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:
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, ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ (the
"Escrow Agent") as set forth in that certain escrow agreement
dated as of June 15, 1998 among the Company, the Escrow Agent and
▇▇▇▇▇▇ Capital
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
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.
(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
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
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 ▇▇▇▇▇▇ 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.
(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.
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
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 ▇▇▇▇▇▇ 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
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
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, ▇▇▇▇▇ & ▇▇▇▇▇, 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)
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
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.
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
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
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
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 ▇▇▇ for any
breach by the other party (or parties).
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:
Zitel Corporation
▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: Chief Financial Officer
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
with copies to:
▇▇▇▇▇▇ Godward LLP
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
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, ▇▇▇▇▇ & ▇▇▇▇▇, P.C.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
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
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]
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: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: Managing Director
PALLADIN PARTNERS I, L.P.
By: PALLADIN ASSET MANAGEMENT, L.L.C.
General Partner
By:
----------------------------
Name:
Title:
PALLADIN OVERSEAS FUND LIMITED
By: THE PALLADIN GROUP L.P.
Attorney-in-Fact
By:
----------------------------
Name: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: Managing Director
THE GLENEAGLES FUND COMPANY
By: THE PALLADIN GROUP L.P.
Attorney-in-Fact
By:
----------------------------
Name: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: Managing Director
PALLADIN SECURITIES, LLC
By:
------------------------------------
Name: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: Principal
COLONIAL PENN LIFE INSURANCE COMPANY
By: THE PALLADIN GROUP L.P.
Attorney-in-Fact
By:
----------------------------
Name: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: Managing Director
[SIGNATURE PAGE TO ZITEL CORPORATION CONVERTIBLE
SUBORDINATED DEBENTURE PURCHASE AGREEMENT]
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
SCHEDULE I
OUTSTANDING NUMBER RESTRICTED
PRINCIPAL AMOUNT OF OWNERSHIP
INVESTOR OF DEBENTURES WARRANTS PURCHASE PRICE PERCENTAGE
-------- ---------------- -------- -------------- ----------
Halifax Fund, L.P. $2,500,000 37,500 $2,500,000 4.9%
c/o The Palladin Group, L.P.
Investment Manager
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Palladin Partners I, L.P. $1,500,000 22,500 $1,500,000 4.9%
c/o Palladin Asset Management
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Palladin Overseas Fund Limited $1,500,000 22,500 $1,500,000 4.9%
c/o The Palladin Group, L.P.
Investment Manager
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
The Gleneagles Fund Company $1,500,000 22,500 $1,500,000 4.9%
c/o The Palladin Group, L.P.
Investment Manager
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Palladin Securities, LLC $1,500,000 22,500 $1,500,000 4.9%
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Colonial Penn Life Insurance
Company $1,500,000 22,500 $1,500,000 4.9%
c/o The Palladin Group, L.P.
Investment Manager
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
TOTAL
---------------- -------- --------------
$10,000,000 150,000 $10,000,000
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
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: ▇▇▇▇▇ ▇▇▇▇▇ (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. ▇▇▇▇▇▇▇▇▇.
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