CERTIFICATE OF DETERMINATION OF SERIES B CONVERTIBLE
PREFERRED STOCK OF ZITEL CORPORATION
(Pursuant to Section 401 of the California General Corporation Law)
The undersigned, JACK H. KING and ANNA M. MCCANN, hereby certify that:
I. They are the duly elected and acting Vice President and Secretary,
respectively, of Zitel Corporation (the "Corporation").
II. Pursuant to authority given by the Corporation's Articles of
Incorporation, the Board of Directors of the Corporation has duly adopted the
following resolutions at a meeting duly called and held on July 29, 1999:
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of the Corporation in accordance with the provisions of its
Restated Articles of Incorporation, the Board of Directors hereby creates a
series of Preferred Stock, without par value, of the Corporation and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges and restrictions thereof, as follows:
SERIES B CONVERTIBLE PREFERRED STOCK:
SECTION 1. DESIGNATION AND AMOUNT. Two Hundred Thousand (200,000)
shares of Preferred Stock, without par value, are designated "Series B
Convertible Preferred Stock" with the rights, preferences, privileges and
restrictions specified herein (the "Series B Preferred"). Such number of shares
may be increased or decreased by resolution of the Board of Directors; PROVIDED,
that no decrease shall reduce the number of shares of Series B Preferred to a
number less than the number of shares then outstanding.
A. LIQUIDATION PREFERENCE.
1. Upon any liquidation (as defined below), dissolution or winding up of
the Corporation, whether voluntary or involuntary, the Holders of Series B
Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of Series A Junior Participating Preferred Stock and Common Stock of the
Corporation by reason of their ownership thereof, (A) property or cash with a
value of Ten Dollars (the "Liquidation Preference") plus (B) declared and unpaid
dividends until the date of payment (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares) for each share of Series B Preferred. If the assets of the Corporation
are insufficient to make payment in full to all holders of Series B Preferred
pursuant to this Section A.1, then such assets shall be distributed among the
holders of Series B Preferred at the time outstanding ratably in proportion to
the full amounts to which they would otherwise be entitled under this
Section A.1.
1.
2. The following events shall be considered a liquidation under this
Section:
(a) any consolidation or merger of the Corporation with or into any
other corporation or other entity or person, or any other corporate
reorganization, in which the stockholders of the Corporation immediately prior
to such consolidation, merger or reorganization, own less than fifty percent
(50%) of the Corporation's voting power immediately after such consolidation,
merger or reorganization, or any transaction or series of related transactions
in which in excess of fifty percent (50%) of the Corporation's voting power is
transferred (an "Acquisition"); or
(b) a sale, lease, or other disposition of all or substantially all
of the assets of the Corporation (an "Asset Transfer").
B. DIVIDEND RIGHTS.
The Holders of Series B Preferred, prior to and in preference to the
holders of Series A Junior Participating Preferred Stock or Common Stock of the
Corporation, shall be entitled to receive dividends at the rate of $.30 per
share per annum (as adjusted for any stock dividends, combinations or splits
with respect to such shares), payable out of funds legally available therefor.
Such dividends shall be payable only when, as, and if declared by the Board of
Directors and shall be noncumulative.
C. VOTING RIGHTS.
The Holders of the Series B Preferred shall have no voting rights except
with respect to matters as to which the Corporations Code of the State of
California requires that such Holders have the right to vote.
D. REDEMPTION RIGHTS.
1. The Corporation shall have the right to redeem all, but no less than
all, of the outstanding shares of Series B Preferred at a redemption price per
share equal to the Liquidation Preference plus any declared and unpaid
dividends. The Holders of Series B Preferred shall have no right to cause the
Corporation to redeem all or any shares of Series B Preferred.
2. In the event the Company elects to redeem the Series B Preferred, it
shall give notice pursuant to Section N hereof. The notice shall be effective
on the fifth day following the date of deposit in the United States mail
pursuant to Section N. Any outstanding shares of Series B Preferred on such
effective date shall be redeemed in accordance with Section E.2(b).
E. CONVERSION RIGHTS.
The holders of the Series B Preferred shall have the following rights with
respect to the conversion of the Series B Preferred into shares of Common Stock
(the "Conversion Rights").
1. OPTIONAL CONVERSION. Subject to and in compliance with the provisions
of this Section E.1, any shares of Series B Preferred may, at the option of the
Holder, be converted at any time into fully-paid and nonassessable shares of
Common Stock. The number of shares of
2.
Common Stock to which a holder of Series B Preferred will be entitled upon
conversion with respect to each share of Series B Preferred being converted
will be the quotient obtained by dividing the Liquidation Preference by the
Conversion Price then in effect (determined as provided in Section E.3.).
The maximum number of shares of Common Stock issuable upon conversion of the
Series B Preferred is 4,659,897 shares and conversions under Sections E.1 and
E.2 will be suspended, unless and until the shareholders of the Company have
approved the issuance of additional shares.
2. CONVERSION PRICE.
(a) Until the effective date (the "Effective Date") of a Registration
Statement on Form S-3 under the Securities Act of 1933, as amended, registering
the Common Stock issuable upon conversion of the Series B Preferred for resale
(the "Registration Statement"), the Series B Conversion Price shall be equal to
the average of the closing prices of the Common Stock on the NASD National
Market System, as reported in the Wall Street Journal, on the ten trading days
preceding but not including the date upon which shares of Series B Preferred are
first issued by the Corporation. On the Effective Date the average of the
closing prices of the Common Stock on the NASDAQ National Market System, as
reported in the Wall Street Journal on the ten trading days preceding but not
including the Effective Date shall be calculated. The amount so calculated, as
it may be adjusted from time to time pursuant to Sections I, J, and K hereof,
shall be referred to herein as the "Baseline Price."
(b) Commencing on the Effective Date and for 180 calendar days
thereafter (the "Adjustment Period") the Conversion Price shall be equal to the
closing price of the Common Stock on the NASDAQ National Market System on the
trading day prior to the date of conversion (the "Unadjusted Conversion Price");
PROVIDED, HOWEVER,
(i) The Conversion Price shall not be less than 70% of the
Baseline Price and
(ii) The Conversion Price shall not be greater than (x) the
Baseline Price plus (y) 50% of the amount by which the Unadjusted Conversion
Price exceeds 130% of the Baseline Price.
For example:
(A) If the Baseline Price is $2.00 per share and the
Unadjusted Conversion Price is $5.00, then the Conversion Price would be $3.20,
calculated as follows:
$2.00 plus 50% of ($5.00 minus ($2.00 times 130%)) equals
$3.20.
(iii) If the Baseline Price is $2.00 per share and the Unadjusted
Conversion Price is $1.20, then the Conversion Price would be $1.40, calculated
as follows:
$2.00 times 70% equals $1.40.
3.
(iv) If the Baseline Price is $2.00 per share and the Unadjusted
Conversion Price is between $1.40 per share and $2.60 per share, there would be
no adjustment and the Conversion Price would be equal to the Unadjusted
Conversion Price.
(c) Commencing on the day following the end of the Adjustment Period,
the Conversion Price shall be equal to the Unadjusted Conversion Price;
PROVIDED, HOWEVER, the Conversion Price shall not be less than the Baseline
Price.
(d) In the event that during the Adjustment Period, the holders of
Series B Preferred are not able to sell Common Stock pursuant to the
Registration Statement for more than five consecutive trading days or for more
than fifteen trading days in the aggregate because (i) of a blackout period or
blackout periods declared by the Corporation, (ii) because effectiveness of the
Registration Statement is suspended, or (iii) a stop order has been issued by
the Securities and Exchange Commission, then the Adjustment Period shall be
extended by one day for each day a blackout period, suspension or stop order is
in effect beyond (x) such five-day period or (y) such fifteen-day period.
(e) In the event that conversions of Series B Preferred are suspended
pursuant to Section E.1, then the Adjustment Period and the automatic conversion
date shall be extended by one day for each day of the period during which
conversions are suspended.
F. MECHANICS OF CONVERSION.
Each holder of Series B Preferred who desires to convert the same into
shares of Common Stock shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or any transfer agent for the
Series B Preferred and shall give written notice to the Corporation at such
office that such holder elects to convert the same. Such notice shall state the
number of shares of Series B Preferred being converted. Thereupon, the
Corporation shall promptly issue and deliver at such office to such holder a
certificate or certificates for the number of shares of Common Stock to which
such holder is entitled. Such conversion shall be deemed to have been made at
the close of business on the date of such surrender of the certificates
representing the shares of the Series B Preferred to be converted, and the
person entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock on such date.
G. ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS.
If the Corporation at any time or from time to time after the date that the
first share of Series B Preferred is issued (the "Original Issue Date") effects
a subdivision of the outstanding Common Stock, the Conversion Price of each
series of Preferred Stock in effect immediately before that subdivision shall be
proportionately decreased. Conversely, if the Corporation at any time or from
time to time after the Original Issue Date combines the outstanding shares of
Common Stock into a smaller number of shares, the Conversion Price of each
series of Preferred Stock in effect immediately before the combination shall be
proportionately increased. Any adjustment under this Section G shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
4.
H. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS.
If the Corporation at any time or from time to time after the Original
Issue Date makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
securities of the Corporation, in each such event provision shall be made so
that the holders of the Series B Preferred shall receive upon conversion
thereof, in addition to the number of shares of Common Stock receivable
thereupon, the amount of other securities of the Corporation which they would
have received had their Series B Preferred been converted into Common Stock on
the date of such event and had they thereafter, during the period from the date
of such event to and including the conversion date, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period hereunder with respect to the rights
of the holders of the Series B Preferred or with respect to such other
securities by their terms.
I. ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
If at any time or from time to time after the Original Issue Date the
Common Stock issuable upon the conversion of the Series B Preferred is changed
into the same or a different number of shares of any class or classes of stock,
whether by recapitalization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend or a reorganization,
merger, consolidation or sale of assets provided for elsewhere herein), in any
such event each holder of Series B Preferred shall have the right thereafter to
convert such stock into the kind and amount of stock and other securities and
property receivable upon such recapitalization, reclassification or other change
by holders of the maximum number of shares of Common Stock into which such
shares of Series B Preferred could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustment
as provided herein or with respect to such other securities or property by the
terms thereof.
J. REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS.
If at any time or from time to time after the Original Issue Date there is
a capital reorganization, merger, consolidation or sale of all or substantially
all of the Corporation's assets (a "Capital Reorganization") or the Common Stock
(other than a recapitalization, subdivision, combination, reclassification,
exchange or substitution of shares provided for elsewhere herein), as a part of
such Capital Reorganization, provision shall be made so that the holders of the
Series B Preferred shall thereafter be entitled to receive upon conversion of
the Series B Preferred the number of shares of stock or other securities or
property of the Corporation to which a holder of the number of shares of Common
Stock deliverable upon conversion would have been entitled on such Capital
Reorganization, subject to adjustment in respect of such stock or securities by
the terms thereof. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section J with respect to the rights
of the holders of Series B Preferred after the Capital Reorganization to the end
that the provisions of this Section J (including adjustment of the Conversion
Price applicable to such series then in effect and the number of shares issuable
upon conversion of the Series B Preferred) shall be applicable after that event
and be as nearly equivalent as practicable.
5.
K. CERTIFICATE OF ADJUSTMENT.
In each case of an adjustment or readjustment of the Conversion Price with
respect to any series of Preferred Stock or the number of shares of Common Stock
or other securities issuable upon conversion of the Series B Preferred, the
Corporation, at its expense, shall compute such adjustment or readjustment in
accordance with the provisions hereof and prepare a certificate showing such
adjustment or readjustment, and shall mail such certificate, by first class
mail, postage prepaid, to each registered holder of Series B Preferred at the
holder's address as shown in the Corporation's books. The certificate shall set
forth such adjustment or readjustment, showing in detail the facts upon which
such adjustment or readjustment is based, including a statement of (A) the
Conversion Price with respect to such Series B at the time in effect, and
(B) the type and amount, if any, of other property that at the time would be
received upon conversion of the Series B Preferred.
L. FRACTIONAL SHARES.
No fractional shares of Common Stock shall be issued upon conversion of the
Series B Preferred. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one share of Series B Preferred by a
holder thereof shall be aggregated for purposes of determining whether the
conversion would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of any
fractional share, the Corporation shall, in lieu of issuing any fractional
share, pay cash equal to the product of such fraction multiplied by the
Conversion Price.
M. RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
The Corporation 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 shares of the Series B Preferred, such number of
its shares of Common Stock as will from time to time be sufficient to effect the
conversion of all outstanding shares of the Series B Preferred. If at any time
the number of authorized but unissued shares of Common Stock is not sufficient
to effect the conversion of all then outstanding shares of the Series B
Preferred, the Corporation shall 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 will be sufficient for such
purpose.
N. NOTICES.
Any notice required by the provisions of this Section 1 to be given to the
holders of Series B Preferred shall be deemed given upon the earlier of actual
receipt or three days after the same has been deposited in the United States
mail, by certified or registered mail, return receipt requested, postage
prepaid, and addressed to each holder of record at the address of such holder
appearing on the books of the Corporation.
O. PROTECTIVE PROVISIONS.
1. So long as any shares of Series B Preferred are outstanding, the
Corporation shall not, without the vote or written consent of the holders of not
less than seventy-five percent (75%)
6.
of the issued and outstanding shares of the Series B Preferred, alter or
change the preferences or privileges of the shares of the Series B Preferred
so as to affect adversely the shares of the Series B Preferred.
2. So long as at least an aggregate of Fifty Thousand (50,000) shares of
Series B Preferred (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares) remain issued and
outstanding, the Corporation shall not, without the vote or written consent of
the holders of at least a majority of the shares of the Series B Preferred,
authorize or issue any class of security senior to the Series B Preferred;
provided, however, that any security with a dividend or liquidation preference
that is greater than that of the Series B Preferred solely as a result of, or in
connection with, a higher per share initial purchase price of such security
shall not be deemed senior for purposes hereof; payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Junior
Preferred Stock shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
7.
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
III. The authorized number of shares of Preferred Stock of this Corporation
is 1,000,000, and the number of shares of Preferred Stock constituting Series B
Convertible Preferred Stock, none of which has been issued, is 200,000.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
August 9, 1999.
Jack H. King
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JACK H. KING
Vice President
Anna M. Mccann
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ANNA M. MCCANN
Secretary
The undersigned Jack H. King, Vice President of Zitel Corporation, and
Anna M. McCann, Secretary of said Corporation, each certifies under penalty of
perjury that the matters set forth in the foregoing Certificate of Determination
are true of their own knowledge.
Executed at Fremont, California on August 9, 1999.
Jack H. King
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JACK H. KING
Vice President
Anna M. Mccann
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ANNA M. MCCANN
Secretary
8.