise the Level of High-Performance Capabilities
for NT/UNIX Servers
11/10/97 Zitel Appoints New Officer
11/26/97 Zitel CEO Reports Changes To Beneficial Ownership of Zitel Common
Stock
12/1/97 Siemens Nixdorf Choose ViewPoint from Datametrics to provide
Performance Analysis for Reliant UNIX and SINIX Operating System
SINIX Operating Systems
12/9/97 Zitel Previews "Portable Factory" at DCI's Year 2000 Show
1/26/98 Zitel Reports First Quarter Fiscal 1998 Results
1/26/98 Zitel Awarded Back-Drop Contract by the State of New York
2/17/98 Datametrics Simplifies Internet Users' Lives
3/16/98 Zitel Corporation Announces New Vice President of Worldwide Sales
3/23/98 Datametrics ViewPoint Enhances Oracle Database Performance
4/6/98 Datametrics Reaffirms Commitment to Unisys Users With Latest Version
of ViewPoint
4/28/98 Zitel Reports Results for Second Quarter Fiscal 1998
<PAGE>
Disclosure Schedule - Page 29 6/12/98
Date Title
- ---- -----
5/4/98 Datametrics and Sequent Team Up to Provide Performance Management
Products for Sequent Customers
5/4/98 Zitel Strengthens Commitment to Expanding Significant Industry Partner
Program
5/11/98 Datametrics and Status Forge Partnership Bringing Performance Bringing
Performance Management Capabilities to Stratus Customers
5/20/98 Zitel Corporation Contracts Manufacturing to Hitachi Computer Products
(America), Inc.
5/28/98 Zitel and Partner FDC Technologies Awarded Year 2000 Contract by the
National Institute of Health
Section 2.1(i) - CONTINGENT LIABILITIES
The Company has incurred and may continue to incur certain liabilities in
connection with (1) a proposed business combination/reorganization, including
without limitation fees and expenses of legal counsel, investment bankers and
accountants; and (2) a proposed divesture of its storage division, including
without limitation fees and expenses of legal counsel, investment bankers and
accountants, costs related to employee severance packages, and expenses
attributable to ongoing customer support commitments and product warranties.
Section 2.1(p) - LITIGATION
Two employees have threatened litigation against the Company or its
subsidiaries: Beryl Crisp (UK - for wrongful termination and sexual
discrimination) and Marc Schuurkes (Netherland - for non-payment of
commissions). There is also ongoing litigation in the Netherlands regarding a
claim of wrongful termination by Mr. M.H.S.M. Schneider.
Section 2.1(s) - OUTSTANDING SECURITIES SUBJECT TO REGISTRATION RIGHTS, ETC.
1. $5,454,000 aggregate principal amount of 5% Convertible Subordinated
Debentures due 1999
Section 2.1(t) - CERTAIN TRANSACTIONS
1. Retention/special severance pool
2. Incentive payment to divest businesses
3. Severance agreements for selected employees
<PAGE>
EXHIBIT 4.5
Zitel Corporation
3% Convertible Subordinated Debentures Due 1999 and
Common Stock Purchase Warrants
PLACEMENT AGENCY AGREEMENT
June 16, 1998
Rochon Capital Group, Ltd.
As Placement Agent
16 Mary Street, Suite 2000
San Rafael, California 94901
Ladies and Gentlemen:
This letter confirms the agreement (this "Agreement") of Zitel
Corporation, a California corporation (the "Company"), to retain Rochon
Capital Group, Ltd., a California corporation (the "Placement Agent"), as the
Company's exclusive agent from May 8, 1998 through and including June 30,
1998 (the "Engagement Period") to identify for the Company prospective
purchasers (collectively, the "Purchasers" and each individually, a
"Purchaser") in a placement (the "Placement") of up to U.S. $20,000,000.00
aggregate principal amount of the Company's 3% Convertible Subordinated
Debentures Due 1999 (the "Debentures"), convertible into shares of the
Company's common stock, no par value per share (the "Common Stock"), and up
to 300,000 warrants (the "Warrants") exercisable into shares of Common Stock.
The Debentures and Warrants are collectively referred to herein as the
"Securities."
Terms of the Placement shall be as set forth in the subscription
documents, including the convertible debenture purchase agreement,
convertible subordinated debenture, registration rights agreement, and common
stock purchase warrant, to be executed in connection with the Placement
(collectively, the "Subscription Documents").
The Placement Agent will act on a best efforts basis and will have no
obligation to purchase any of the securities offered by the Company in the
Placement. During the Engagement Period, the Placement Agent shall have the
exclusive right to make all offers and to arrange for all sales of securities
by the Company, including without limitation the exclusive right to identify
buyers for the Securities. The Engagement Period shall be automatically
extended for a reasonable number of days if, during the Engagement Period,
sales relating to commitments from Purchasers are not consummated during the
<PAGE>
Rochon Capital Group, Ltd.
June 16, 1998
Page 2
Engagement Period due to delays in the preparation of final documentation;
provided, however, that in no event will the Engagement Period be
automatically extended beyond July 7, 1998 without the written consent of the
Company and the Placement Agent and provided further that to the extent the
Subscription Documents contemplate a second closing, the terms of this
Agreement shall apply to such second closing (and herein reference to the
"Closing" shall be deemed to include each of the first and second such
closing unless the text specifically indicates otherwise).
The Placement is intended to be exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to Regulation D ("Regulation D") of the rules and regulations
of the Securities and Exchange Commission (the "SEC") promulgated under the
Securities Act.
In order to effectuate the Closing (as defined in Section 1 hereof), the
Company, the Placement Agent and a bank reasonably acceptable to both parties
(the "Escrow Agent") 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, terms and conditions:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The representations
and warranties of the Company made to the Purchasers as set forth in the
Subscription Documents are hereby incorporated by reference as of the date of
consummation of the sale of the Securities (the "Closing") and all such
representations and warranties are hereby deemed made by the Company directly
to the Placement Agent as though set forth in full herein.
2. COVENANTS OF THE COMPANY.
(a) The covenants of the Company made to the Purchasers as set
forth in the Subscription Documents are hereby incorporated by reference as
of the Closing and all such covenants are hereby deemed made by the Company
directly to the Placement Agent as though set forth in full herein.
(b) Neither the Company nor any affiliate of the Company (as
defined in Rule 501(b) of Regulation D) 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
Securities or the shares of Common Stock issuable upon conversion of the
Debentures or exercise of the Warrants (the "Underlying Common Shares") in a
manner which would require the registration under the Securities Act of the
Securities or the Underlying Common Shares.
<PAGE>
Rochon Capital Group, Ltd.
June 16, 1998
Page 3
(c) Any and all filings and documents required to be filed in
connection with or as a result of the Placement pursuant to federal and state
securities laws are the responsibility of the Company and will be filed by
the Company.
(d) Any press release to be issued by the Company announcing or
referring to the Placement shall be subject to the prior review of the
Placement Agent, and each such press release shall, at the request of the
Placement Agent, identify Rochon Capital Group, Ltd. as the placement agent.
This Agreement shall not be filed publicly by the Company without the prior
written consent of the Placement Agent.
3. COVENANTS OF THE PLACEMENT AGENT. On the basis of, and in reliance
on, the representations, warranties and covenants of the Purchasers set forth
in the Subscription Documents, the Placement Agent hereby covenants with the
Company as follows:
(a) The Placement Agent 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 Securities would not be exempt from the
registration requirements of the Securities Act pursuant to Regulation D.
(b) No action is being taken or is contemplated by the Placement
Agent that would permit a public offering of the Securities in any
jurisdiction where, or in any other circumstance in which, action for those
purposes is required (other than in jurisdictions where such action has been
duly taken). The Placement Agent will comply with applicable laws and
regulations in any jurisdiction in which it may offer, sell or deliver the
Securities and will not, directly or indirectly, offer, sell or deliver the
Securities or distribute or publish any prospectus, circular, advertisement
or other offering material in relation to the Securities in or from any
country or jurisdiction except under circumstances that will result in
compliance with any applicable laws and regulations, and all offers, sales
and deliveries of the Securities by it will be made on the foregoing terms.
4. COMPENSATION OF THE PLACEMENT AGENT; EXPENSES. As compensation for
services rendered by the Placement Agent in connection with the transactions
contemplated herein, the Company agrees to pay the Placement Agent, directly
from the escrowed funds at the Closing, a fee of 4.0% of the gross proceeds
from the sale of the Securities on the first $6,000,000.00 raised, 3.5% of
the gross proceeds from the sale of the Securities on amounts between
$6,000,001.00 and $20,000,000.00, and 3.0% of the gross proceeds from the
sale of the Securities on amounts in excess of $20,000,000.00 (the "Agency
Fee"). The parties hereto expressly agree that the gross proceeds from the
sale of the Securities at a second closing shall be subject to compensation
as provided in this Section 4 on a cumulative basis with the gross proceeds
of the first closing and the fee so paid in respect of the first and second
Closings shall collectively be referred to herein as the "Agency Fee". In
addition, the Company agrees to pay to the Placement Agent, directly from
<PAGE>
Rochon Capital Group, Ltd.
June 16, 1998
Page 4
the escrowed funds at the first Closing, an expense allowance of $19,500.00
and directly from the escrowed funds at the second Closing, an expense
allowance of $10,000.00, each as reimbursement for the Placement Agent's
expenses, including without limitation attorney fees and costs,
travel-related expenses and estimated telephone, facsimile and postage
charges (collectively, the "Expense Reimbursement"). Costs incurred by the
Placement Agent in excess of the Expense Reimbursement shall be the Placement
Agent's sole responsibility. The Company will pay all of its own expenses
incurred in connection with the Placement and will also pay the Escrow
Agent's fee and the reasonable accountable attorney fees and costs incurred
by one investor in an amount not to exceed $30,000.00.
5. CLOSING. The Closing may be held at such place or places as shall
be specified by the Placement Agent and reasonably agreed to by the Company.
Certificates evidencing the Securities in the names of the respective
Purchasers and in the respective denominations aggregating all of the
Securities sold at the Closing shall be delivered by the Company to the
Escrow Agent.
6. CONDITIONS TO CLOSING. The Company and the Placement Agent agree
that the issuance and sale of the Securities and all obligations of the
Placement Agent provided herein shall be subject to the receipt by the
Placement Agent of (i) a legal opinion of the Company's securities counsel,
indicating that the Placement Agent is entitled to rely thereon, in the form
required to be delivered to the Purchasers pursuant to the Subscription
Documents and (ii) an escrow agreement duly executed by the Company in a form
reasonably satisfactory to the Placement Agent.
7. INDEMNIFICATION.
(a) The Company will indemnify and hold harmless the Placement
Agent and each of its partners, directors, officers, associates, affiliates ,
subsidiaries, divisions, 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 offering materials related to the Placement, 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
<PAGE>
Rochon Capital Group, Ltd.
June 16, 1998
Page 5
expense arising from a breach by the Placement Agent of its obligations in
Section 3 hereof (a "Non-Indemnity Event") or 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 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
Agreement for any settlement of any claim against the indemnified party made
without the indemnifying party's written consent, which consent shall not be
unreasonably withheld. Notwithstanding anything to the contrary contained in
the foregoing subsection (b) or the following subsection (d), the Placement
Agent shall not be obligated to pay, and will not pay, any amount in respect
of its obligation to indemnify or contribute greater than the Agency Fee (as
defined in Section 4 hereof).
(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 Securities 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.
<PAGE>
Rochon Capital Group, Ltd.
June 16, 1998
Page 6
(a) NON-CIRCUMVENTION. The Company hereby agrees that, for a
period of two years form the end of the Engagement Period, the Company will
not enter into any agreement, transaction or arrangement with any of the
institutions (including their agents, principals and affiliates and the
accounts and funds which they manage or advise) which the Placement Agent has
identified to the Company as prospective purchasers of the Securities in the
Placement (collectively, the "Rochon Contacts"), regardless of whether a
transaction is consummated with such prospective purchasers, unless the
Company notifies the Placement Agent in writing of the agreement, transaction
or arrangement, and pays the Placement Agent the Agency Fee set forth in
Paragraph 4 hereof. Within five business days after the expiration of the
Engagement Period, the Placement Agent will provide the Company with a list
of the Rochon Contacts, which list and names the Company agrees to hold
strictly confidential. The parties agree that the prospective purchasers
whose names appear on the list submitted to the Company by the Placement
Agent in a letter dated May 23, 1997 shall continue to be subject to the
provisions of Section 8(a) of the placement agency agreement by and between
the Company and the Placement Agent dated May 19, 1997, and shall not be
subject to the two-year limitation referred to in the first sentence of
Paragraph 8(a) of this Agreement.
(b) RIGHT OF FIRST REFUSAL. For a period of two hundred forty
(240) days from the Closing Date, if the Company desires to sell any equity
securities of the Company or any 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), then the Company shall offer the Placement Agent in writing the
exclusive right to identify buyers for such securities upon terms that are
reasonably acceptable to the Company and the Placement Agent. The Company
shall set forth all terms of the Subsequent Transaction in the written offer
to the Placement Agent and 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 commitments from investors to purchase the securities, or the Company
will then be free to engage others to assist it in offering such securities
on identical terms. If the Company chooses to offer or sell securities in the
Subsequent Transaction on terms which differ in any way from those set forth
in the written offer to the Placement Agent, then the Company must offer the
Placement Agent in writing the right to act as the Company's exclusive agent
in the Subsequent Transaction on the modified terms. The foregoing
notwithstanding, in the event of a Change in Control of the Company (as that
term is defined in the Subscription Documents), the right of first refusal
set forth in this Section 8(b) shall terminate.
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 be binding upon any
successors
<PAGE>
Rochon Capital Group, Ltd.
June 16, 1998
Page 7
and assigns of the Company and shall survive any termination of this
Agreement and/or issuance of the Securities. Any successor or assign of the
Placement Agent and/or its designees, 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 contained
herein.
10. TERMINATION. Either party may terminate this Agreement by giving
notice as hereinafter specified at any time after July 7, 1998 if the Closing
has not occurred by such date. In the event of termination pursuant to this
Section 10, the Company shall remain obligated to pay the Expense
Reimbursement as set forth in Section 4 hereof. Subject to the foregoing
sentence, any termination pursuant to this Section 10 shall be without
liability of either party to the other party except as provided in the
immediately preceding sentence.
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 Company: Zitel Corporation
47211 Bayside Parkway
Fremont, California 94538
Attention: Larry B. Schlenoff
Telephone: 510-440-9600
Facsimile: 510-440-8526
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Rochon Capital Group, Ltd.
June 16, 1998
Page 8
with a copy to: Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, California 94111
Attention: John L. Cardoza, Esq.
Telephone: 415-693-2045
Facsimile: 415-951-3699
To the Placement Agent: Rochon Capital Group, Ltd.
16 Mary Street, Suite 2000
San Rafael, California 94901
Attention: Phillip L. Neiman
Telephone: 415-256-2400
Facsimile: 415-256-1214
with a copy to: Bryan Cave LLP
700 Thirteenth Street, N.W., Suite 700
Washington, D.C.20005
Attention: LaDawn Naegle, Esq.
Telephone: 202-508-6046
Facsimile: 202-508-6200
(d) SEVERABILITY. If any provision of this Agreement, other than
Section 4, Section 7 and Section 8, is found to be unenforceable, invalid or
illegal, and cannot be modified to the satisfaction of the Placement Agent,
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 and costs.
(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 written and oral agreements 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 California without regard to its
principles of conflicts of laws.
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Rochon Capital Group, Ltd.
June 16, 1998
Page 9
(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 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.
(j) HEADINGS. The headings in this Agreement are for convenience
of reference only and are in no way intended to describe, interpret, define,
modify, add to, or limit the scope, extent or intent of, this Agreement or
any provision hereof.
[REMAINDER OF PAGE INTENTIALLY LEFT BLANK]
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Rochon Capital Group, Ltd.
June 16, 1998
Page 10
If the foregoing correctly sets forth the understandings between you as
Placement Agent and the Company, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement between us.
Very truly yours,
Zitel Corporation
By: _______________________________
Name: Larry B. Schlenoff
Title: Vice President, Finance and
Administration and CFO
ACCEPTED AND AGREED TO AS OF
THE DATE FIRST WRITTEN ABOVE:
Rochon Capital Group, Ltd.
By: ___________________________________
Name: Phillip L. Neiman
Title: President
