EXHIBIT 4.1
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID
ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE
TO THE BORROWER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT.
ANY PROSPECTIVE TRANSFEREE OF THIS DEBENTURE SHOULD CAREFULLY REVIEW THE TERMS
HEREOF INCLUDING WITHOUT LIMITATION SECTION 1.4(B) RELATING TO THE PRINCIPAL
AMOUNT OF THIS DEBENTURE.
CONVERTIBLE SUBORDINATED DEBENTURE
Fremont, California
May 22, 1997 $_________
FOR VALUE RECEIVED, ZITEL CORPORATION, a California corporation
(hereinafter called the "Borrower") hereby promises to pay to the order of
______________________________ or registered assigns (the "Holder") the sum of
____________________ Dollars ($____________), on November 22, 1999 (the
"Automatic Conversion Date"), and to pay interest on the unpaid principal
balance hereof at the rate of five percent (5%) per annum from May 22, 1997 (the
"Issue Date") until the same becomes due and payable, whether at maturity or
upon acceleration or by prepayment or otherwise. Any amount of principal of or
interest on this Debenture which is not paid when due shall bear interest at the
rate of seven percent (7%) per annum from the due date thereof until the same is
paid ("Default Interest"). Interest shall commence accruing on May 22, 1997,
shall be computed on the basis of a 365-day year and the actual number of days
elapsed and shall be payable at the time of optional or automatic conversion of
the principal to which such interest relates in accordance with Article I below.
All payments of principal and accrued interest (to the extent not converted into
Common Stock in accordance with the terms hereof) shall be made in lawful money
of the United States of America. All payments shall be made at such address as
the Holder shall hereafter give to the Borrower by written notice made in
accordance with the provisions of this Debenture. Whenever any amount expressed
to be due by the terms of this Debenture is due on any day which is not a
Exhibit 4.1 - Page 1
business day, the same shall instead be due on the next succeeding day which is
a business day and, in the case of any interest payment date which is not the
date on which this Debenture is paid in full, the extension of the due date
thereof shall not be taken into account for purposes of determining the amount
of interest due on such date. As used in this Debenture, the term "business
day" shall mean any day other than a Saturday, Sunday or a day on which
commercial banks in the city of New York, New York are authorized or required by
law or executive order to remain closed. Each capitalized term used herein, and
not otherwise defined, shall have the meaning ascribed thereto in the Securities
Purchase Agreement, dated May 21, 1997, pursuant to which this Debenture was
originally issued (the "Purchase Agreement"). The Automatic Conversion Date is
subject to extension pursuant to Section 1.4 below.
The following terms shall apply to this Debenture:
ARTICLE I. CONVERSION RIGHTS
1.1 CONVERSION RIGHT. The Holder shall have the right from and after
the earlier of (i) the ninetieth (90th) day following the Issue Date and (ii)
the occurrence of an event described in Section 1.6 below, and then at any time
on or prior to the day that all of the principal, accrued interest and other
amounts payable hereunder are paid in full, to convert at any time all or from
time to time any part of the outstanding and unpaid principal amount of this
Debenture of at least $50,000, or such lesser amount as shall remain unpaid at
the time of the conversion (together with accrued interest thereon, unless the
Borrower pays such accrued interest in cash as provided below), into fully paid
and non-assessable shares of Common Stock, as such Common Stock exists on the
date of issuance of this Debenture, or any shares of capital stock of Borrower
into which such Common Stock shall hereafter be changed or reclassified (the
"Common Stock") at the conversion price determined as provided herein (the
"Conversion Price"); provided, however, that unless the Holder delivers a waiver
in accordance with the immediately following sentence, in no event (other than
in connection with an Automatic Conversion (as defined in Section 1.4 below) on
the Automatic Conversion Date) shall the Holder be entitled to convert any
portion of this Debenture in excess of that portion of this Debenture upon
conversion of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of this Debenture) and (2) the number of shares of Common
Stock issuable upon the conversion of the portion of this Debenture with respect
to which the determination of this proviso is being made, would result in
beneficial ownership by the Holder and its affiliates of more than 4.9% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, (i) beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13 D-G thereunder, except as otherwise provided in
clause (1) of such proviso and (ii) the Holder may waive the limitations set
forth therein by written notice to the Borrower upon not less than sixty-one
(61) days prior notice (with such waiver taking effect only upon the expiration
of such 61 day notice period). The number of shares of Common Stock to be
Exhibit 4.1 - Page 2
issued upon each conversion of this Debenture shall be determined by dividing
the Conversion Amount (as defined below) by the Conversion Price in effect on
the date a notice of conversion, in the form attached hereto as Exhibit A (the
"Notice of Conversion"), is delivered to the Borrower by the Holder in
accordance with Section 1.4 below (the "Conversion Date"). The term "Conversion
Amount" means, with respect to any conversion of this Debenture, the sum of (1)
the principal amount of this Debenture to be converted in such conversion PLUS
(2) accrued and unpaid interest, if any, on such principal amount at the
interest rates provided in this Debenture to the Conversion Date PLUS (3)
Default Interest, if any, on the interest referred to in the immediately
preceding clause (2) (subject to the Borrower's right to pay the interest
referred to in clauses (2) and (3) in cash, as provided below) PLUS (4) at the
Holder's option, any additional amounts (to the extent not already included in
principal) owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or
pursuant to Section 2(c) of the Registration Rights Agreement, dated as of
May 22, 1997, executed in connection with the initial issuance of this Debenture
(the "Registration Rights Agreement"). The Borrower shall have the right to
elect to pay accrued interest (including Default Interest, if any) in cash, in
lieu of conversion to Common Stock in accordance with this Article I. If the
Borrower elects to pay accrued interest (including Default Interest, if any) in
cash, such cash shall be paid simultaneously with the delivery to the Holder of
the certificates representing the Common Stock issuable upon conversion in
accordance with Section 1.4 below. At the written request of the Holder, the
Borrower shall advise such Holder in writing, within two (2) business days of
such request, whether conversion of accrued interest will be paid in Common
Stock or in cash, and such election shall be binding for thirty (30) days
following the date of the Borrower's response. Failure to respond by the
Borrower within two (2) business days shall be deemed to be an election to
convert the accrued interest to Common Stock for any conversions within thirty
(30) days of the request.
1.2 CONVERSION PRICE. The Conversion Price shall be the lesser of
(i) 90% of the Market Price, when Market Price means the average of the Closing
Bid Prices for the Common Stock on The Nasdaq National Market, or on the
principal securities exchange or other securities market on which the Common
Stock is then being traded, for the five (5) consecutive Trading Days (as
defined below) ending one Trading Day prior to the date the Conversion Notice is
sent by the Holder to the Borrower via facsimile (the "Conversion Date"), and
(ii) $26.975 (subject, in each case, to equitable adjustments for stock splits,
stock dividends or rights offerings by the Borrower relating to the Borrower's
securities or the securities of any subsidiary of the Borrower, combinations,
recapitalization, reclassifications, extraordinary distributions and similar
events). "Closing Bid Price" means, for any security as of any date, the last
closing bid price on the Nasdaq National Market as reported by Bloomberg
Financial Markets or an equivalent, reliable reporting service mutually
acceptable to and hereafter designated by Holders of a majority in interest of
the Debentures and the Borrower ("Bloomberg") or, if The Nasdaq National Market
is not the principal trading market for such security, the last closing bid
price of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by Bloomberg, or if the
foregoing do not apply, the last closing bid price of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by
Exhibit 4.1 - Page 3
Bloomberg, or, if no closing bid price is reported for such security by
Bloomberg, then the last closing trade price of such security as reported by
Bloomberg, or, if no last closing trade price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the
Closing Bid Price cannot be calculated for such security on such date on any of
the foregoing bases, the Closing Bid Price of such security on such date shall
be the fair market value as mutually determined by the Borrower and the Holders
of a majority in interest of Debentures being converted for which the
calculation of the closing bid price is required in order to determine the
Conversion Price of such Debentures. "Trading Day" shall mean any day on which
the Common Stock is traded for any period on the Nasdaq National Market, or on
the principal securities exchange or other securities market on which the Common
Stock is then being traded.
1.3 AUTHORIZED SHARES. The Borrower covenants that during the period
the conversion right exists, the Borrower will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the full conversion of this Debenture and the other
Debentures issued on the Issue Date. As of the date of issuance of this
Debenture, 3,000,000 authorized and unissued shares of Common Stock have been
duly reserved for issuance upon conversion of this Debenture and the other
Debentures issued on the Issue Date (the "Reserved Amount"). The Borrower
represents that upon issuance, such shares will be duly and validly issued,
fully paid and non-assessable. The Borrower (i) acknowledges that it has
irrevocably instructed its transfer agent to issue certificates for the Common
Stock issuable upon conversion of this Debenture and (ii) agrees that its
issuance of this Debenture shall constitute full authority to its officers and
agents who are charged with the duty of executing stock certificates to execute
and issue the necessary certificates for shares of Common Stock in accordance
with the terms and conditions of this Debenture.
If, at any time a Holder of this Debenture submits a Notice of
Conversion, the Borrower does not have sufficient authorized but unissued shares
of Common Stock available to effect such conversion in accordance with the
provisions of this Article I (a "Conversion Default"), subject to Section 6.8,
the Borrower shall issue to the Holder all of the shares of Common Stock which
are then available to effect such conversion. The portion of this Debenture
which the Holder included in its Conversion Notice and which exceeds the amount
which is then convertible into available shares of Common Stock (the "Excess
Amount") shall, notwithstanding anything to the contrary contained herein, not
be convertible into Common Stock in accordance with the terms hereof until (and
at the Holder's option at any time after) the date additional shares of Common
Stock are authorized by the Borrower, at which time the Conversion Price in
respect thereof shall be the lower of (i) the Conversion Price on the Conversion
Default Date (as defined below) and (ii) the Conversion Price on the Conversion
Date thereafter elected by the Holder in respect thereof. The Borrower shall
pay to the Holder payments ("Conversion Default Payments") for a Conversion
Default in the amount of (N/365) x .24 x the Excess Amount on the Conversion
Date in respect of the Conversion Default (the "Conversion Default Date"), where
(i) N = the number of days from the Conversion Default Date to the date (the
"Authorization Date")
Exhibit 4.1 - Page 4
that the Borrower authorizes a sufficient number of shares of Common Stock to
effect conversion of the full outstanding principal balance of this Debenture.
The Borrower shall use its best efforts to authorize a sufficient number of
shares of Common Stock as soon as practicable following the earlier of (i) such
time that the Holder notifies the Borrower or that the Borrower otherwise
becomes aware that there are or likely will be insufficient authorized and
unissued shares to allow full conversion thereof and (ii) a Conversion Default.
The Borrower shall send notice to the Holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of Holder's
accrued Conversion Default Payments. The accrued Conversion Default Payments
for each calendar month shall be paid in cash or shall be convertible into
Common Stock (at such time as there are sufficient authorized shares of Common
Stock) at the Market Price, at the Holder's option, as follows:
(a) In the event Holder elects to take such payment in cash,
cash payment shall be made to Holder by the fifth day of the month following the
month in which it has accrued; and
(b) In the event Holder elects to take such payment in Common
Stock, the Holder may convert such payment amount into Common Stock at the
Conversion Price (as in effect at the time of conversion) at any time after the
fifth day of the month following the month in which it has accrued (at such time
as there are sufficient authorized shares of Common Stock) in accordance with
the terms of this Article I.
The Holder's election shall be made in writing to the Borrower at any
time prior to 9:00 p.m., New York City Time, on the third day of the month
following the month in which Conversion Default payments have accrued. If no
election is made, the Holder shall be deemed to have elected to receive cash.
Nothing herein shall limit the Holder's right to pursue actual damages (to the
extent in excess of the Conversion Default Payments) due to the Borrower's
failure to maintain a sufficient number of authorized shares of Common Stock.
1.4 METHOD OF CONVERSION.
(a) This Debenture may be converted by the Holder in whole or in
part (provided such partial conversion is at least $50,000, or such lesser
amount as shall remain unpaid at the time of the conversion (together with
accrued and unpaid interest thereon)) at any time from time to time after the
earlier of (i) ninety (90) days from the Issue Date and (ii) the occurrence of
an event described in Section 1.6 below, by (A) submitting to the Borrower a
Notice of Conversion (by facsimile or other reasonable means of communication
dispatched on the Conversion Date prior to 9:00 p.m., New York City Time) and
(B) subject to Section 1.4(b), surrendering this Debenture at the principal
office of the Borrower. So long as the registration statement filed pursuant to
Section 2(a) of the Registration Rights Agreement (the "Registration Statement")
is effective (or the Common Stock issuable upon conversion hereof may otherwise
be resold publicly without restriction) and there is not then a continuing Event
of Default, each
Exhibit 4.1 - Page 5
Debenture issued and outstanding on November 22, 1999 (the "Automatic Conversion
Date"), automatically shall be converted into shares of Common Stock on such
date at the then effective Conversion Price in accordance with, and subject to,
the provisions of this Article I (the "Automatic Conversion"). The Automatic
Conversion Date shall be the Conversion Date for purposes of determining the
Conversion Price and the time within which certificates representing the Common
Stock must be delivered to the holder. Notwithstanding anything to the contrary
contained herein, the Automatic Conversion Date shall be extended for the
aggregate number of days comprising any Allowed Delays under the Registration
Rights Agreement.
(b) Notwithstanding anything to the contrary set forth herein,
upon conversion of this Debenture in accordance with the terms hereof, the
Holder shall not be required to physically surrender this Debenture to the
Borrower unless the entire unpaid principal amount of this Debenture is so
converted. The Holder and the Borrower shall maintain records showing the
principal amount so converted and the dates of such conversions or shall use
such other method, reasonably satisfactory to the Holder and the Borrower, so as
not to require physical surrender of this Debenture upon each such conversion.
In the event of any dispute or discrepancy, such records of the Borrower shall
be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if any portion of this Debenture is converted as
aforesaid, the Holder may not transfer this Debenture unless the Holder first
physically surrenders this Debenture to the Borrower, whereupon the Borrower
will forthwith issue and deliver upon the order of the Holder a new note of like
tenor, registered as the Holder (upon payment by the Holder of any applicable
transfer taxes) may request, representing in the aggregate the remaining unpaid
principal amount of this Debenture. The Holder and any assignee, by acceptance
of this Debenture, acknowledge and agree that, by reason of the provisions of
this paragraph, following conversion of a portion of this Debenture, the unpaid
and unconverted principal amount of this Debenture represented by this Debenture
may be less than the amount stated on the face hereof.
(c) The Borrower shall not be required to pay any tax which may
be payable in respect of any transfer involved in the issue and delivery of
shares of Common Stock or other securities or property on conversion of this
Debenture in a name other than that of the Holder (or in street name), and the
Borrower shall not be required to issue or deliver any such shares or other
securities or property unless and until the person or persons (other than the
Holder or the custodian in whose street name such shares are to be held for the
Holder's account) requesting the issuance thereof shall have paid to the
Borrower the amount of any such tax or shall have established to the
satisfaction of the Borrower that such tax has been paid.
(d) Upon receipt by the Borrower from the Holder of a facsimile
transmission (or other reasonable means of communication) of a Notice of
Conversion meeting the requirements for conversion as provided in this Section
1.4, the Borrower shall issue and deliver or cause to be issued and delivered to
the Holder certificates for the Common Stock issuable upon such conversion
within three (3) business days after such receipt (and, solely in the case of
conversion of the entire unpaid principal amount hereof, surrender of this
Debenture)
Exhibit 4.1 - Page 6
(such third business day being hereinafter referred to as the "Deadline") in
accordance with the terms hereof and the Purchase Agreement (including, without
limitation, in accordance with the requirement that certificates for shares of
Common Stock issued on or after the effective date of the Registration Statement
upon conversion of this Debenture shall not bear any restrictive legend).
(e) Upon receipt by the Borrower of a Notice of Conversion, the
Holder shall be deemed to be the holder of record of the Common Stock issuable
upon such conversion, the outstanding principal amount and the amount of accrued
and unpaid interest on this Debenture shall be reduced to reflect such
conversion, and, unless the Borrower defaults on its obligations under this
Article I, all rights with respect to the portion of this Debenture being so
converted shall forthwith terminate except the right to receive the Common Stock
or other securities, cash or other assets, as herein provided, on such
conversion. If the Holder shall have given a Notice of Conversion as provided
herein, the Borrower's obligation to issue and deliver the certificates for
Common Stock shall be absolute and unconditional, irrespective of the absence of
any action by the Holder to enforce the same, any waiver or consent with respect
to any provision thereof, the recovery of any judgment against any person or any
action to enforce the same, any failure or delay in the enforcement of any other
obligation of the Borrower to the holder of record, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder of any obligation to the Borrower, and irrespective of any other
circumstance which might otherwise limit such obligation of the Borrower to the
Holder in connection with such conversion. The date of receipt of such Notice
of Conversion shall be the Conversion Date so long as it is received before 9:00
p.m., New York City Time, on such date.
(f) In lieu of delivering physical certificates representing the
Common Stock issuable upon conversion, provided the Borrower's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the Holder and its compliance with
the provisions contained in Section 1.1 and in this Section 1.4, the Borrower
shall use its best efforts to cause its transfer agent to electronically
transmit the Common Stock issuable upon conversion to the Holder by crediting
the account of Holder's Prime Broker with DTC through its Deposit Withdrawal
Agent Commission ("DWAC") system.
(g) Without in any way limiting the Holder's right to pursue
other remedies, including actual damages and/or equitable relief, the parties
agree that if delivery of the Common Stock issuable upon conversion of this
Debenture is more than one (1) business day after the Deadline (other than a
failure due to the circumstances described in Section 1.3 above, which failure
shall be governed by such Section) the Borrower shall pay to the Holder $500 per
day in cash, for the first day beyond the Deadline and $2,500 per day in cash
for each day thereafter that the Borrower fails to deliver such Common Stock.
Such cash amount shall be paid to Holder by the fifth day of the month following
the month in which it has accrued or, at the option of the Holder (by written
notice to the Borrower by the first day of the month following
Exhibit 4.1 - Page 7
the month in which it has accrued), shall be added to the principal amount of
this Debenture, in which event interest shall accrue thereon in accordance with
the terms of this Debenture and such additional principal amount shall be
convertible into Common Stock in accordance with the terms of this Debenture.
1.5 CONCERNING THE SHARES. The shares of Common Stock issuable upon
conversion of this Debenture may not be sold or transferred unless either (i)
such shares shall have been included in an effective registration statement
under the Act or (ii) the Borrower or its transfer agent shall have been
furnished with an opinion or other similar letter of legal counsel to the effect
that such sale or transfer is exempt from the registration requirements of the
Act or (iii) such shares are sold pursuant to Rule 144 under the Act (or a
successor rule). Except as otherwise provided in the Purchase Agreement (and
subject to the removal provisions set forth below), each certificate for shares
of Common Stock issuable upon conversion of this Debenture that has not been so
included in an effective registration statement or that has not been sold
pursuant to an effective registration statement or an exemption that permits
removal of the legend, shall bear a legend substantially in the following form,
as appropriate:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID
ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE
TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT."
The legend set forth above shall be removed and the Borrower shall
issue to the Holder a new certificate therefor free of any transfer legend if
(i) the Borrower or its transfer agent shall have received an opinion or other
similar letter of counsel, to the effect that a public sale or transfer of such
Common Stock may be made without registration under the Act and any applicable
state securities laws, or that the Common Stock issuable upon conversion of this
Debenture (to the extent such securities are deemed to have been acquired on the
same date) can be sold pursuant to Rule 144 (or a successor rule thereto)
without any restriction as to the number of shares of Common Stock acquired as
of a particular date that can then be immediately sold or (ii) in the case of
the Common Stock issuable upon conversion of this Debenture, a registration
statement under the Act covering such securities is in effect. Nothing in this
Debenture shall (i) limit the Borrower's obligation under the Registration
Rights Agreement or (ii) affect in any way the Holder's obligations to comply
with applicable prospectus delivery requirements upon the resale of the
securities referred to herein.
1.6 EFFECT OF MERGER, CONSOLIDATION, ETC. If at any time when this
Debenture
Exhibit 4.1 - Page 8
is issued and outstanding, there shall be any merger, consolidation, exchange of
shares, recapitalization, reorganization, or other similar event, as a result of
which shares of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or securities of
the Borrower or another entity, or in case of any sale or conveyance of all or
substantially all of the assets of the Borrower other than in connection with a
plan of complete liquidation of the Borrower, then the Holder of this Debenture
shall thereafter have the right to receive upon conversion of this Debenture,
upon the bases and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock immediately theretofore issuable upon conversion,
such stock, securities or assets which the Holder would have been entitled to
receive in such transaction had this Debenture been converted immediately prior
to such transaction, and in any such case appropriate provisions shall be made
with respect to the rights and interests of the Holder of this Debenture to the
end that the provisions hereof (including, without limitation, provisions for
adjustment of the Conversion Price and of the number of shares issuable upon
conversion of the Debenture) shall thereafter be applicable, as nearly as may be
practicable in relation to any securities or assets thereafter deliverable upon
the exercise hereof. Subject to the terms of the Purchase Agreement, the
Borrower shall not effect any transaction described in this Section 1.6 unless
(a) it first gives, to the extent practicable, forty-five (45) days prior
written notice (but in any event at least thirty (30) business days prior
written notice) of the record date of the special meeting of stockholders to
approve, or if there is no such record date, the consummation of, such merger,
consolidation, exchange of shares, recapitalization, reorganization or other
similar event or sale of assets (during which time the Holder shall be entitled
to convert this Debenture) and (b) the resulting successor or acquiring entity
(if not the Borrower) assumes by written instrument the obligations of this
Section 1.6. The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers or share exchanges.
1.7 CERTAIN PAYMENTS IN LIEU OF CONVERSION. In no event shall the
Borrower issue more than the Maximum Share Amount (as defined below and subject
to adjustment as provided herein) upon conversion of this Debenture, unless the
Borrower shall have obtained Stockholder Approval (as defined below) or a waiver
of such requirement by The Nasdaq Stock Market. As used herein, Stockholder
Approval means approval by the stockholders of the Borrower in accordance with
Rule 4460(i) of the rules of The Nasdaq Stock Market. Once the Maximum Share
Amount has been issued (the date of which is hereinafter referred to as the
"Maximum Conversion Date"), unless the Borrower shall have obtained Stockholder
Approval or a waiver of such requirement by The Nasdaq Stock Market, in lieu of
any further right to convert this Debenture, and in full satisfaction of the
Borrower's obligations under this Debenture, the Borrower shall pay to the
Holder, within fifteen (15) business days of the Maximum Conversion Date, an
amount equal to the greater of (i) the sum of (a) 111.11% TIMES the then
outstanding principal amount of this Debenture immediately following the Maximum
Conversion Date PLUS (b) accrued and unpaid interest on such principal amount
PLUS (c) accrued and unpaid Default Interest, if any, on the amount referred to
in the immediately preceding clause (b) at the rate provided in this Debenture
PLUS (d) any optional amounts that may
Exhibit 4.1 - Page 9
be added thereto at the Maximum Conversion Date by the Holder in accordance with
the terms hereof (the then outstanding principal amount of this Debenture
immediately following the Maximum Conversion Date PLUS the amounts referred to
in clauses (b), (c) and (d) above shall collectively be referred to as the
"Remaining Convertible Amount"), or (ii) the Remaining Convertible Amount
DIVIDED BY the Conversion Price (based on the five (5) consecutive trading days
ending on the date which is two (2) trading days prior to the date of payment)
MULTIPLIED BY the closing sale price of the Common Stock on Nasdaq or the
principal trading market for the Common Stock on the trading day immediately
preceding the date of payment. The Maximum Share Amount shall mean an aggregate
of 3,039,597 shares of Common Stock (19.9% of the Borrower's outstanding shares
of Common Stock as of May 21, 1997), subject to equitable adjustment from time
to time for stock splits, stock dividends, combinations, capital reorganizations
and similar events relating to the Common Stock occurring after the date hereof.
With respect to each Holder of Debentures, the Maximum Share Amount shall refer
to such Holder's PRO RATA share thereof determined in accordance with Section
6.8 below. In the event that Borrower obtains Stockholder Approval, the
approval of The Nasdaq Stock Market or otherwise concludes that it is able to
increase the number of shares to be issued above the Maximum Share Amount (such
increased number being the "New Maximum Share Amount"), the references to
Maximum Share Amount, above, shall be deemed to be, instead, references to the
greater New Maximum Share Amount. In the event that Stockholder Approval is not
obtained or a registration statement covering the additional shares of Common
Stock which constitute the New Maximum Share Amount is not effective prior to
the Maximum Share Amount being issued (if such registration statement is
necessary to allow for the public resale of such securities), the Maximum Share
Amount shall remain unchanged; provided, however, that the Holder may grant an
extension of the effective date of such registration statement. In the event
that (a) the aggregate number of shares of Common Stock issued pursuant to this
Debenture and the other Debentures issued on the Issue Date represents at least
fifty percent (50%) of the Maximum Share Amount and (b) the sum of (x) the
aggregate number of shares of Common Stock issued pursuant to this Debenture and
the other Debentures issued on the Issue Date PLUS (y) the aggregate number of
shares of Common Stock that remain issuable pursuant to this Debenture and the
other Debentures issued on the Issue Date, represents at least one hundred
percent (100%) of the Maximum Share Amount (the "Triggering Event"), the
Borrower will use its best efforts to seek and obtain Stockholder Approval (or
obtain such other relief as will allow conversions hereunder in excess of the
Maximum Share Amount) as soon as practicable following the Triggering Event and
before the Maximum Conversion Date.
1.8 MATRIDIGM DISTRIBUTION. In the event of any distribution to the
Borrower's shareholders of any assets or securities or rights to acquire assets
or securities in respect of MatriDigm Corporation or any assignee or successor
thereof or thereto (a "MatriDigm Distribution"), in lieu of any adjustment to
the Fixed Conversion Price that may otherwise be required hereunder, the Holder
shall be entitled to receive fifty percent (50%) of the MatriDigm Distribution
distributable with respect to each share of the Borrower's Common Stock for each
share of Common Stock issuable upon conversion of this Debenture (without regard
to any
Exhibit 4.1 - Page 10
limitations on conversions) at the then applicable Conversion Price (based on
the average closing bid price of the Common Stock during the five (5) Trading
Days ending one day prior to the public announcement of such MatriDigm
Distribution). To the extent that this Debenture is converted subsequent to
such announcement in accordance with the terms hereof, the number of shares in
respect of which the MatriDigm Distribution is payable in accordance with this
Section 1.8 shall be reduced on a share for share basis. Notwithstanding
anything to the contrary contained herein, the Borrower may not effect a
MatriDigm Distribution unless public announcement shall have been made and the
Holder shall have received advance notice of the record date in respect thereof
in accordance with Section 6.12 below and the Registration Statement covering
the resale of the Common Stock issuable upon conversion of this Debenture is
effective (and sales of Common Stock may be made thereunder) during the period
between such notification and such record date. The advance notice required by
Section 6.12 in respect of a MatriDigm Distribution shall be extended by one day
for each day that sales cannot be made pursuant to such Registration Statement
during such period.
ARTICLE II. CERTAIN COVENANTS
2.1 DISTRIBUTIONS ON CAPITAL STOCK. Except as provided in Section
1.8 hereof, so long as the Borrower shall have any obligation under this
Debenture, the Borrower shall not (a) pay, declare or set apart for such
payment, any dividend or other distribution (whether in cash, property or other
securities) on shares of capital stock other than dividends on shares of Common
Stock solely in the form of additional shares of Common Stock or (b) directly or
indirectly or through any subsidiary make any other payment or distribution in
respect of its capital stock.
2.2 RESTRICTION ON STOCK REPURCHASES. So long as the Borrower shall
have any obligation under this Debenture, and except for net exercises of
options and warrants in accordance with the terms thereof, the Borrower shall
not redeem, repurchase or otherwise acquire (whether for cash or in exchange for
property or other securities or otherwise) in any one transaction or series of
related transactions any shares of capital stock of the Borrower or any
warrants, rights or options to purchase or acquire any such shares.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events of default (each, an "Event of
Default") shall occur:
3.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower fails (a) to
pay the principal hereof when due, whether at maturity, upon mandatory
prepayment pursuant to Section 1.7, upon acceleration or otherwise or (b) to pay
any installment of interest hereon when due and, in the case of this clause (b)
only, such failure continues for a period of ten (10) calendar days after notice
of such failure to pay interest is received by the Borrower;
Exhibit 4.1 - Page 11
3.2 CONVERSION AND THE SHARES. The Borrower fails to issue shares of
Common Stock to the Holder (or announces that it will not honor its obligation
to do so) upon exercise by the Holder of the conversion rights of the Holder in
accordance with the terms of this Debenture (for a period of at least ninety
(90) days, if such failure is solely as a result of the circumstances governed
by Section 1.3 and the Borrower is using its best efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable), fails to
transfer any certificate for shares of Common Stock issued to the Holder upon
conversion of this Debenture and when required by this Debenture or the
Registration Rights Agreement, or fails to remove any restrictive legend on any
certificate for any shares of Common Stock issued to the Holder upon conversion
of this Debenture as and when required by this Debenture, the Purchase Agreement
or the Registration Rights Agreement and any such failure shall continue uncured
(or any announcement not to honor conversions shall not be rescinded) for ten
(10) business days after the Borrower shall have been notified thereof in
writing by the Holder.
3.3 FAILURE TO EFFECT REGISTRATION. The Borrower fails to obtain
effectiveness with the Securities and Exchange Commission of the Registration
Statement prior to November 30, 1997 or the Registration Statement lapses in
effect (or sales cannot otherwise be made thereunder) for more than thirty (30)
consecutive Trading Days or sixty (60) Trading Days in any twelve month period
after the Registration Statement becomes effective;
3.4 BREACH OF COVENANTS. The Borrower breaches any material covenant
or other material term or condition contained in Sections 1.3, 1.6, 1.7, 1.8 or
4.1 of this Debenture (other than as specifically provided in Sections 3.1, 3.2
and 3.3 hereof) or Sections 4(i) and 4(j) of the Purchase Agreement and such
breach continues for a period of ten (10) business days after written notice
thereof to the Borrower from the Holder;
3.5 BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation or
warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Purchase Agreement and the Registration
Rights Agreement), shall be false or misleading in any material respect when
made and the breach of which has (or with the passage of time will have) a
material adverse effect on the rights of the Holder with respect to this
Debenture, the Purchase Agreement or the Registration Rights Agreement and such
effect substantially diminishes the value of the Holder's investment in the
Borrower;
3.6 RECEIVER OR TRUSTEE. The Borrower or any subsidiary of the
Borrower shall make an assignment for the benefit of creditors, or apply for or
consent to the appointment of a receiver or trustee for it or for a substantial
part of its property or business, or such a receiver or trustee shall otherwise
be appointed;
3.7 JUDGMENTS. Any money judgment, writ or similar process shall be
entered or filed against the Borrower or any subsidiary of the Borrower or any
of its property or other
Exhibit 4.1 - Page 12
assets for more than $500,000, and shall remain unvacated, unbonded or unstayed
for a period of twenty (20) days unless otherwise consented to by the Holder,
which consent will not be unreasonably withheld;
3.8 BANKRUPTCY. Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Borrower or any subsidiary of the Borrower; or
3.9 DELISTING OF COMMON STOCK. The Common Stock is not listed on at
least one of the Nasdaq National Market, the Nasdaq SmallCap Market, the New
York Stock Exchange or the American Stock Exchange;
then, upon the occurrence and during the continuation of any Event of
Default specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7 or 3.9, at the option
of the Holders of a majority of the aggregate principal amount of the
outstanding Debentures issued pursuant to the Securities Purchase Agreement, the
Borrower shall, and upon the occurrence of an Event of Default specified in
Section 3.6 or 3.8, the Debentures shall become immediately due and payable and
the Borrower shall pay to the Holder, in full satisfaction of its obligations
hereunder, an amount equal to the greater of (i) the SUM of (w) 115% TIMES the
then outstanding principal amount of this Debenture PLUS (x) accrued and unpaid
interest on the unpaid principal amount of this Debenture to the date of payment
PLUS (y) Default Interest, if any, on the interest referred to in the
immediately preceding clause PLUS (z) any additional amounts (to the extent not
already included in principal) owed to the Holder pursuant to Sections 1.3 and
1.4(g) hereof or pursuant to Section 2(c) of the Registration Rights Agreement
(the then outstanding principal amount of this Debenture to the date of payment
PLUS the amounts referred to in clauses (x), (y) and (z) shall collectively be
known as the "Default Sum") or (ii) the Default Sum DIVIDED BY the then
applicable Conversion Price (based on the average closing bid price during the
five (5) Trading Days ending one day prior to the date the Holders exercise
their option pursuant to this paragraph or the date of the occurrence of an
event referred to in Section 3.6 or 3.8) MULTIPLIED BY the closing bid price of
the Common Stock on the Nasdaq National Market or the principal trading market
for the Common Stock on the date the Holders exercise their option pursuant to
this paragraph or the date of the occurrence of an event referred to in Section
3.6 or 3.8 (the "Default Amount") and all other amounts payable hereunder shall
immediately become due and payable, all without demand, presentment or notice,
all of which hereby are expressly waived, together with all costs, including,
without limitation, legal fees and expenses, of collection, and the Holder shall
be entitled to exercise all other rights and remedies available at law or in
equity.
If the Borrower fails to pay the Default Amount within five (5)
business days of written notice that such amount is due and payable, then the
Holder shall have the right at any time, so long as the Borrower remains in
default (and so long and to the extent that there are sufficient authorized
shares), to require the Borrower, upon written notice, to immediately issue, in
lieu of the Default Amount, the number of shares of Common Stock of the Borrower
equal to
Exhibit 4.1 - Page 13
the Default Amount divided by the Conversion Price then in effect.
ARTICLE IV. PREPAYMENT
4.1 PREPAYMENT. So long as no Event of Default shall have occurred
and be continuing, upon the occurrence of a merger or consolidation involving
the Borrower or sale of all or substantially all of the Borrower's assets in a
transaction where the consideration for the sale will be liquidated to the
Borrower's shareholders (collectively, a "Merger Transaction"), the Borrower
shall have the right, exercisable on not less than twenty (20) Trading Days
prior written notice to the Holder, to prepay the Debentures, in whole but not
in part, in accordance with this Section 4.1. Any notice of prepayment (a
"Prepayment Notice") shall be delivered to the Holder at its registered address
appearing on the records of the Borrower and shall state (1) that the Borrower
is exercising its right to prepay this Debenture and all other Debentures issued
on the Issue Date and (2) the date of prepayment. On the date fixed for
prepayment (the "Prepayment Date"), the Borrower shall make payment of the
Prepayment Amount (as hereinafter defined) to or upon the order of the Holder as
specified by the Holder in writing to the Borrower at least one business day
prior to the Prepayment Date. If the Borrower exercises its right to prepay the
Debentures, the Borrower shall make payment to the Holder or upon the order of
the Holder of an amount in cash (the "Prepayment Amount") equal to (a) in the
event of a Merger Transaction occurring within one year from the Issue Date, the
cash value of the merger consideration that would be payable with respect to the
shares of Common Stock into which this Debenture is then convertible (without
regard to any limitations or restrictions on conversion contained in this
Debenture) so long as the Prepayment Amount is at least $35 per share or (b) in
the event of a Merger Transaction occurring after one year from the Issue Date,
at the greater of (i) the sum of (a) 111.11% MULTIPLIED BY the then outstanding
principal amount of this Debenture on the Prepayment Date PLUS (b) accrued and
unpaid interest on such principal amount PLUS (c) accrued and unpaid Default
Interest, if any, on the amount referred to in the immediately preceding clause
(b) at the rate provided in this Debenture PLUS (d) any additional amounts (to
the extent not already included in principal) owed to the Holder pursuant to
Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of the Registration
Rights Agreement or (ii) the Remaining Convertible Amount DIVIDED BY the
Conversion Price (based on the five (5) consecutive Trading Days ending one day
prior to the public announcement of the Merger Transaction) MULTIPLIED BY an
amount per share equal to the consideration per share to be paid in the Merger
Transaction. Notwithstanding anything to the contrary contained in this Section
4.1, the Holder shall at all times prior to the Prepayment Date maintain the
right to convert all or any part of this Debenture in accordance with Article I
and any amounts so converted after receipt of a Prepayment Notice and prior to
the Prepayment Date set forth in such notice and payment of the Prepayment
Amount shall be deducted from the amount which is otherwise subject to
prepayment pursuant to such notice.
ARTICLE V. SUBORDINATION
5.1. AGREEMENT TO SUBORDINATE. Except as otherwise provided in
Section 1.7,
Exhibit 4.1 - Page 14
Article III and Article IV of this Debenture, the principal amount of this
Debenture is payable solely in shares of Common Stock upon conversion in
accordance with Article I hereof. Notwithstanding anything in this Debenture to
the contrary, the Borrower agrees, and by accepting this Debenture the Holder
agrees, that the indebtedness evidenced by this Debenture is subordinate and
subject in right of payment, to the extent and in the manner expressly provided
in this Article V, to the prior payment in full of all Senior Debt, and that the
subordination is for the benefit of and enforceable by the holders of Senior
Debt. This Debenture shall in all respects rank at least PARI PASSU with all
other present and future obligations of the Borrower, and only Senior Debt shall
rank senior to this Debenture.
5.2 INSOLVENCY, BANKRUPTCY, DISSOLUTION OF BORROWER. Upon any
payment or distribution (whether in cash, securities or other property) to
creditors of the Borrower upon any Insolvency Event:
(a) all Senior Debt shall first be paid in full before the
Holder shall be entitled to receive any payment or other distribution on or
in respect of this Debenture; and
(b) until all Senior Debt is paid in full, any payment or
distribution to which the Holder of this Debenture would be entitled but
for this Article V shall be made to holders of Senior Debt as their
interests may appear, except that the Holder may receive shares of the
Borrower as reorganized or readjusted or securities of the Borrower or any
other corporation if the payment of such securities is subordinate to
Senior Debt to at least the same extent as this Debenture is subordinate to
Senior Debt.
5.3 DEFAULT ON SENIOR DEBT. (a) The Borrower may not pay the
principal of, premium, if any, or interest on, this Debenture or make any
deposit in respect of this Debenture and may not repurchase, redeem or otherwise
retire this Debenture (collectively, "pay this Debenture") if (i) the principal
of or interest on any Senior Debt is not paid when due or (ii) any other default
on Senior Debt occurs and the maturity of such Senior Debt is accelerated in
accordance with its terms unless, in each case, the default has been cured or
waived and any such acceleration has been rescinded or such Senior Debt has been
paid in full. During the continuance of any default (other than a default
described in clause (i) or (ii) of the preceding sentence) with respect to any
Senior Debt pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Borrower may not pay this Debenture for a period (a "Payment Blockage Period")
commencing upon the receipt by the Borrower and the Holder of written notice of
such default from a representative of such Senior Debt specifying an election to
effect a Payment Blockage Period (a "Payment Blockage Notice") and ending 179
days thereafter (or earlier if such Payment Blockage Period is terminated (i) by
written notice to the Borrower from the representative which gave such Payment
Blockage Notice, (ii) by repayment in full of such Senior Debt or (iii) because
the default specified in such Payment Blockage Notice is no
Exhibit 4.1 - Page 15
longer continuing). Notwithstanding the immediately preceding sentence (but
subject to the provisions contained in the first sentence of this Section),
unless the holders of such Senior Debt or the representative of such holders
shall have accelerated the maturity of such Senior Debt, the Borrower shall
resume payments (including any missed payments) on this Debenture after the end
of such Payment Blockage Period unless such payment is otherwise prohibited
under this Article V. Multiple Payment Blockage Periods may be imposed so long
as (x) the cumulative period covered by all such Payment Blockage Periods does
not exceed 179 days in any 365 consecutive day period and (y) no more than one
Payment Blockage Period may result from the same default.
(b) The failure to make a payment or distribution on this
Debenture by reason of this Article V shall not be construed or deemed to
prevent the occurrence of an Event of Default hereunder; provided that any
acceleration of payment of this Debenture resulting therefrom shall be rescinded
if and when the following conditions shall be simultaneously satisfied (x) each
payment or distribution which gave rise to such Event of Default shall be made
and (y) no other such Event of Default shall have occurred.
5.4 SUBORDINATED ACCELERATION; STANDSTILL. (a) The Holder agrees to
give the Borrower not less than 10 days' prior written notice of its intention
to accelerate the maturity of this Debenture pursuant to Article III hereof.
The Borrower will promptly notify holders of Senior Debt of any obligation to
make payments to be made under Section 1.7.
(b) The Holder will not for a period of ninety (90) days
following an acceleration of this Debenture pursuant to Article III, including
by reason of the Borrower's breach of its covenants under Section 1.7 (other
than if an Insolvency Event shall have occurred or if the Senior Debt shall have
been accelerated) pursue or exercise any other right, power or remedy arising
under Article III of this Debenture.
5.5. PERMITTED PAYMENTS. So as to eliminate any doubt, except as
provided in Sections 5.2 and 5.3, payments of interest, payments under 1.3 and
1.4(g) of this Debenture, and payments under Section 2(c) of the Registration
Rights Agreement (whether in cash or Common Stock (as applicable))
(collectively, "Permitted Payments") shall be made by the Borrower on the terms
of this Debenture.
5.6 TURNOVER. If the Holder receives any payment or other
distribution on this Debenture (whether in cash, property, securities or
whatever) at a time when such payment or distribution should not have been made
to the Holder by reason of this Article V, such payment or distribution shall be
deemed to have been received and held in trust for the benefit of the holders of
the Senior Debt, and shall be segregated from other property of the Holder and
be paid and delivered as promptly as practicable to the holders of the Senior
Debt, as their interests may appear, for application to, or collateral for, the
payment or prepayment of the Senior Debt.
5.7 RELATIVE RIGHTS. This Article V defines the relative rights of
the Holder
Exhibit 4.1 - Page 16
and the holders of Senior Debt. Nothing herein shall:
(a) impair, as between the Borrower and the Holder, the
obligation of the Borrower, which is absolute and unconditional, to pay
principal of, premium, if any, and interest on this Debenture in accordance
with its terms and to fulfill its other obligations hereunder; or
(b) except as otherwise expressly provided herein, prevent the
Holder from exercising its available remedies upon a default, subject to
the rights of holders of Senior Debt to receive distributions otherwise
payable to the Holder.
5.8 AGREEMENT TO COOPERATE. In the event that a payment may not be
made on the Debentures as a result of the provisions of this Article V,
including without limitation, as a result of an Insolvency Event or a default on
any Senior Debt, the Borrower shall, if requested by the Holder, reasonably
assist the Holder in attempting to purchase such Senior Debt or otherwise cure
such default so that the payment may be made on the Debenture. Nothing in this
Section 5.8 shall obligate the Holder to purchase such Senior Debt or to attempt
to cure any such default.
5.9 CONVERSION. Notwithstanding anything to the contrary contained
in this Article V, nothing in this Article V shall restrict the rights of the
Holder to convert the Conversion Amount (as defined in Section 1.1) in
accordance with Article I, including, without limitation, after an Insolvency
Event and during the pendency of a default on Senior Debt. To the extent any
Permitted Payments would be payable, but for the provisions of this Article V,
in cash (whether at the Borrower's option or the Holder's option), such
Permitted Payments shall automatically be added to the Conversion Amount
including after an Insolvency Event or during the pendency of a default on
Senior Debt and shall thereafter and during such pendency be convertible into
Common Stock in accordance with Article I.
5.10 DEFINITIONS.
(a) "Bank Credit Agreement" shall mean that certain credit
agreement by and between the Borrower and Comerica Bank, as the same may be
amended, supplemented or otherwise modified from time to time, as well as any
future credit agreement that may be executed by the Borrower and Comerica Bank
or another financial institution that replaces Comerica Bank as the Borrower's
primary commercial bank or lending institution.
(b) "Bankruptcy Code" means the Bankruptcy Reform Act of 1978,
11 U.S.C. Section 101 ET SEQ., or any successor statute thereto.
(c) "Insolvency Event" means (i) any winding-up, insolvency,
bankruptcy, liquidation or reorganization of the Borrower, whether voluntary or
involuntary, (ii) any proceeding or case for reorganization, liquidation,
bankruptcy, dissolution or other winding-up of
Exhibit 4.1 - Page 17
the Borrower or its assets, whether or not involving insolvency or bankruptcy,
(iii) any assignment by the Borrower for the benefit of creditors or (iv) any
receivership or other similar proceeding or any marshalling of assets of the
Borrower.
(d) "Senior Debt" means (i) all obligations and liabilities of
the Borrower, whether for or on account of principal, reimbursement obligations,
accrued and unpaid interest (including without limitation all interest accruing
on and after an Insolvency Event), fees, expenses, indemnities and other amounts
payable under or in connection with the Bank Credit Agreement and all documents
or instruments executed in connection therewith, whether outstanding on the date
of issuance of this Debenture or hereafter created, assumed or incurred.
Notwithstanding the foregoing definition of Senior Debt, the Holder agrees that
upon the written request of the Borrower at any time prior to an Insolvency
Event, it shall by written amendment modify such definition of Senior Debt to
include any material obligation or liability (including any amendment,
modification or extension of an existing obligation or liability) that the
Borrower intends to incur, but only if, in good faith, the Borrower certifies
that the incurrence of such obligation or liability is in the best interests of
the Borrower and either (a) the holder of the proposed Senior Debt will not
extend credit or services unless such obligation or liability becomes Senior
Debt or (b) the terms under which such holder will extend credit or services are
commercially unreasonable unless such obligations or liabilities becomes Senior
Debt. Notwithstanding the foregoing, (x) no such modification to the definition
of Senior Debt shall become effective unless set forth in a written document
executed by the Holder and (y) trade payables incurred in the ordinary course of
business, debt which is convertible into equity securities of the Borrower and
shall not under any circumstances become Senior Debt.
ARTICLE VI. MISCELLANEOUS
6.1 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the
part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privileges. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
6.2 NOTICES. Any notice herein required or permitted to be given
shall be in writing and may be personally served or delivered by courier or sent
by United States mail and shall be deemed to have been given upon receipt if
personally served (which shall include telephone line facsimile transmission) or
sent by courier or three (3) days after being deposited in the United States
mail, certified, with postage pre-paid and properly addressed, if sent by mail.
For the purposes hereof, the address of the Holder shall be as shown on the
records of the Borrower; and the address of the Borrower shall be Zitel
Corporation, 47211 Bayside Parkway, Fremont, California 94538-6517 (facsimile
number: (510) 440-8526). Both the Holder and the Borrower may change the
address for service by service of written notice to the other as herein
provided.
Exhibit 4.1 - Page 18
6.3 AMENDMENTS. This Debenture and any provision hereof may only be
amended by an instrument in writing signed by the Borrower and the Holder. The
term "Debenture" and all reference thereto, as used throughout this instrument,
shall mean this instrument (and the other Debentures issued pursuant to the
Purchase Agreement) as originally executed, or if later amended or supplemented,
then as so amended or supplemented.
6.4 ASSIGNABILITY. This Debenture shall be binding upon the Borrower
and its successors and assigns, and shall inure to be the benefit of the Holder
and its successors and assigns; provided, however, that so long as no Event of
Default has occurred, this Debenture shall only be transferable to (i) an
affiliate of a Holder or (ii) to other persons who do not compete, directly or
indirectly, with the Borrower in the Borrower's business in increments of not
less than Three Million Dollars ($3,000,000). Each transferee of this Debenture
must be an "accredited investor" (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding the foregoing or anything else in this Debenture to the
contrary, this Debenture may be pledged as collateral in connection with a BONA
FIDE margin account or other lending arrangement.
6.5 COST OF COLLECTION. If default is made in the payment of this
Debenture, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys' fees.
6.6 GOVERNING LAW. This Debenture shall be governed by the internal
laws of the State of California, without regard to the principles of conflict of
laws.
6.7 CERTAIN AMOUNTS. Whenever pursuant to this Debenture the
Borrower is required to pay an amount in excess of the outstanding principal
amount (or the portion thereof required to be paid at that time) plus accrued
and unpaid interest plus Default Interest on such interest, the Borrower and the
Holder agree that the actual damages to the Holder from the receipt of cash
payment on this Debenture may be difficult to determine and the amount to be so
paid by the Borrower represents stipulated damages and not a penalty and is
intended to compensate the Holder in part for loss of the opportunity to convert
this Debenture and to earn a return from the sale of shares of Common Stock
acquired upon conversion of this Debenture at a price in excess of the price
paid for such shares pursuant to this Debenture. The Borrower and the Holder
hereby agree that such amount of stipulated damages is not plainly
disproportionate to the possible loss to the Holder from the receipt of a cash
payment without the opportunity to convert this Debenture into shares of Common
Stock.
6.8 ALLOCATIONS OF MAXIMUM SHARE AMOUNT AND RESERVED AMOUNT. The
Maximum Share Amount and the Reserved Amount (including any increases thereto)
shall be allocated pro rata among the Holders of Debentures based on the
principal amount of Debentures then held by each Holder relative to the
aggregate principal amount of the Debentures then outstanding.
6.9 DAMAGES SHARES. The shares of Common Stock that may be issuable
to
Exhibit 4.1 - Page 19
the Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant to Section
2(c) of the Registration Rights Agreement ("Damages Shares") shall be treated as
Common Stock issuable upon conversion of this Debenture for all purposes hereof
and shall be subject to all of the limitations and afforded all of the rights of
the other shares of Common Stock issuable hereunder, including without
limitation, the right to be included in the Registration Statement filed
pursuant to the Registration Rights Agreement. For purposes of calculating
interest payable on the outstanding principal amount hereof, except as otherwise
provided herein, amounts convertible into Damages Shares ("Damages Amounts")
shall not bear interest but must be converted prior to the conversion of any
outstanding principal amount hereof, until the outstanding Damages Amounts is
zero.
6.10 DENOMINATIONS. At the request of the Holder, upon surrender of
this Debenture, the Borrower shall promptly issue new Debentures in the
aggregate outstanding principal amount hereof, in the form hereof, in such
denominations of at least $100,000 as the Holder shall request.
6.11 PURCHASE AGREEMENT. By its acceptance of this Debenture, each
Holder agrees to be bound by the applicable terms of the Purchase Agreement.
6.12 NOTICE OF CORPORATE EVENTS. Except as otherwise provided below,
the Holder of this Debenture shall have no rights as a Holder of Common Stock
unless and only to the extent that it converts this Debenture into Common Stock.
The Borrower shall provide the Holder with prior notification of any meeting of
the Borrower's shareholders (and copies of proxy materials and other information
sent to shareholders). In the event of any taking by the Borrower of a record
of its shareholders for the purpose of determining shareholders who are entitled
to receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation,
reclassification or recapitalization) any share of any class or any other
securities or property, or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Borrower or any proposed liquidation, dissolution or winding up of the
Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20)
days prior to the record date specified therein (or thirty (30) days prior to
the consummation of the transaction or event, whichever is earlier), of the date
on which any such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time; PROVIDED, HOWEVER, that notwithstanding the foregoing, the
Borrower shall mail a notice to the Holder at least forty-five (45) days in
advance of the taking of any record for the distribution to its shareholders of
any assets or securities or rights to acquire assets or securities in respect of
MatriDigm Corporation or any assignee or successor thereof or thereto. The
Borrower shall make a public announcement of any event requiring notification to
the Holder hereunder substantially simultaneously with the notification to the
Holder in accordance with the terms of this Section 6.12.
Exhibit 4.1 - Page 20
6.13 FORCE MAJEURE. If the performance of the obligations under this
Debenture by any party is prevented, restricted, or interfered with by reason of
war, revolution, civil commotion, acts of public enemies, blockade, embargo,
strikes, and any other similar and unforseeable acts which are beyond the
reasonable control of the party affected, then the parties so affected shall,
upon giving prior written notice to the other parties, be excused from such
performance to the extent of such prevention, restriction, or interference,
provided that the party so affected shall use its best efforts to avoid or
remove such causes of nonperformance, and shall continue performance hereunder
with the utmost dispatch whenever such causes are removed. Upon such
circumstances arising, the parties shall meet forthwith to discuss what (if any)
modification may be required to the terms of this Debenture, in order to arrive
at an equitable solution.
IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in
its name by its duly authorized officer this 22nd day of May, 1997.
ZITEL CORPORATION
By: Henry C. Harris
Name: Henry C. Harris
Title: Chief Financial Officer
Exhibit 4.1 - Page 21
Exhibit A
NOTICE OF CONVERSION
OF CONVERTIBLE DEBENTURE
TO: Zitel Corporation
(1) Pursuant to the terms of the attached Convertible Debenture (the
"Debenture"), the undersigned hereby elects to convert $ principal
amount of the Debenture into shares of Common Stock of Zitel Corporation, a
California corporation (the "Borrower"). Capitalized terms used herein and not
otherwise defined herein have the respective meanings provided in the Debenture.
(2) Please issue a certificate or certificates for the number of
shares of Common Stock into which such principal amount of the Debenture (plus
interest thereon to the extent not paid in cash in accordance with the terms of
the Debenture) is convertible (_____ shares, based on the Holder's calculation
attached hereto) in the name(s) specified immediately below or, if additional
space is necessary, on an attachment hereto:
_____________________________ ______________________________
Name Name
_____________________________ ______________________________
Address Address
_____________________________ ______________________________
SS or Tax ID Number SS or Tax ID Number
(3) Holder acknowledges and affirms that the Common Stock issued
pursuant to this Notice of Conversion has been or will be sold in accordance
with the prospectus delivery requirements of the 1933 Act, if applicable, or
pursuant to an exemption under the 1933 Act.
(4) Capitalized terms used in this Notice of Conversion and not
otherwise defined herein shall have the respective meanings provided in the
Debenture.
Date_________________ ______________________________________________
Signature of Registered Holder (must be signed
exactly as name appears in the Debenture).
Exhibit 4.1 - Page 22