AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1998
REGISTRATION NO. 333-65959-01
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MILLENNIUM HOLDING CORP.
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 7372 94-3312746
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
MILLENNIUM HOLDING CORP.
47211 BAYSIDE PARKWAY
FREMONT, CALIFORNIA 94538-6517
(510) 440-9600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JACK H. KING
MILLENNIUM HOLDING CORP.
47211 BAYSIDE PARKWAY
FREMONT, CALIFORNIA 94538-6517
(510) 440-9600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
WITH COPIES TO:
JOHN L. CARDOZA, ESQ. KENTON J. KING, ESQ. JEFFREY M. SONE, ESQ.
COOLEY GODWARD LLP SKADDEN, ARPS, SLATE, ARTER & HADDEN LLP
ONE MARITIME PLAZA, 20TH FLOOR MEAGHER & FLOM LLP 1717 MAIN STREET, SUITE 4100
SAN FRANCISCO, CALIFORNIA 525 UNIVERSITY AVENUE, SUITE 220 DALLAS, TEXAS 75201
94111-3580 PALO ALTO, CALIFORNIA 94301 (214) 761-2100
(415) 693-2045 (650) 470-4500
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the Mergers (as defined herein).
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [X]
CALCULATION OF REGISTRATION FEE
==================================================================================
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- ----------------------------------------------------------------------------------
Common Stock ($0.01 par
value)................ 48,600,709 $2.2969 $111,630,968.50 $32,931.14
==================================================================================
(1) Represents the number of shares of common stock of Millennium Holding Corp.
("Holdco") which may be issued to former shareholders of Zitel Corporation
("Zitel") and MatriDigm Corporation ("MatriDigm") pursuant to the Mergers
described herein.
(2) Based on (a) each share of Zitel being converted into one fully paid and
nonassessable share of common stock of Holdco, and (b) each share of
MatriDigm, other than shares held by Zitel, being converted into 0.6504 of
a share of common stock of Holdco, in each case pursuant to the Mergers
described herein. Pursuant to Rule 457(f) under the Securities Act of 1933,
as amended, the registration fee has been calculated as of October 21,
1998.
(3) This amount has been previously paid in connection with the filing on Form
S-4 made by Zitel on October 21, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF
1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION
8(a), MAY DETERMINE.
================================================================================
[ZITEL CORPORATION LOGO] [MATRIDIGM CORPORATION LOGO]
PROXY STATEMENT CONSENT SOLICITATION
[MILLENNIUM HOLDING CORP. LOGO]
PROSPECTUS
TO THE SHAREHOLDERS OF ZITEL CORPORATION AND MATRIDIGM CORPORATION:
There are risks inherent in
the ownership of Holdco shares.
See "Risk Factors" on page 23.
The Boards of Directors of MatriDigm Corporation and Zitel
Corporation have agreed to a business combination whereby (i)
Millennium Acquisition I Corp., a wholly-owned subsidiary of
Millennium Holding Corp. ("Holdco"), would merge with and into
MatriDigm, and (ii) Zenith Acquisition Corp., a wholly-owned
subsidiary of Holdco, would merge with and into Zitel. In
connection with the Mergers, MatriDigm and Zitel would become
wholly-owned subsidiaries of Holdco. Zitel shareholders would
receive one share of Holdco common stock for each share of Zitel
common stock they own. MatriDigm shareholders (except for Zitel)
would receive approximately .65 of a share of Holdco common stock
for each share of MatriDigm common stock that they own.
Zitel is asking you to sign and return the proxy card that has the effect of
voting your Zitel shares in favor of the Zitel Merger. If the Zitel Merger is
approved, the exchange of shares will be tax free to you. If you choose to vote
against the Zitel Merger and also perfect your dissenter's rights under
California law, you will receive the fair value of your Zitel shares in cash.
This would be a taxable transaction to you. MatriDigm is asking you to sign and
return a MatriDigm written consent that has the effect of voting your MatriDigm
shares in favor of the MatriDigm Merger. If the MatriDigm Merger is approved,
the exchange of shares will be tax free to you. If you choose to vote against
the MatriDigm Merger and also perfect your dissenter's rights under California
law, you will receive the fair value of your MatriDigm shares in cash. This
would be a taxable transaction to you.
You can get more information about MatriDigm, Zitel or Holdco, and about the
MatriDigm Merger or the Zitel Merger, by writing or calling Zitel or MatriDigm
as follows:
MatriDigm Corporation Zitel Corporation
4777 Hellyer Avenue 47211 Bayside Parkway
San Jose, California 95138 Fremont, California 94538
(408) 360-2300 (510) 440-9600
Information about MatriDigm, Zitel and Holdco may change from that contained in
this Proxy Statement/Prospectus/Consent Solicitation. Such parties will send
you additional information about themselves before the Special Meeting or the
date on which the written consents take effect, as the case may be, if the new
information would be material to your decision on the Zitel Merger or the
MatriDigm Merger.
No one at MatriDigm or Zitel should give you any information different from
what is in this Proxy Statement/Prospectus/Consent Solicitation. Please rely
only on the information in the Proxy Statement/Prospectus/Consent Solicitation
in making your decision on the Zitel Merger or the MatriDigm Merger.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES AGENCY
HAS APPROVED THE HOLDCO SHARES OR DETERMINED THAT THIS PROXY
STATEMENT/PROSPECTUS/CONSENT SOLICITATION IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS/CONSENT SOLICITATION IS [ ], 1998
FORM S-4 TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION.................................................... 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 6
TRADEMARKS............................................................... 7
FORWARD-LOOKING STATEMENTS............................................... 8
SUMMARY.................................................................. 9
ZITEL SELECTED HISTORICAL FINANCIAL DATA................................. 16
MATRIDIGM SELECTED HISTORICAL FINANCIAL DATA............................. 17
MATRIDIGM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .................................................. 18
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA........... 22
RISK FACTORS............................................................. 23
COMPARATIVE PER SHARE DATA............................................... 36
ZITEL MARKET PRICE DATA.................................................. 37
ZITEL SPECIAL MEETING
Date, Time and Place of Zitel Special Meeting.......................... 38
Purpose................................................................ 38
Record Date and Outstanding Shares..................................... 38
Vote Required.......................................................... 38
Proxies................................................................ 39
Solicitation of Proxies; Expenses...................................... 39
Recommendation of Zitel Board ......................................... 39
MATRIDIGM CONSENT SOLICITATION
Purpose................................................................ 41
Consent Procedure...................................................... 41
Vote Required.......................................................... 41
Solicitation of Consents; Expenses..................................... 42
INFORMATION ABOUT MATRIDIGM
General................................................................ 44
Competition............................................................ 45
Employees.............................................................. 46
Properties............................................................. 46
Legal Proceedings...................................................... 46
Principal MatriDigm Shareholders....................................... 47
Ownership of Common Stock by Management of MatriDigm................... 48
THE MERGERS AND RELATED TRANSACTIONS
(Proposal No. 1 for Zitel Shareholders and the Only Proposal for
MatriDigm Shareholders)
Joint Reasons for the Mergers.......................................... 49
Zitel's Reasons for the Merger......................................... 50
MatriDigm's Reasons for the MatriDigm Merger........................... 52
Material Contacts and Board Deliberations.............................. 53
Opinion of Zitel's Financial Advisor................................... 56
Certain Federal Income Tax Considerations.............................. 67
Governmental and Regulatory Approvals.................................. 70
Rights of Dissenting Shareholders...................................... 71
2
PAGE
----
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF ONLY ZITEL SHAREHOLDERS
Proposal No. 2--Approval of Amendment to Zitel 1990 Stock Option Plan.. 76
Proposal No. 3--Approval of Amendment to the 1984 Employee Stock
Purchase Plan......................................................... 81
TERMS OF THE MERGERS
Effective Time......................................................... 85
Manner and Basis of Converting Shares.................................. 85
Stock Ownership Following the Mergers.................................. 88
Conduct Following the Merger........................................... 89
Conduct of Zitel's Business and MatriDigm's Business Prior to the
Merger................................................................ 89
Conditions to the Mergers.............................................. 92
Termination of the Agreement of Reorganization......................... 94
Shareholder Agreements................................................. 95
Lock-Up Agreements..................................................... 96
Affiliate Agreements................................................... 97
Employee Benefits...................................................... 98
Interests of Certain Persons........................................... 99
COMPARISON OF CAPITAL STOCK
Description of Holdco Capital Stock.................................... 100
Authorized Capital Stock............................................... 100
Holdco Common Stock.................................................... 100
Comparison of Rights of Stockholders of Holdco and Shareholders of
MatriDigm............................................................. 101
Comparison of Rights of Stockholders of Holdco and Shareholders of
Zitel................................................................. 115
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS.............. 129
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET..................... 130
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS.......... 131
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS..... 133
LEGAL MATTERS............................................................ 134
EXPERTS.................................................................. 134
FINANCIAL STATEMENTS, MATRIDIGM CORPORATION.............................. F-1
ANNEX A-- Agreement and Plan of Reorganization and Merger, dated as of
October 5, 1998 among Zitel, MatriDigm, Millennium Holding
Corp, Zenith Acquisition Corp. and Millennium Acquisition I
Corp.
ANNEX B-- California Merger Agreement (Zitel Merger)
ANNEX C-- California Merger Agreement (MatriDigm Merger)
ANNEX D-- Form of Shareholder Agreement, dated as of October 5, 1998
ANNEX E-- Form of Lock-Up Letter, dated as of October 5, 1998
ANNEX F-1-- Form of MatriDigm Affiliates Agreement, dated as of October
5, 1998
ANNEX F-2-- Form of Zitel Affiliates Agreement, dated as of October 5,
1998
ANNEX G-- Section 1300 et seq. of the California Corporations Code
ANNEX H-- Opinion of Salomon Smith Barney Inc.
ANNEX I-- Opinion of Robert E. LaBlanc & Associates
ANNEX J-1--Amended and Restated 1990 Stock Option Plan
ANNEX J-2--Amended and Restated Employee Stock Purchase Plan
ANNEX K-- Certificate of Incorporation of Millennium Holding Corp.
ANNEX L-- Bylaws of Millennium Holding Corp.
3
AVAILABLE INFORMATION
Zitel is subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith must file periodic reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Copies of such
reports, proxy statements and other information can be obtained, upon payment
of prescribed fees, at the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. Information regarding the operation of
the Public Reference Room can be obtained by calling the Commission at 1-800-
SEC-0330. Such reports, proxy statements and other information can also be
inspected at the Commission's facilities referred to above and at the
Commission's Regional Offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60621-2511, and at 7 World Trade Center, Suite 1300 New York, New York
10048. Electronic copies of all such reports are also available on the World
Wide Web at http://www.sec.gov/edgarhp.htm. In addition, the Zitel Common Stock
is listed and traded on the Nasdaq National Market ("Nasdaq"), and such
reports, proxy statements and other information concerning Zitel and Holdco are
available for inspection and copying at the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. After consummation
of the Zitel Merger, Zitel may no longer file reports, proxy statements or
other information with the Commission. Instead, such filings would be provided,
to the extent required, in filings made by Holdco.
Holdco has filed with the Commission a registration statement on Form S-4
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Holdco Common Stock to be issued pursuant to the
Agreement of Reorganization. This Proxy Statement/Prospectus/Consent
Solicitation does not contain all the information set forth in the Registration
Statement, certain portions of which are omitted in accordance with the rules
and regulations of the Commission. For further information, reference is hereby
made to the Registration Statement. Copies of the Registration Statement and
the exhibits and schedules thereto may be inspected, without charge, at the
offices of the Commission or obtained at prescribed rates from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
Information in this Proxy Statement/Prospectus/Consent Solicitation concerning
Zitel has been furnished by Zitel and has not been independently verified or
investigated by MatriDigm. Information in this Proxy Statement/Prospectus
concerning MatriDigm has been furnished by MatriDigm and has not been
independently verified or investigated by Zitel.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS/CONSENT SOLICITATION IN CONNECTION WITH THE SOLICITATION
OF PROXIES OR THE OFFERING OF SECURITIES MADE HEREBY, AND, IF GIVEN, ANY SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY ZITEL, HOLDCO, MATRIDIGM, OR ANY OTHER PERSON. THIS PROXY
STATEMENT/PROSPECTUS/CONSENT
4
SOLICITATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR
FROM ANY PERSON WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS/CONSENT SOLICITATION NOR ANY DISTRIBUTION OF SECURITIES
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF ZITEL OR MATRIDIGM SINCE THE DATE HEREOF, OR
THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Zitel with the Commission (File Number 0-
12194) pursuant to the Exchange Act are incorporated herein by reference:
1. Annual Report on Form 10-K for the fiscal year ended September 30,
1997, as amended by Annual Report on Form 10-K/A (filed on October 21,
1998).
2. Quarterly Report on Form 10-Q for the quarters ended December 31,
1997, March 31, 1998 and June 30, 1998.
3. Current Reports on Form 8-K reporting events on June 30, 1997
(filed on July 14, 1997), May 22, 1997 (filed on May 29, 1997), June
16, 1998 (filed on June 25, 1998), July 10, 1998 (filed on July 10,
1998), and October 5, 1998 (filed on October 6, 1998).
4. Description of Zitel Common Stock contained in Registration
Statement on Form S-1 filed with the Commission on October 27, 1983,
and declared effective on December 22, 1983.
5. Description of Zitel Preferred Share Purchase Rights Plan
contained in the Current Report on Form 8-K filed with the Commission
on June 25, 1996.
All documents filed by Zitel pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act, after the date of this Proxy Statement/Prospectus/Consent
Solicitation and prior to the date of the Zitel Special Meeting shall be deemed
to be incorporated by reference into this Proxy Statement/Prospectus/Consent
Solicitation and to be a part hereof from the dates of filing of such documents
and reports.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes
hereof to the extent that a statement herein (or in any other subsequently
filed document that is or is deemed to be incorporated by reference herein)
modifies or supersedes such previous statement. Any statement so modified or
superseded shall not be deemed to constitute a part hereof except as so
modified or superseded.
All information contained or incorporated by reference in this Proxy
Statement/Prospectus/Consent Solicitation relating to MatriDigm has been
supplied by MatriDigm, and all such information relating to Zitel and its
subsidiaries has been supplied by Zitel.
THIS PROXY STATEMENT/PROSPECTUS/CONSENT SOLICITATION INCORPORATES DOCUMENTS BY
REFERENCE THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON ORAL OR
WRITTEN REQUEST BY ANY PERSON TO WHOM THIS PROXY STATEMENT/PROSPECTUS/CONSENT
SOLICITATION HAS BEEN DELIVERED, IN THE CASE OF DOCUMENTS RELATING TO ZITEL
FROM ZITEL, 47211 BAYSIDE PARKWAY, FREMONT, CALIFORNIA 94538, ATTENTION: LARRY
B. SCHLENOFF, TELEPHONE NUMBER (510) 440-9600, AND IN THE CASE OF DOCUMENTS
RELATING TO MATRIDIGM, FROM MATRIDIGM, 4777 HELLYER AVE., SAN JOSE, CALIFORNIA
95138-1001 ATTENTION: ROBERT J. LUTH;
6
TELEPHONE NUMBER: (408) 360-3200. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS PRIOR TO THE ZITEL SPECIAL MEETING, ANY SUCH REQUEST SHOULD BE MADE
BY [ ], 1998
TRADEMARKS
"Zitel" is a registered trademark, "Datametrics" and "ViewPoint" are
unregistered trademarks, and "Zitel 2000" is a servicemark, of Zitel.
"MAP2000," "MARC2000," "MICOS," "MCAP," and "MICROTEST" are servicemarks and
"MatriDigm" is a trademark of MatriDigm. Tradenames and trademarks of other
companies appearing in this Proxy Statement/Prospectus/Consent Solicitation are
the property of their respective holders.
7
FORWARD-LOOKING STATEMENTS
Other than statements of historical fact, statements made in this Proxy
Statement/Prospectus/Consent Solicitation, including statements as to the
benefits expected to result from the Mergers and as to future operating results
and financial performance and the analyses performed by the financial advisors
to Zitel and MatriDigm, are forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual
results could differ materially from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth in "Risk
Factors" below, which shareholders should carefully review.
8
SUMMARY
This summary may not contain all the information that is important to you. For
a more complete understanding of the Mergers described herein, you should read
this entire document carefully, as well as the additional documents referred to
below.
QUESTIONS AND ANSWERS ABOUT THE MERGERS
WHAT IS ZITEL?
Zitel Corporation ("Zitel") is an information technology company specializing
in systems optimization, correlation and search technology. Zitel employs these
core competencies in two business divisions: a software products and services
division marketing multi-platform performance analysis and correlation software
used to optimize performance in mission critical systems, databases and
applications, and a solution services division that markets Year 2000 services
and consulting, which includes project management, planning, analysis, code
conversion and testing using the MatriDigm Corporation ("MatriDigm") technology
and other tools.
The software products division is the combination of Datametrics Systems
Corporation and Palmer & Webb Systems companies, which were acquired in 1997
and combined with Zitel's Performance and Modeling subsidiary. The division
operates under the Datametrics name. The division includes a business that
markets a suite of ViewPoint software utilized for data management that
automatically alerts, analyzes, correlates, investigates and reports on data
center performance for mainframe computers, open systems and distributed
network systems. In addition, the division includes a professional services
business to solve customers' IT professional needs and a training business to
assist customers with their software training needs. Products are sold through
a direct sales force in the United States and Europe, and through VARs,
distributors and OEMs worldwide. The division provides both direct and indirect
customer maintenance and support for its software products.
The solution services division provides services to convert customers' legacy
software code that could not recognize or utilize dates in and after the year
2000 into code that is able to recognize and utilize dates into the next
century. The division operates under the name Zitel Solution Services ("ZSS").
Year 2000 conversion services include project management, planning, analysis,
code conversion and testing. Zitel's primary code conversion methodology is
based on the MatriDigm Map2000(TM) process for IBM COBOL. The division acts as
a "Technology Associate" to MatriDigm, representing their factory service for
code remediation and their Independent Validation and Verification product for
remediated IBM COBOL code. In addition, as a solution provider, Zitel utilizes
other tools and processes to meet customer needs in different environments.
Zitel serves its Year 2000 customers both directly, with its own consulting
staff, and through a teaming program where Zitel may be a subcontractor or
partner to other solution providers worldwide.
In July 1998, Zitel finalized the sale of its storage business unit for
proceeds of approximately $1,000,000 and possible royalty payments of up to
$4,000,000 on the purchaser's net sales of the acquired storage product,
subject to a purchase price adjustment. The transaction involved the sale of
the assets and liabilities of this business unit. Pursuant to the purchase
price adjustment provisions,
9
Zitel will remit $334,922.92 back to the third party buyer arising from the
shortfall of purchased assets minus assumed liabilities appearing in the
closing date balance sheet that Zitel delivered to the buyer in August 1998. In
addition, the buyer is alleging in a letter dated October 16, 1998 an
additional shortfall of $975,342.06. Zitel is in the process of responding to
this letter. Included in the financial statements for the fiscal quarter ended
June 30, 1998 are losses of approximately $1,400,000 related to the operation
of this business unit. Additionally, costs related to the storage business unit
during such quarter included severance costs in the amount of $1,000,000,
excess capacity of Zitel's Fremont, California facility in the amount of
$750,000, and the write-off of assets specific to the business unit of
approximately $4,000,000. In addition, it is anticipated that approximately
$1,200,000 in personnel-related costs of the storage business unit will be
incurred in the fourth quarter of fiscal 1998.
Zitel's executive offices are located at 47211 Bayside Parkway, Fremont,
California 94538-6517, and its telephone number is (510) 440-9600.
WHAT IS MATRIDIGM?
MatriDigm is a privately-held software technology company incorporated in
California on August 9, 1995. Through September, 1997, MatriDigm was in the
development stage and devoted substantially all of its efforts to developing
its processes, raising capital and recruiting personnel. MatriDigm has
developed a process to renovate the IBM COBOL language software code to operate
in the year 2000 and beyond (MAP2000) and a process to independently validate
and verify (IV & V) IBM COBOL language software code that had been renovated
utilizing a process other than MatriDigm's (MARC2000). MatriDigm was co-founded
by James Brady and Franklin Chiang, utilizing technology developed since 1978
for Chiang's company, Chiang Labs. This technology provides the foundation for
the MatriDigm Code Analyzer.
MatriDigm specializes in COBOL maintenance and re-engineering, utilizing
products and services such as the MatriDigm Advanced Process 2000 ("MAP2000"),
MatriDigm Analysis of Renovated Code ("MARC2000"), the Millennium Control
System ("MICOS") and the MatriDigm COBOL Analysis Product ("MCAP"). MatriDigm's
products and services are made available to customers via MatriDigm's twenty-
one Technology Associates. These independent businesses, provide a full range
of assessment, project management, consulting and systems testing services to
businesses seeking to enable their computer systems to operate in the Year 2000
and beyond on a non-exclusive basis.
Zitel is a creditor as well as a shareholder of MatriDigm. As of October 5,
1998, Zitel beneficially owned approximately 31% of MatriDigm Common Stock on
an as converted basis. As of the date of this Proxy
Statement/Prospectus/Consent Solicitation, Zitel had loaned MatriDigm
$2,500,000.
MatriDigm's executive offices are located at 4777 Hellyer Avenue, San Jose,
California 95138-1001, and its telephone number is (408) 360-3200.
10
WHAT IS MILLENNIUM HOLDING CORP.?
Millennium Holding Corp. ("Holdco") is a Delaware corporation and a direct
wholly-owned subsidiary of Zitel that was formed to effect the Mergers
contemplated by the Agreement of Reorganization. Accordingly, Holdco has no
operations or employees. As a result of the Mergers, Zitel and MatriDigm will
each become a wholly-owned subsidiary of Holdco. Former shareholders of Zitel
and former shareholders of MatriDigm will become stockholders of Holdco. Upon
the consummation of the Mergers, the Board of Directors of Holdco will be seven
members consisting of three members elected or appointed by Zitel, three
members elected or appointed by MatriDigm and one member to be mutually agreed
upon by Zitel and MatriDigm, which person will be unaffiliated with either of
Zitel or MatriDigm.
Holdco's executive offices are located at 47211 Bayside Parkway, Fremont,
California 94538-6517, and its telephone number is (510) 440-9600.
WHY IS THIS TRANSACTION BEING EFFECTED?
The Mergers are being consummated with the expectation that, by combining the
complementary products and services of the two companies, each of Zitel and
MatriDigm, as the surviving corporations in the Mergers, and Millennium Holding
Corp. ("Holdco"), as the parent company of the surviving corporations, will
have the potential to realize long-term synergies and improved financial and
operating results.
HOW WILL THE MERGERS BE STRUCTURED?
Pursuant to the Agreement of Reorganization between Zitel, MatriDigm, Holdco,
and each of Zenith Acquisition Corp., a Delaware corporation ("Zenith
Acquisition"), and Millennium Acquisition I Corp., a Delaware corporation
("Millennium Acquisition"), (i) Zenith Acquisition will be merged with and into
Zitel (the "Zitel Merger"), with Zitel remaining as the surviving corporation
in the Zitel Merger (the "Zitel Surviving Corporation"), and (ii) and
Millennium Acquisition I Corp. will be merged with and into MatriDigm (the
"MatriDigm Merger", and together with the Zitel Merger, the "Mergers"), with
MatriDigm remaining as the surviving corporation in the MatriDigm Merger (the
"MatriDigm Surviving Corporation"). Following the Mergers, Zitel and MatriDigm
will each become a wholly-owned subsidiary of Holdco. The time at which the
Mergers are to be consummated is referred to in this Proxy
Statement/Prospectus/Consent Solicitation as the "Effective Time" of the
Mergers.
WHEN WILL THE MERGERS BE COMPLETED?
We are working to complete the Mergers by , 1998. However, certain delays
in meeting the conditions to the Mergers could postpone the closing.
HOW WILL THE MERGERS BE TREATED FOR TAX AND ACCOUNTING PURPOSES?
For federal income tax purposes, the Mergers will qualify as nonrecognition
transfers under the Internal Revenue Code of 1986, as amended (the "Code"). The
Mergers will be accounted for as "purchases" for financial accounting purposes
in accordance with generally accepted accounting principles, whereby the
purchase price will be allocated based on the fair values of the assets
11
acquired and the liabilities assumed. Any excess of such purchase price over
the amounts so allocated will be allocated to goodwill.
WHAT IS THE RECOMMENDATION OF THE ZITEL AND MATRIDIGM BOARDS OF DIRECTORS?
The Zitel Board of Directors (the "Zitel Board") has unanimously approved and
the members of the MatriDigm Board of Directors (the "MatriDigm Board") who
were disinterested and eligible to vote have unanimously approved the Zitel
Merger and the MatriDigm Merger, respectively, and the Agreement of
Reorganization and the transactions contemplated thereby. After careful
consideration, (i) the Zitel Board unanimously recommends a vote in favor of
adoption and approval of the Agreement of Reorganization and the Zitel Merger,
and unanimously recommends a vote in favor of approval of the Share Issuance,
and (ii) the members of the MatriDigm Board who were disinterested and eligible
to vote unanimously recommend a vote in favor of adoption and approval of the
Agreement of Reorganization and the MatriDigm Merger.
WHAT WILL I RECEIVE FOR THE SHARES AND OPTIONS I CURRENTLY HOLD?
As of the Effective Time of the Mergers, each issued and outstanding share of
common stock, par value $0.01 per share ("Zitel Common Stock"), of Zitel (other
than shares, if any, as to which dissenters' rights have been exercised
pursuant to California law) shall be converted into one fully paid and
nonassessable share of common stock, par value $0.01 per share ("Holdco Common
Stock"), of Holdco (the "Zitel Exchange Ratio"). As of the Effective Time of
the Mergers, Holdco will assume all options to purchase Zitel Common Stock then
outstanding under the Zitel stock option plans. Thereafter, the holders of such
options will have the right to receive Holdco Common Stock upon exercise of
their options.
Holders of all of the shares of MatriDigm's preferred stock have agreed that
immediately prior to the Effective Time of the Mergers, each issued and
outstanding share of preferred stock of MatriDigm, no par value (the "MatriDigm
Preferred Stock") will be converted into MatriDigm Common Stock. As of the
Effective Time of the Mergers, each issued and outstanding share of common
stock, no par value ("MatriDigm Common Stock," and together with the MatriDigm
Preferred Stock, the "MatriDigm Capital Stock"), of MatriDigm (other than
shares, if any, as to which dissenters' rights have been exercised pursuant to
California law and shares held by Zitel) shall be converted into approximately
.65 of a fully paid and nonassessable share of Holdco Common Stock (the
"MatriDigm Exchange Ratio"). As of the Effective Time of the Mergers, Holdco
will assume all options to purchase MatriDigm Common Stock then outstanding
under the MatriDigm stock option plans. Thereafter, the holders of such options
will have the right to receive approximately .65 of a share of Holdco Common
Stock upon exercise of their options.
WHAT SHOULD I DO NOW TO VOTE MY SHARES?
If you are a Zitel shareholder, just mail your signed proxy card in the
enclosed return envelope as soon as possible, so that your shares can be voted
at the Zitel shareholder meeting. If you are a MatriDigm shareholder, just mail
in your signed Written Consent form in the enclosed return envelope as soon as
possible.
12
IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
Your broker cannot vote your shares without your instructions. You should
instruct your broker to vote your shares, following the directions your broker
provides. Shares that are not voted because you do not instruct your broker
effectively will be counted as voted against the merger.
CAN I CHANGE MY VOTE AFTER I MAIL MY PROXY CARD?
Yes, if you are a Zitel shareholder, you can change your vote at any time
before your proxy is voted at the Zitel shareholder meeting. You can do this in
three ways: First, you can send Zitel a written statement that you would like
to revoke your proxy. Second, you can send Zitel a new proxy card. You should
send your revocation or new proxy card to MacKenzie Partners at 156 Fifth
Avenue, New York, NY 10010; telephone: (800) 322-2885. Third, you can attend
the shareholder meeting and vote in person. However, your attendance alone will
not revoke your proxy. If you instructed a broker to vote your shares, you must
follow your broker's directions for changing those instructions.
Yes, if you are a MatriDigm shareholder, you can change your vote at any time
before MatriDigm receives Written Consents from the holders of a majority of
its outstanding shares of each of its Common Stock and its Series A Preferred
Stock, Series B Preferred Stock and Series D Preferred Stock. You may change
your vote in two ways. First, you may send MatriDigm a written statement that
you would like to revoke your Written Consent. Second, you can send MatriDigm a
new Written Consent form with a different vote. You should send your revocation
or new Written Consent to MatriDigm's Secretary at the address on the cover
page. If you do not revoke your Written Consent before MatriDigm has received
Written Consents from the holders of a majority of its shares of Common Stock
and each of its Series A Preferred Stock, Series B Preferred Stock and Series D
Preferred Stock, you will lose the right to revoke your Written Consent.
Certain holders of shares of MatriDigm Common Stock and shares of Series A
Preferred Stock, Series B Preferred Stock and Series D Preferred Stock
representing approximately 36% of the outstanding shares of MatriDigm Capital
Stock have agreed to execute and deliver Written Consents in favor of adoption
and approval of the Agreement of Reorganization and the MatriDigm Merger.
Written consents from these shareholders are expected to be received promptly
upon mailing of this Proxy Statement/Prospectus/Consent Solicitation. As a
result, it is unlikely that there will be any significant period of time during
which you will be able to revoke your Written Consent.
WHEN AND WHERE IS THE ZITEL SHAREHOLDER MEETING?
The Zitel shareholder meeting will be held at the offices of Zitel at 47211
Bayside Parkway, Fremont, California 94538-6517 on , 1998, at [10:00 a.m.]
local time. The purpose of the Zitel shareholder meeting is to consider and
vote upon proposals to approve and adopt the Agreement of Reorganization and to
approve the Zitel Merger and any related transactions contemplated thereby.
WHAT IS THE MATRIDIGM CONSENT SOLICITATION?
The MatriDigm Board has decided to seek the consent of its shareholders to the
adoption and approval of the Agreement of Reorganization and the MatriDigm
Merger instead of holding a special
13
meeting of MatriDigm's shareholders for that purpose. Under applicable law and
under MatriDigm's Articles of Incorporation and Bylaws, the Agreement of
Reorganization and MatriDigm Merger may be approved if holders of a majority of
the outstanding shares of MatriDigm's Common Stock and a majority of the
outstanding shares of each of its Series A Preferred Stock, its Series B
Preferred Stock and its Series D Preferred Stock give their consent in writing.
The MatriDigm Board is seeking this consent by means of the Written Consent
form included with this Proxy Statement/Prospectus/Consent Solicitation. If you
execute and return the Written Consent form enclosed with this Proxy
Statement/Prospectus/Consent Solicitation, you will have consented to the
adoption and approval of the Agreement of Reorganization and the MatriDigm
Merger. The Written Consent form may be returned to MatriDigm in the enclosed
return envelope for that purpose.
HOW CAN I EXCHANGE MY CERTIFICATES?
Promptly after the Effective Time of the Mergers, Holdco, acting through
American Stock Transfer & Trust Company (the "Exchange Agent"), will deliver to
each MatriDigm shareholder of record as of the Effective Time of the Mergers a
letter of transmittal with instructions to be used by such shareholder in
surrendering certificates which, prior to the Mergers, represented shares of
MatriDigm Common Stock. Certificates should not be surrendered by the holders
of MatriDigm Common Stock until such shareholders receive the letter of
transmittal from the Exchange Agent. Shares of Zitel Common Stock will, at the
Effective Time of the Mergers, by operation of law, represent shares of Holdco
Common Stock. Zitel shareholders will not need to surrender their certificates
for shares of Holdco Common Stock.
HOW WILL THE BUSINESS OF MATRIDIGM BE CONDUCTED PENDING THE MERGERS?
Pursuant to the Agreement of Reorganization, until the earlier of the
termination of the Agreement of Reorganization and the Effective Time of the
Mergers, MatriDigm agreed (except to the extent expressly contemplated by the
Agreement of Reorganization or with the prior written consent of Zitel) that
(i) it shall conduct its business only in the ordinary and customary course
consistent with past practice, (ii) it will use its best efforts to preserve
its business organization intact and to maintain its existing relations with
customers, suppliers, employees, creditors and business partners, and
(iii) that it would not perform or engage in certain activities in the conduct
of its business.
WHAT CONDITIONS COULD PREVENT THE MERGERS?
Consummation of the Mergers is subject to certain conditions precedent,
including, but not limited to, (i) certain approvals by the respective
shareholders of Zitel and MatriDigm in connection with the Mergers, (ii)
declaration by the SEC of the effectiveness of this Proxy
Statement/Prospectus/Consent Solicitation, (iii) the absence of any law or
order prohibiting consummation of the Mergers, (iv) the shares of Holdco Common
Stock to be issued in the Mergers having been authorized for listing on the
Nasdaq, (v) receipt by Zitel and MatriDigm of legal opinions that the Mergers
will be treated as nonrecognition transfers of Zitel Common Stock and MatriDigm
Common Stock, respectively, by those holders thereof (other than Zitel, in the
case of MatriDigm Common Stock) to Holdco for shares of Holdco Common Stock,
and (vi) all of the issued and outstanding MatriDigm Preferred Stock having
been converted to MatriDigm Common Stock, and there being no class or series of
any capital stock of MatriDigm outstanding other than MatriDigm Common Stock.
14
WHAT OTHER CIRCUMSTANCES MIGHT PREVENT THE MERGERS?
Either Zitel or MatriDigm can withdraw from its obligations under the Agreement
of Reorganization if the Mergers have not occurred on or prior to March 31,
1999, or if a governmental entity has issued a final, non-appealable order,
decree or ruling permanently restraining or prohibiting the transactions
contemplated by the Agreement of Reorganization.
In addition, Zitel can withdraw from its obligations under the Agreement of
Reorganization if (i) MatriDigm has breached its covenants or representations
and warranties under the Agreement of Reorganization (and such breach is not
cured within 30 days after MatriDigm receives notice of the breach), (ii) the
Agreement of Reorganization and the MatriDigm Merger are not approved by the
shareholders of MatriDigm, or (iii) the Zitel Board determines in its good
faith judgment that failure to terminate the Agreement of Reorganization could
violate its fiduciary obligations to the shareholders of Zitel.
Finally, MatriDigm can withdraw from its obligations under the Agreement of
Reorganization if (i) Zitel, Holdco, Zenith Acquisition or Millennium
Acquisition has breached its covenants or representations and warranties under
the Agreement of Reorganization (and such breach is not cured within 30 days
after such party receives notice of the breach), (ii) the Agreement of
Reorganization, and the Zitel Merger are not approved by the shareholders of
Zitel, or (iii) the MatriDigm Board determines in its good faith judgment that
failure to terminate the Agreement of Reorganization could violate its
fiduciary obligations to the shareholders of MatriDigm.
WHAT RISKS ARE INVOLVED IN CONSUMMATING THE TRANSACTION?
The Mergers involve certain risks. Shareholders could lose all, or a
significant amount of the remaining value, of their investment if Millennium
Holding Corp. is not successful, or if the stock market declines. Shareholders
should read this entire Proxy Statement/Prospectus/Consent Solicitation,
including any Supplements. Before completing either the proxy card if you are a
Zitel shareholder or the written consent if you are a MatriDigm shareholder,
you should also carefully consider the risks set forth on pages 23 through 35
of this Proxy Statement/Prospectus/Consent Solicitation.
DO ANY ZITEL OR MATRIDIGM SHAREHOLDERS HAVE APPRAISAL RIGHTS?
As a result of the Mergers, the shareholders of Zitel and MatriDigm will become
shareholders of Holdco, and will exchange their Zitel and MatriDigm shares for
Holdco shares in accordance with the Zitel Exchange Ratio and the MatriDigm
Exchange Ratio, respectively. Those Zitel and MatriDigm shareholders who
dissent from the Zitel Merger and the MatriDigm Merger, respectively, will be
paid the fair value of the shares they currently hold in cash as provided under
California law. Although shareholders of MatriDigm and Zitel have the right to
dissent under California law from the Mergers, Holdco has the right to
terminate the Agreement of Reorganization if holders of a material number of
MatriDigm or Zitel shares of common stock do so.
15
ZITEL SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data should be read in conjunction
with the Zitel Financial Statements and related notes thereto and "ZITEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" incorporated by reference in this Proxy
Statement/Prospectus/Consent Solicitation. The statement of operations data for
each of the three years in the period ended September 30, 1997 and the balance
sheet data at September 30, 1997 and 1996 are derived from the financial
statements of Zitel which have been audited by PricewaterhouseCoopers LLP,
independent accountants, and are incorporated by reference in this Proxy
Statement/Prospectus/Consent Solicitation. The balance sheet data at September
30, 1995, 1994 and 1993 and the statement of operations data for the years
ended September 30, 1994 and 1993 are derived from financial statements that
have been audited by PricewaterhouseCoopers LLP that are not included in this
Proxy Statement/Prospectus/Consent Solicitation. Zitel's unaudited historical
financial statement data as of and for the nine months ended June 30, 1998 and
1997 has been prepared on the same basis as the historical financial
information and, in the opinion of Zitel's management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the financial position and results of operations for such
periods. The results of operations for those interim periods are not
necessarily indicative of the results to be expected for the entire year.
ZITEL CORPORATION SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- -------- --------
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $21,780 $17,452 $23,714 $23,066 $ 17,966 $ 11,708 $ 17,678
Operating income(loss).. (9,867) (6,831) 4,209 1,883 (19,907) (14,830) (19,559)
Net income(loss)........ (8,277) (6,961) 8,526 4,049 (17,501) (10,455) (28,513)
Basic net income(loss)
per share.............. (0.67) (0.55) 0.60 0.27 (1.15) (0.69) (1.73)
Diluted net income(loss)
per share.............. (0.67) (0.55) 0.56 0.26 (1.15) (0.69) (1.73)
AS OF SEPTEMBER 30, AS OF JUNE 30,
---------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- -------- -------
(UNAUDITED)
BALANCE SHEET DATA:
Total assets............ $24,230 $13,678 $26,206 $30,699 $ 49,294 $ 52,612 $33,282
Total shareholders'
equity................. 16,203 10,004 22,957 27,089 15,946 19,034 9,187
16
MATRIDIGM SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data should be read in conjunction
with the MatriDigm Financial Statements and related notes thereto and
"MATRIDIGM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" which are included elsewhere in this Proxy
Statement/Prospectus/Consent Solicitation. The statement of operations data for
the period August 9, 1995 (inception) through September 30, 1996 and for the
year ended September 30, 1997, and the balance sheet data at September 30, 1996
and 1997 are derived from the financial statements of MatriDigm which have been
audited by PricewaterhouseCoopers LLP, independent accountants, and are
included elsewhere in this Proxy Statement/Prospectus/Consent Solicitation.
MatriDigm's unaudited historical financial statement data as of and for the
nine months ended June 30, 1997 and 1998 has been prepared on the same basis as
the historical financial information and, in the opinion of MatriDigm's
management, contain all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations for such periods. The results of operations for those
interim periods are not necessarily indicative of the results to be expected
for the entire year.
MATRIDIGM, CORPORATION
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
FOR THE PERIOD AUGUST 9, 1995 NINE MONTHS ENDED
(DATE OF INCEPTION) THROUGH JUNE 30,
SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, ------------------------
1996 1997 1997 1998
----------------------------- ------------------------ -------- --------------
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Net revenues............ -- $ 123 $ 42 $ 3,825
Income (loss) from oper-
ations................. $(2,005) (14,639) (10,253) (10,571)
Net income (loss)....... (1,873) (14,579) (10,179) (10,835)
Basic and diluted income
(loss) per share....... (0.13) (0.76) (0.54) (0.53)
AS OF SEPTEMBER 30, AS OF JUNE 30,
------------------------------------------------------ --------------
1996 1997 1998
----------------------------- ------------------------ --------------
(UNAUDITED)
BALANCE SHEET DATA:
Total assets............ $ 3,621 $ 7,825 $ 5,453
Total shareholders'
equity (deficit)....... 3,297 812 (4,889)
17
MATRIDIGM MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
For the period August 19, 1995 (date of inception) to September 30, 1996, and
for the year ended September 30, 1997, MatriDigm was a development stage
enterprise, and therefore any comparisons of results during those periods with
results after such period may not be meaningful in understanding the trend of
MatriDigm's business.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH PERIOD AUGUST 5, 1995 (DATE OF
INCEPTION) TO SEPTEMBER 30, 1996
As MatriDigm was in the development stage during both periods, revenue and cost
of sales were not meaningful.
Operating expenses grew from $2.0 million during the period ended September 30,
1996 to $14.7 million during the year ended September 30, 1997 as MatriDigm
made significant investments in infrastructure, research and development
related to MatriDigm's primary technologies, and sales and marketing efforts to
generate awareness and demand for MatriDigm's products.
Interest income for both periods represents earnings on invested cash. Interest
expense for the year September 30, 1997 was related to capital leases and note
payable.
Cash used in investing activities during the period ended September 30, 1996 of
$1.0 million related primarily to the purchase of equipment and technology
rights. During the year ended September 30, 1997 cash used in investing
activities grew to $2.9 million primarily related to leasehold improvements on
facilities and equipment purchases.
Cash from financing activities during the period ended September 30, 1996 of
$5.0 million was from the sale of preferred stock to two shareholders. During
the year ended September 30, 1997 cash from financing activities was $16.3
million: $5.0 million generated from proceeds of a convertible note payable,
and $12.1 million from the sale of common and convertible preferred stock.
NINE MONTHS ENDED JUNE 30, 1998 COMPARED WITH PERIOD NINE MONTHS ENDED JUNE 30,
1997
MatriDigm recorded a net loss of $10.8 million for the nine months ended June
30, 1998 compared with a net loss of $10.2 million for the same period a year
earlier.
Revenue for the nine months ended June 30, 1998, the first nine months when
MatriDigm was not a development stage enterprise, was $3.8 million versus nil
for the same period a year earlier.
Gross margin for the nine months ended June 30, 1998 was $1.3 million,
representing a 35% gross margin, versus nil for the same period a year earlier.
Costs of sales primarily consists of personnel and equipment costs and is not
directly variable with the volume of code processed. Staffing levels exceeded
business requirements as MatriDigm's market developed, and continues to
develop, at a slower rate than expected. During the nine months ended June 30,
1997 MatriDigm was processing code, but it was primarily for proof of concept
purposes, not revenue producing. Therefore, processing costs for this period
are classified as Research and Development.
18
Operating expenses for the nine months ended June 30, 1998 totaled $11.9
million, an increase of 16% over the $10.3 million for the same period a year
earlier. The increase is attributable to MatriDigm's continuing to invest in
the required infrastructure, enhancements to MatriDigm's primary technology and
continued sales and marketing spending. Operating expense investment exceeded
requirements as MatriDigm's market developed, and continues to develop, at a
slower rate than expected.
Interest expense for the nine months ended June 30, 1998 was $.3 million versus
nil for the same period of a year earlier. The increase was attributable to
interest on debt and capital leases.
During the nine months ended June 30, 1998 cash used in operating activities
amounted to $9.8 million versus $9.2 million for the same period a year
earlier. The primary cause in both periods was the loss from operations offset
partially by the depreciation and amortization of $1.6 million and $.8 million,
respectively, and an increase of $.8 million in receivables in 1998.
Cash used in investing activities declined from $2.8 million for the nine
months ended June 30, 1997 to $.4 million during the same period in 1998, as
required leasehold improvements and equipment purchases declined. MatriDigm
does not anticipate significant capital expenditures for the balance of the
year ended September 30, 1998.
Cash from financing activities during the nine months ended June 30, 1997 of
$15.4 million includes $5.0 million in proceeds from the issuance of a
convertible note and $11.1 million in proceeds from the sale of common and
convertible stock.
Cash from financing activities during the nine months ended June 30, 1998 of
$7.8 million net primarily consists of $3.0 million in proceeds from a bank
loan guaranteed by three shareholders, $4.0 million in proceeds from
convertible subordinated notes sold to shareholders and $.8 million in proceeds
from the sale of common stock, primarily to employees of MatriDigm, and
warrants to shareholders.
LIQUIDITY AND CAPITAL RESOURCES:
Management believes that it will require additional financing to meet its
financial obligations until MatriDigm is cash flow positive. MatriDigm is not
able to estimate when, if ever, it will be cash flow positive or whether it
will be able to obtain the required additional financing to meet its financial
obligations.
Since June 30, 1998, MatriDigm has received $2.5 million in loans from Zitel
Corporation. As part of the definitive Merger Agreement signed on October 5,
1998, Zitel Corporation agreed to continue to fund the working capital
requirements of MatriDigm. There can be no assurance, however, that Zitel will
not terminate the Agreement of Reorganization and, therefore, cease to fund
MatriDigm, should Zitel determine that there has been a material adverse change
in the business prospects of MatriDigm.
EFFECTS OF INFLATION
MatriDigm believes that the relatively moderate rate of inflation over the past
few years has not had a significant impact on MatriDigm's results.
19
ENVIRONMENTAL MATTERS
MatriDigm believes that it is currently in compliance with all applicable
environmental regulations. Compliance with these regulations has not had, and
is not anticipated to have, any material impact upon MatriDigm's capital
expenditures, earnings or competitive position.
YEAR 2000
The Year 2000 issue concerns the ability of computer software programs,
including the logic contained within embedded chips, to correctly identify and
process date-sensitive calculations across and beyond the Year 2000 dateline.
This concern is largely a result of programming practices that use a two-digit
field to represent the year without other program logic to identify the
century. Accordingly, such software may process a year field of "00' as the
year 1900 instead of the year 2000. If not identified and replaced or
corrected, systems using such software, including systems used by MatriDigm's
major suppliers, could fail or produce erroneous results such that materially
adverse financial results and/or results of operations could occur.
MatriDigm believes the services it sells satisfactorily address the Year 2000
issue. MatriDigm currently utilizes third-party equipment and software that may
be affected by the Year 2000 issue and has begun to assess and address its
critical business information and production systems regarding the Year 2000
issue for both Information Technology ("IT') and non-IT systems. For IT
systems, MatriDigm is continuing the normal replacement of its financial
business systems which it expects to complete by June 30, 1999. The
implementation of the new business systems, through planned normal business
upgrades, are not expected to have a material impact on MatriDigm's financial
statements arising from the Year 2000 issue. Based upon the information
currently available form MatriDigm's assessment of non-IT systems, MatriDigm
does not believe that the costs associated with these Year 2000 activities will
have a material adverse effect on MatriDigm consolidated results of operations
or financial position. Internal and external costs specifically associated with
Year 2000 issues will be charged to expense as incurred.
MatriDigm plans to contact its critical suppliers to determine their status for
Year 2000 readiness. The ability of such third parties to effectively address
Year 2000 issues is outside of MatriDigm's control, and there can be no
assurance that the failure of any third party with which MatriDigm transacts
business to adequately address the Year 2000 issue will not have a material
adverse effect on MatriDigm's financial results and/or results of operation.
MatriDigm is in the process of developing contingency plans to allow
continuation of mission-critical business processes to moderate the impact of
any Year 2000 issues not adequately addressed by MatriDigm or any material
third-party to MatriDigm. These efforts, when completed, are expected to allow
MatriDigm to define the most reasonably likely worst case scenario, currently
uncertain, resulting from Year 2000 issues.
Although MatriDigm does not expect Year 2000 issues to have a material impact
on its financial results or operations, there can be no assurance that there
will be no disruptions or that MatriDigm will not incur significant costs to
avoid such disruptions.
20
This information contains certain forward-looking statements. It is important
to note that MatriDigm's actual results could differ materially from those
projected by such forward-looking statements. Important factors that could
cause actual results to differ materially from those projected in the forward-
looking statements include, but are not limited to, the following: operations
may not improve as projected, new products may not be accepted by the
marketplace as anticipated, or new products may take longer to develop than
anticipated.
21
ZITEL CORPORATION AND MATRIDIGM CORPORATION
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The unaudited pro forma combined condensed financial information set forth
below gives effect to the Merger as a purchase, assuming that approximately
0.65 shares of Holdco Common Stock are issued in exchange for each share of
MatriDigm Common Stock. The pro forma information combines Zitel's audited
consolidated statements of operations for the year ended September 30, 1997 and
the unaudited statements of operations for the nine months ended June 30, 1998,
with MatriDigm's audited results of operations for the year ended September 30,
1997 and the unaudited results of operations for the nine months ended June 30,
1998, respectively. This data should be read in conjunction with the selected
historical financial information, the unaudited pro forma condensed combined
financial statements and the separate historical financial statements of Zitel
and MatriDigm and the notes thereto incorporated or included elsewhere in this
Joint Proxy Statement/Prospectus/ Consent Solicitation. The unaudited pro forma
condensed combined financial statements are not necessarily indicative of the
operating results or financial position that would have been achieved had the
Merger been consummated at the beginning of the periods presented and should
not be construed as representative of future operations.
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 JUNE 30, 1998
------------------ -----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
PRO FORMA CONDENSED
COMBINED STATEMENT OF
OPERATIONS DATA(1):
Net revenues............ $ 18,089 $ 21,387
Acquired in-process
research and
development ........... 6,600 --
Operating income
(loss)................. (45,431) (38,335)
Net income (loss)(2).... (41,338) (41,006)
Basic and diluted net
income (loss) per
share(2)............... (1.24) (1.19)
PERIOD ENDED
JUNE 30, 1998
-----------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
FOR PER SHARE AMOUNTS)
PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA:
Cash and cash equivalents............................... $12,405
Working capital......................................... 3,016
Current assets.......................................... 19,605
Total assets............................................ 90,873
Current liabilities..................................... 16,589
Total stockholders' equity.............................. 43,174
- --------
(1) The unaudited selected pro forma combined condensed financial information
gives effect to the completion of the Merger as if it had occurred on
October 1, 1996
(2) Net loss per share information for the year ended September 30, 1997
includes acquired in-process research and development, net of tax effect.
Net loss and diluted net loss per share before these expenses were $34,738
and $1.05, respectively.
22
RISK FACTORS
THE MERGERS INVOLVE CERTAIN RISKS. SHAREHOLDERS COULD LOSE ALL, OR A
SIGNIFICANT AMOUNT OF THE REMAINING VALUE, OF YOUR INVESTMENT IF HOLDCO IS NOT
SUCCESSFUL, OR IF THE STOCK MARKET DECLINES. SHAREHOLDERS SHOULD READ THIS
ENTIRE PROXY STATEMENT/PROSPECTUS/CONSENT SOLICITATION, INCLUDING ANY
SUPPLEMENTS. BEFORE COMPLETING EITHER THE PROXY CARD IF YOU ARE A ZITEL
SHAREHOLDER OR THE WRITTEN CONSENT IF YOU ARE A MATRIDIGM SHAREHOLDER, YOU
SHOULD ALSO CAREFULLY CONSIDER THE FOLLOWING RISKS.
IN THE PROSPECTUS AND ELSEWHERE, ZITEL AND MATRIDIGM HAVE MADE FORWARD-LOOKING
STATEMENTS REGARDING VARIOUS ASPECTS OF THE BUSINESS AND OPERATIONS OF ZITEL,
MATRIDIGM AND HOLDCO. THE STATEMENTS ARE QUALIFIED BY THE "RISK FACTORS"
DISCUSSED BELOW. THESE FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE DISCUSSED. SHAREHOLDERS SHOULD NOT RELY ON ZITEL'S OR MATRIDIGM'S
STATEMENTS OR PLANS AS A PREDICTION OF ACTUAL RESULTS.
RISKS RELATED TO THE MERGERS
INTEGRATION OF OPERATIONS MAY BE DIFFICULT
The realization of the benefits sought from the Mergers depends on the ability
of the combined company following the Effective Time of the Mergers to
effectively utilize the joint product development capabilities, sales and
marketing capabilities, administrative organizations and facilities of the two
companies. There can be no assurance that these benefits will be achieved or
that the activities of Zitel and MatriDigm will be integrated in a coordinated,
timely and efficient manner. The combination of the two organizations also will
require the dedication of certain members of management that will detract their
attention from the day-to-day business of the combined company. There can be no
assurance that the integration will be completed without disrupting Zitel's and
MatriDigm's businesses. The inability of the combined company to effectively
utilize resources and to achieve integration in a timely and coordinated
fashion could result in a material adverse effect on the combined company's
financial condition, operating results and cash flows. There can be no
assurance that the combined company will retain and successfully integrate its
key management, technical, sales and customer support personnel, or that it
will obtain any of the anticipated benefits of the Mergers. See "The Merger and
Related Transactions--Joint Reasons for the Merger."
THE COMPANIES WILL INCUR SUBSTANTIAL EXPENSES RESULTING FROM THE MERGERS
Zitel and MatriDigm anticipate that they will incur costs associated with the
Mergers of approximately $5 million, of which $1.35 million will be payable in
Holdco Common Stock. These expenses include investment advisory fees, legal and
accounting fees, financial printing costs and other costs related to the
Mergers. Although the companies do not believe that the costs will exceed the
aforementioned amount, there can be no assurance that the companies' estimate
is correct or that unanticipated contingencies will not occur that will
substantially increase the costs of combining the operations of the two
companies.
23
VALUE OF CONSIDERATION TO MATRIDIGM SHAREHOLDERS DEPENDS ON MARKET PRICE OF
ZITEL COMMON STOCK AT THE TIME OF THE MERGERS
Under the terms of the Agreement of Reorganization, each share of MatriDigm
Common Stock issued and outstanding at the Effective Time will be converted
into the right to receive approximately .65 of a share of Holdco Common Stock,
subject to adjustment for any options to purchase Zitel and MatriDigm Common
Stock exercised from October 5, 1998 through the date of this Proxy
Statement/Prospectus/Consent Solicitation. Nevertheless, the value of the
consideration to be received by shareholders of MatriDigm in the MatriDigm
Merger will depend entirely on the market price of the Zitel Common Stock at
the Effective Time of the Mergers. If the market price of Zitel Common Stock
decreases or increases prior to the Effective Time of the Mergers, the market
value at the Effective Time of the Mergers of the Holdco Common Stock to be
received by MatriDigm shareholders in the MatriDigm Merger would
correspondingly decrease or increase. The market prices of Zitel Common Stock
as of recent dates are set forth under "--Market and Price Data for Zitel
Common Stock" and "Comparative Market Price Data." There can be no assurance
that the market price of the Zitel Common Stock at, or the Holdco Common Stock
after, the Effective Time of the Mergers will not be higher or lower than such
price. Shareholders of Zitel and MatriDigm should obtain and consider
historical and recent trading prices for the Zitel Common Stock in determining
whether to vote in favor of the Mergers and the Agreement of Reorganization.
See "--Zitel Stock Price Has Been Volatile."
MERGERS COULD DILUTE EARNINGS PER SHARE
Although the companies believe that certain synergies will result from the
Mergers, there can be no assurance that combining the two companies'
businesses, even in an efficient, effective and timely manner, will result in
combined results of operations and financial condition superior to what would
have been achieved by each company independently, or as to the period of time
required to achieve such result. The issuance of Holdco Common Stock in
connection with the Mergers may have the effect of reducing the combined
company's net income per share from levels otherwise expected for Zitel and
could reduce the market price of the Holdco Common Stock following the
Effective Time unless revenue growth or cost savings and other business
synergies are sufficient to offset the effect of such issuance can be achieved.
MATRIDIGM WILL NO LONGER BE A STAND-ALONE ENTITY
As a consequence of the Mergers, MatriDigm shareholders will lose the chance to
benefit from the development and exploitation of MatriDigm's products and
services on a stand-alone basis. Additionally, the combined company will have
different management than MatriDigm's current management, and consequently the
management of the combined company may make strategic and operational decisions
that differ from those that would be made by MatriDigm's current management. It
is possible that MatriDigm, if it were to remain independent, could achieve
economic performance superior to that of the combined company. Consequently,
there can be no assurance that shareholders of MatriDigm would not achieve
greater returns on investment if MatriDigm were to remain an independent
company.
24
RISKS RELATED TO THE COMBINED COMPANY
THE COMBINED COMPANY WILL NEED ADDITIONAL OPERATING CAPITAL
Both Zitel and MatriDigm have a history of operating losses and will exhaust
current working capital and cash resources over the next two fiscal quarters if
expected revenue growth does not provide sufficient positive cash flow. Zitel's
and MatriDigm's capital requirements in connection with designing, developing,
processing and marketing products have been significant, and, consequently, the
combined company's working capital and cash requirements will be significant
going forward. If additional funds were to be needed, (i.e., if the combined
company is not able to achieve cost savings or if revenues do not generate
sufficient funds to cover marketing or other operational costs), the combined
company could be required to seek additional financing through loan
transactions and/or the sale of securities. However, existing obligations of
Zitel and MatriDigm could make finding additional financing difficult. There
can be no assurance that further financings will be available on acceptable
terms, or at all.
POTENTIAL FLUCTUATIONS IN QUARTERLY PERFORMANCE
Each of Zitel's and MatriDigm's revenue and operating results have varied
substantially from quarter to quarter in the past. The combined company's
quarterly operating results may continue to fluctuate due to a number of
factors, including:
. The timing, size and nature of its sales of software licenses and the
timing of remediation contracts and conversion;
. Unforeseen difficulties in performing such transactions;
. The performance of its value added integrators and distributors and
significant industry partners;
. The timing of the introduction and the market acceptance of new services,
products or product enhancements by the combined company or its
competitors;
. Changes in the combined company's operating expenses;
. Personnel changes; and
. Foreign currency exchange rates and fluctuations in economic and
financial market conditions.
The timing, size and nature of sales of software licenses and the timing of
remediation contracts and conversion will be important factors in the combined
company's quarterly operating results. Many such transactions involve large
dollar amounts, and the sales cycle for these transactions may be often lengthy
and unpredictable. In addition, the sales cycle associated with these
transactions is subject to a number of uncertainties, including clients'
budgetary constraints, the timing of clients' budget cycles and clients'
internal approval processes. There can be no assurance that the combined
company will be successful in closing such large transactions on a timely basis
or at all. In addition, as the combined company begins to derive a greater
proportion of total revenue from license revenue, the combined company may
realize a disproportionate amount of its revenue and income in the last month
of each quarter and, as a result, the magnitude of quarterly fluctuations may
not become evident until late in, or at the end of, a given quarter.
Accordingly, delays in product delivery or in the closing of sales near the end
of a quarter could cause quarterly revenue and, to a greater degree, operating
results to fall substantially short of anticipated levels.
25
Each of Zitel's and MatriDigm's expense levels have been, and the combined
company's expense levels will be, based, in part, on expectations as to future
revenue and have been, and will be, fixed, to a large extent, in the short
term. As a result, the combined company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall in revenue in relation to the combined company's
expectations would have an immediate and material adverse effect on the
combined company's business, financial condition and results of operations. In
addition, the combined company may increase operating expenses to expand its
client technical support and professional services staff and sales force. The
timing of such expansion and the rate at which new personnel become productive
could cause material fluctuations in quarterly and annual results of
operations.
Due to all of the foregoing factors, the combined company believes that period-
to-period comparisons of its operating results are not necessarily meaningful
and that such comparisons cannot be relied upon as predictors of future
performance. There can be no assurance that future revenue and operating
results will not vary substantially. It is also possible that in some future
quarter the combined company's operating results will be below the expectations
of public market analysts and investors. In either case, the price of Holdco
Common Stock could be materially adversely affected.
CONCENTRATION OF CLIENTS AND CREDIT RISK
Until recently, MatriDigm has offered its products and services exclusively
through independent businesses, such as value added resellers and systems
integrators with whom it had a contractual relationship (collectively, the
"Technology Associates"). In addition, sales to MatriDigm's ten largest
customers accounted for all of MatriDigm's total revenue in the nine months
ended June 30, 1998.
Although Zitel's and MatriDigm's largest clients have varied from period to
period, the combined company anticipates that its results of operations in any
given period will continue to depend to a significant extent upon revenue from
a small number of clients. There can be no assurance that the combined
company's major clients will continue to purchase products and services from it
at current levels, if at all, or that the combined company will be able to
replace revenue from such clients with revenue from other clients. The loss of,
or a significant reduction in revenue from, any of the combined company's major
clients could have a material adverse effect on the combined company's
business, financial condition and results of operations. In addition, with such
a large percentage of the combined company's revenue attributable to a small
number of clients, the loss of one or more major clients could have a material
adverse effect on the combined company's liquidity.
COMBINED COMPANY COULD FAIL TO MAINTAIN EXCHANGE LISTING ON NASDAQ
The combined company intends to list the Holdco Common Stock on the NASDAQ, and
believes that it will be able to satisfy and maintain the NASDAQ's current and
proposed standards when the companies complete the Mergers. If the combined
company is unable to satisfy and maintain the requirements for continued
listing on the NASDAQ, its shares will not be traded in that market.
If Holdco shares are not listed as intended, trading, if any, would be
conducted in the over-the-counter market in the so-called "pink sheets" or the
OTC Bulletin Board, which was established for
26
securities that do not meet the NASDAQ SmallCap Market SM listing requirements.
Consequently, selling Holdco shares would be more difficult because smaller
quantities of shares could be bought and sold, transactions could be delayed,
and security analysts' and news media's coverage of Holdco may be reduced.
These factors could result in lower prices and larger spreads in the bid and
ask prices for Holdco shares.
RISKS OF LOW-PRICED SHARES
If Holdco shares are not listed on the NASDAQ SmallCap Market SM, they may
become subject to Rule 15g-9 under the Exchange Act. That rule imposes
additional sales practice requirements on broker-dealers that sell low-priced
securities to persons other than established customers and institutional
accredited investors. For transactions covered by this rule, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale.
Consequently, the rule may affect the ability of broker-dealers to sell Holdco
shares and may affect the ability of holders to sell Holdco shares in the
secondary market.
The SEC's regulations define a "penny stock" to be any equity security that has
a market price less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. The penny stock restrictions
will not apply to Holdco shares if they are listed on the NASDAQ SmallCap
Market SM and the combined company provides certain price and volume
information on a current and continuing basis, or meet required minimum net
tangible assets or average revenue criteria. There can be no assurance that
Holdco shares will qualify for exemption from these restrictions. During the
nine months ended June 30, 1998, Zitel Common Stock traded at a market price of
less than $5.00 per share for 2 weeks out of the 39 weeks during that period.
Since June 30, 1998 through [the last practicable date before mailing], Zitel
Common Stock has traded at less than $5.00 per share for out of the
weeks during that period. If Holdco shares were subject to the penny stock
rules, the market liquidity for the shares could be adversely affected. See
"Comparative Share Price Data."
LIMITED PROTECTION OF PROPRIETARY RIGHTS
Each of Zitel and MatriDigm relies on a combination of patent, copyright,
trademark and trade secret laws and license agreements to establish and protect
its rights in its software products and proprietary technology. In addition,
each of Zitel and MatriDigm currently requires its employees and consultants to
enter into nondisclosure and assignment of invention agreements to limit use
of, access to and distribution of its proprietary information. There can be no
assurance that the combined company's means of protecting its proprietary
rights in the United States or abroad will be adequate. The laws of some
foreign countries may not protect the combined company's proprietary rights as
fully or in the same manner as do the laws of the United States. Also, despite
the steps taken by each of Zitel and MatriDigm to protect its proprietary
rights, unauthorized third parties can copy aspects of their products, reverse
engineer, develop similar technology independently or obtain and use
information that they regard as proprietary. Furthermore, there can be no
assurance that others will not develop technologies similar or superior to the
combined company's technology or design around the proprietary rights owned by
the combined company.
Zitel seeks to protect its software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection.
Zitel has registered its Zitel trademark and will
27
continue to evaluate the registration of additional trademarks as appropriate.
Zitel generally enters into confidentiality agreements with its employees and
with key vendors and suppliers. Zitel currently holds a United States patent on
certain of its software technology. There can be no assurance that this patent
will provide the combined company with any competitive advantages or will not
be challenged by third parties, or that the patent of others will not have a
material adverse effect on the combined company's ability to do business. We
believe that the rapidly changing technology in the computer industry makes the
combined company's success depend more on the technical competence and creative
skills of its personnel than on patents.
MatriDigm has filed four patent applications with the United States Patent and
Trademark Office (the "PTO") pertaining to technologies, processes and
methodologies with respect to MatriDigm's software. Two of these patents have
been granted, and two are pending. There can be no assurance that additional
patents will be issued pursuant to either of these applications or that, if
granted, such patents would survive a legal challenge to their validity or
provide meaningful or significant protection to MatriDigm. Some competitors of
MatriDigm have announced the filing with the PTO of patent applications
relating to fixing and assessing the year 2000 problem. MatriDigm expects that
the risk of infringement claims against the combined company might increase
because its competitors might successfully obtain patents for software products
and processes or because new and overlapping processes and methodologies used
in such services will become more pervasive, increasing the likelihood of
infringement. There can be no assurance that third parties will not assert
infringement claims against the combined company in the future, that the
assertion of such claims will not result in litigation or that the combined
company would prevail in such litigation or be able to obtain a license for the
use of any infringed intellectual property from a third party on commercially
reasonable terms, if at all. Furthermore, litigation, regardless of its
outcome, could result in substantial cost to the combined company and divert
management's attention from the combined company's operations. Any infringement
claim or litigation against the combined company could, therefore, have a
material adverse effect on the combined company's business, financial condition
and results of operations.
MatriDigm maintains trademarks and service marks to identify its various
service offerings, products and software. Although MatriDigm has registered one
trademark and has eleven trademark and service mark applications pending in the
United States and foreign jurisdictions, not all of the applications have been
granted and, even if granted, there can be no assurance that a particular
trademark or service mark will survive a legal challenge to its validity or
provide meaningful or significant protection to MatriDigm. In some cases,
entities other than MatriDigm are using certain trademarks and service marks,
either in jurisdictions in which MatriDigm has not filed an application or in
which MatriDigm is using a mark in a different manner than a third party. There
may be some risk of infringement claims against the combined company in the
event that a service or product of the combined company is too similar to that
of another entity that is using a similar mark.
COMBINED COMPANY'S MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE
The market for the combined company's products and services is characterized by
rapidly changing technology, evolving industry standards and new product
introductions and enhancements that may render existing products obsolete. As a
result, the combined company's market position could erode rapidly due to
unforeseen changes in the features and functionality of competing products. The
28
combined company's future success will depend in part upon its ability to
enhance its existing products and services and to develop and introduce new
products and services to meet changing client requirements. The process of
developing products and services such as those offered by the combined company
is extremely complex and is expected to become increasingly complex and
expensive in the future with the introduction of new platforms and
technologies. There can be no assurance that the combined company will
successfully complete the development of new products in a timely fashion or
that the combined company's current or future products will satisfy the needs
of its target market.
COMBINED COMPANY WILL DEPEND UPON KEY MANAGEMENT PERSONNEL
The combined company's business will depend on a small number of key managerial
personnel. The loss of any of these key individuals could have a material
adverse effect on the combined company's operations.
IDENTIFYING AND HIRING CERTAIN PERSONNEL ARE DIFFICULT
The future success of the combined company also depends on its continuing
ability to identify, hire, train and retain other highly qualified technical
and managerial personnel, particularly project managers, software engineers and
other technical personnel. The combined company believes that there is a
shortage of, and significant competition for, software development
professionals with the skills and experience necessary to perform the services
offered by the combined company. Competition for such personnel is intense,
particularly in the Silicon Valley, and Zitel and MatriDigm have experienced
difficulty in identifying and hiring qualified engineering personnel in the
past. There can be no assurance that the combined company will be able to
attract, assimilate or retain highly qualified technical and managerial
personnel in the future. The inability to attract and retain the necessary
technical and managerial personnel could have a material adverse effect on the
combined company's business, operating results, financial condition and cash
flows.
IMPACT OF YEAR 2000
Some of the computer programs used by Zitel and MatriDigm in their initial
operations rely on time-sensitive software that was written using two digits
rather than four to identify the applicable year. These programs may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. Each of Zitel
and MatriDigm expects to successfully implement a year 2000 compliance program
and does not believe that the cost of such procedures will have a material
effect on either of their results of operations or financial condition. There
can be no assurance, however, that there will not be a delay in the completion
of these procedures or that the cost of such procedures will not exceed
original estimates, either of which could have a material adverse effect on
future results of operations.
In addition to correcting the business and operating systems used by Zitel and
MatriDigm in the ordinary course of business as described above, Zitel and
MatriDigm are engaged in a survey of their key product and service suppliers to
determine their level of Year 2000 compliance. This includes providers of key
utility services such as electric power and telephone services. There can be no
assurance that Zitel and MatriDigm will not experience serious disruptions in
2000 as a result of supplier problems and failures notwithstanding that their
own systems are compliant.
29
RISKS RELATED TO THE BUSINESS OF MATRIDIGM
LIMITED OPERATING HISTORY; NET LOSS
MatriDigm was founded in August 1995 and began operations in October 1995.
MatriDigm's MAP2000 and MARC2000 software tools, which MatriDigm anticipates
will provide the principal source of revenue for the foreseeable future, have a
limited history of client acceptance and use. Accordingly, MatriDigm has only a
limited operating history upon which to evaluate the combined company and any
long-term viability, profitability and growth from which MatriDigm's technology
can be based. The combined company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by organizations in
their early stage of development, particularly companies in new and rapidly
evolving markets. MatriDigm incurred a net loss of approximately $10.8 million
during the nine months ended June 30, 1998, and there can be no assurance that
MatriDigm as an operating unit of the combined company will achieve or sustain
profitability.
DEPENDENCE ON YEAR 2000 MARKET
The growth in MatriDigm's revenue in the nine months ended June 30, 1998
resulted primarily from increased demand for MatriDigm's services and products
relating to resolution of the year 2000 problem. Although the combined company
believes that the market for products and services relating to the year 2000
problem will grow as the year 2000 approaches, there can be no assurance that
this market will develop to the extent anticipated by the combined company, if
at all. Significant expense for sales and marketing may be required to inform
potential clients of the year 2000 problem and the need for products and
services addressing the problem. There can be no assurance that the year 2000
solution providers will devote the resources necessary to effectively inform
potential clients of this problem or that potential clients will understand or
acknowledge the problem. In addition, affected organizations may not be willing
or able to allocate the resources, financial or otherwise, to address the
problem in a timely manner. Many organizations may attempt to resolve the
problem internally rather than contract with outside firms such as the combined
company or value added integrators to which the combined company sells its
services. Due to these factors, development of the market for year 2000
products and services is uncertain and unpredictable. If the market for year
2000 products and services fails to grow, or grows more slowly than
anticipated, the combined company's business, financial condition and results
of operations could be materially adversely affected.
NEED TO DEVELOP ADDITIONAL PRODUCTS AND SERVICES
MatriDigm currently generates all of its revenue from, and devotes significant
resources to, products and services that address the year 2000 problem.
Although it is believed that the demand for such products and services relating
to the year 2000 problem will continue to exist for some time after the year
2000, this demand will diminish significantly over time and will eventually
disappear. There can be no assurance that the combined company will be able to
expand successfully its business beyond the year 2000 market. MatriDigm is
currently working to develop other software maintenance and conversion
services, but there can be no assurance that these can be completed or that a
market for them will develop. The failure to diversify and develop additional
products and services would have a material adverse effect on the combined
company's business, financial condition and results of operations.
30
DEPENDENCE UPON TECHNOLOGY ASSOCIATES; POTENTIAL FOR CHANNEL CONFLICT
MatriDigm offers its products and services directly to end users through its
sales force and indirectly through its Technology Associates, which include
value added integrators and distributors. Although sales through Technology
Associates accounted for all of MatriDigm's total revenue in the nine months
ended June 30, 1998, the combined company expects to continue to rely to a
significant degree on its value added integrators and distributors to provide
sales and marketing presence and name recognition, as well as the resources
necessary to offer large scale, comprehensive software maintenance solutions,
including solutions relating to the year 2000 problem. Although MatriDigm
dedicates resources to develop its indirect channels, there can be no assurance
that the combined company will be able to attract and retain a sufficient
number of qualified firms to successfully sell and market its products. While
MatriDigm has granted marketing rights to certain Technology Associates in
defined geographic territories, these firms are not prohibited from entering
into similar arrangements with the combined company's competitors. The failure
of the combined company to maintain its current Technology Associates or
develop other Technology Associates, the combined company's inability to
adequately support the requirements of its Technology Associates, the
development of competitive products and services by the combined company's
value added integrators and distributors or the entry by such firms into
alliances with competitors of the combined company would substantially limit
the combined company's ability to provide its products and services and
accordingly, would have a material adverse effect on the combined company's
business, financial condition and results of operation.
Selling through indirect channels may also limit the combined company's
contacts with end users of its products and services. As a result, the combined
company's ability to accurately forecast sales, evaluate client satisfaction
and recognize emerging client requirements may be hindered. MatriDigm's
strategy of selling its products directly to end users and indirectly through
Technology Associates may result in distribution channel conflicts. The
combined company's direct sales efforts may compete with those of its
Technology Associates and, to the extent different value added integrators and
distributors target the same clients, they may also come into conflict with
each other. There can be no assurance that channel conflicts will not
materially adversely affect its relationship with existing value added
integrators or distributors or adversely affect its ability to attract new
Technology Associates or other distributors of its products and services.
COMPETITION IN Y2K INDUSTRY IS INTENSE
The market for MatriDigm's products and services is intensely competitive and
is characterized by rapid change in technology and user needs and the frequent
introduction of new products. The anticipated growth in the mass change and
year 2000 industries is expected to attract additional competitors, some of
which may offer additional products and services. There are no significant
barriers to entry in the year 2000 industry. In addition, MatriDigm faces
competition in the software maintenance outsourcing services market. A number
of MatriDigm's competitors are more established, benefit from greater name
recognition and have substantially greater financial, technical and marketing
resources than those of MatriDigm and certain of MatriDigm's Technology
Associates. As a result, there can be no assurance that combined company's
products and services, including the solutions offered by combined company's
Technology Associates and other distributors, will compete effectively with
those of their respective competitors. The combined
31
company's Technology Associates and other distributors may also offer or
develop products and services that compete with the combined company's products
and services. There can be no assurance that such Technology Associates and
other distributors will not give higher priority to the sales of these or other
competitive products and services. See "INFORMATION ABOUT MATRIDIGM--
Competition."
The market for Year 2000 conversion services is highly competitive, with
services being provided by a number of national, regional and local firms, many
of which have existing relationships and contractual arrangements with
customers. Many of these competitors have substantially greater financial,
technical and marketing resources than the combined company. The ability of the
combined company to compete in the IBM COBOL segment of this market will depend
primarily on the ability of MatriDigm to achieve market acceptance of its
automated solution and as yet there can be no assurance that the combined
company will be successful in this effort. In addition, the combined company
must achieve general credibility as a provider of Year 2000 conversion services
by generating substantial net sales.
POTENTIAL FOR CONTRACT LIABILITY
MatriDigm's products and services relating to software maintenance, especially
solutions addressing the Year 2000 problem, involve key aspects of its
customers' computer systems. A failure in a customers' system could result in a
claim for substantial damages against MatriDigm or the combined company,
regardless of MatriDigm's responsibility for such failure. MatriDigm attempts
to limit contractually its liability for damages arising from negligent acts,
errors, mistakes or omissions in rendering its products and services. Despite
this precaution, there can be no assurance that following the Effective Time
the limitations of liability set forth in its contract would be enforceable or
would otherwise protect the combined company from liability for damages.
Additionally, the combined company will maintain general liability insurance
coverage, including coverage for errors and omissions. However, there can be no
assurance that such coverage will continue to be available on acceptable terms,
or will be available in sufficient amounts to cover one or more large claims,
or that the insurer will not disclaim coverage as to any future claim. The
successful assertion of one or more large claims against the combined company
that exceed available insurance coverage or changes in the combined company's
insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, could have a material adverse effect
on the combined company's business, financial condition and results of
operations. Furthermore, litigation, regardless of its outcome, could result in
substantial cost to the combined company and divert management's attention from
the combined company's operations. Any contract liability claim or litigation
against the combined company could, therefore, have a material adverse effect
on the combined company's business, financial condition and results of
operations.
SOFTWARE ERRORS OR BUGS
MatriDigm's software products and tools are highly complex and sophisticated
and could from time to time contain design defects or software errors that
could be difficult to detect and correct. Errors, bugs or viruses may result in
loss of or delay in market acceptance, a failure in a client's system or loss
or corruption of customer data. Although MatriDigm has not experienced material
adverse effects resulting from any software defects or errors, there can be no
assurance that, despite testing
32
by MatriDigm and its customers, errors will not be found in new products, which
errors could have a material adverse effect upon the combined company's
business, financial condition and results of operations.
DEPENDENCE ON THIRD PARTY TECHNOLOGY
MatriDigm's proprietary software is currently designed, and may in the future
be designed, to work on or in conjunction with certain third party hardware
and/or software products. If any of these current or future third-party vendors
were to discontinue making their products available to MatriDigm or to
licensees of MatriDigm's software or to increase materially the cost to
MatriDigm or its licensees to acquire, license or purchase the third party
vendors' products, or if a material problem were to arise in connection with
the ability of MatriDigm to design its software to properly use or operate with
third-party hardware and/or software products, MatriDigm would be required to
design its software to function with or on alternative third-party products or
attempt to develop internally a replacement for the third-party products. In
such an event, interruptions in the availability or functioning of MatriDigm's
software and delays in the introduction of new products and services may occur
until equivalent technology is obtained. There can be no assurance that an
alternative source of suitable technology would be available or that MatriDigm
would be able to develop an alternative product in sufficient time or at a
reasonable cost. The failure of MatriDigm to obtain or develop alternative
technologies or products on a timely basis and at a reasonable cost could have
a material adverse effect on MatriDigm's business, financial condition and
results of operations.
RISKS RELATED TO THE BUSINESS OF ZITEL
RECENT LEVELS OF NET SALES HAVE BEEN INSUFFICIENT
In recent years, Zitel has not generated net sales sufficient to produce an
operating profit and has relied on a stream of royalty payments under an
agreement with IBM and significant financings to support its activities. In
April 1998, Zitel and IBM entered into an agreement whereby IBM stopped paying
royalties to the Company in exchange for a lump sum payment amounting to
$740,000. Zitel sustained substantial operating losses and net losses in fiscal
1997 and for the nine months ended June 30, 1998. Zitel must generate
substantial additional net sales and gross margins on its products and services
and must successfully implement a program to manage cost and expense levels in
order to remain a viable operating entity. There is no assurance that Zitel or
the combined company can achieve these objectives.
FLUCTUATIONS IN QUARTERLY RESULTS
Zitel's quarterly operating results have in the past varied and may in the
future vary significantly depending on a number of factors, including:
. The level of competition, the size, timing, cancellation or rescheduling
of significant orders;
. Product configuration and mix;
. Market acceptance of new products and product enhancements;
. New product announcements or introductions by Zitel's competitors;
. Deferrals of customer orders in anticipation of new products or product
enhancements;
33
. Changes in pricing by Zitel or its competitors;
. The ability of Zitel to develop, introduce and market new products and
product enhancements on a timely basis;
. Zitel's success in expanding its sales and marketing programs;
. Technological changes in the market for Zitel's products;
. Product mix and the mix of sales among Zitel's sales channels;
. Levels of expenditures on research and development;
. Changes in Zitel's strategy; personnel changes; and
. General economic trends and other factors.
Due to all of the foregoing factors, Zitel believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as an indicator of future performance of the combined
company. It is possible that in some future quarter the combined company's
operating results may be below the expectations of public market analysts and
investors. In such event, the price of Holdco's Common Stock would likely be
materially and adversely affected.
ZITEL STOCK PRICE HAS BEEN VOLATILE
The price of Zitel's Common Stock has been subject to extreme volatility during
fiscal 1997 and the nine months ended June 30, 1998, as the closing bid price
has ranged between a low of 10 7/8 and a high of 61 1/4 and a low of 4 1/32 and
a high of 23 5/8 respectively. Zitel believes that one of the reasons for this
volatility is rumored progress of and rumored problems in the product
development program and marketing efforts of MatriDigm. See "Comparative Share
Price Data."
COMPETITION IS INTENSE IN THE SYSTEM MANAGEMENT TOOL MARKET
The market for system management tools in which Zitel's software products
competes is intensely competitive. Many of the companies with which Zitel
competes, such as TeamQuest, Computer Associates and BGS, Inc. have
substantially larger installed bases and greater financial resources than
Zitel. There can be no assurance that Zitel's competitors will not develop
products comparable or superior to those developed by it and the combined
company or adapt more quickly than the combined company to new technologies,
evolving industry standards, new product introductions, or changing customer
requirements.
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The market in which Zitel operates is characterized by rapid technological
change, changing customer needs, frequent new product introductions and
evolving industry standards. The introduction of products embodying new
technologies and/or the emergence of new industry standards could render
Zitel's existing products and services obsolete and unmarketable. Zitel's
future success will depend upon its ability to develop and to introduce new
products and services on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. There can be no assurance that the
combined company will be successful in developing and marketing products or
services that respond to technological changes or evolving industry standards,
that the combined company will not experience difficulties that could
34
delay or prevent the successful development, introduction and marketing of new
products or services, or that its new products or services will adequately meet
the requirements of the marketplace and achieve market acceptance. If the
combined company is unable, for technological or other reasons, to develop and
introduce new products or services in a timely manner in response to changing
market conditions or customer requirements, the combined company's business,
operating results and financial condition will be materially and adversely
affected.
35
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Zitel and
MatriDigm and combined per share data on an unaudited pro forma basis after
giving effect to the Mergers on a purchase basis assuming that approximately
0.65 shares of Holdco Common Stock are issued in exchange for each share of
MatriDigm Common Stock. This data should be read in conjunction with the
selected historical financial data set forth herein and the historical
financial statements of Zitel and MatriDigm and the notes thereto that are
incorporated herein by reference. The pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the combined
financial position or results of operations of future periods or the results
that actually would have been realized had the entities been a single entity
during the periods presented.
AS OF AND FOR THE
AS OF AND FOR THE YEAR NINE MONTHS ENDED
ENDED SEPTEMBER 30, 1997 JUNE 30, 1998
------------------------ ------------------
(UNAUDITED)
ZITEL HISTORICAL PER COMMON SHARE:
Net income (loss) per common
share--basic and diluted........ $(1.15) $(1.73)
Book value....................... 1.02 0.52
AS OF AND FOR THE
AS OF AND FOR THE YEAR NINE MONTHS ENDED
ENDED SEPTEMBER 30, 1997 JUNE 30, 1998
------------------------ ------------------
(UNAUDITED)
MATRIDIGM HISTORICAL PER COMMON
SHARE:
Net income (loss) per common
share--basic and diluted........ $(0.76) $(0.53)
Book value....................... 0.04 (0.23)
AS OF AND FOR THE
AS OF AND FOR THE YEAR NINE MONTHS ENDED
ENDED SEPTEMBER 30, 1997 JUNE 30, 1998
------------------------ ------------------
(UNAUDITED)
PRO FORMA COMBINED NET LOSS PER
SHARE(1):
Per Zitel common share--basic and
diluted......................... $(1.24) $(1.19)
Equivalent per MatriDigm share--
basic and diluted............... (0.81) (0.77)
PRO FORMA COMBINED BOOK VALUE PER
SHARE(1)(2):
Per Zitel share.................. $(1.21)
Equivalent per MatriDigm share... 0.79
- --------
(1) The unaudited equivalent MatriDigm pro forma per share amounts are
calculated by multiplying the Zitel combined pro forma per share amounts by
the Exchange Ratio.
(2) Historical book value per share is computed by dividing shareholders'
equity by the number of shares of common stock outstanding at the end of
each period. Pro forma book value per share is computed by dividing pro
forma shareholders' equity by the pro forma number of shares of common
stock outstanding at the end of each period.
36
ZITEL MARKET PRICE DATA
Zitel Common Stock trades on NASDAQ under the symbol "ZITL". The table below
sets forth, for the calendar quarters indicated, the reported high and low sale
prices of Zitel Common Stock as reported on Nasdaq.
ZITEL COMMON STOCK
-------------------
HIGH LOW
--------- ---------
1996 CALENDAR YEAR
First Quarter........................................ 6.94 5.06
Second Quarter....................................... 10.00 6.06
Third Quarter........................................ 10.13 5.13
Fourth Quarter....................................... 61.25 10.88
1997 CALENDAR YEAR
First Quarter........................................ 50.13 27.88
Second Quarter....................................... 33.13 11.50
Third Quarter........................................ 25.56 19.06
Fourth Quarter....................................... 23.63 9.38
1998 CALENDAR YEAR
First Quarter........................................ 16.75 9.50
Second Quarter....................................... 14.38 4.03
Third Quarter........................................ 8.13 2.53
Fourth Quarter (through , 1998)...................
Set forth below is a table containing, for each of October 5, 1998 (the last
trading day before the announcement of the Agreement of Reorganization) and
, 1998 (the last trading day before the printing of this Proxy
Statement/Prospectus/Consent Solicitation), the last reported sale price per
share of Zitel Common Stock, as reported on NASDAQ, as well as the equivalent
market price per share of MatriDigm Common Stock (after applying the MatriDigm
Exchange Ratio of approximately 0.65 per share), assuming that the Zitel
Special Meeting and the MatriDigm Special Meeting and the Mergers had occurred
on such Day:
OCTOBER 5, 1998 , 1998
--------------- ----------
Zitel........................................... $[ ] $[ ]
MatriDigm (Zitel equivalent).................... $[ ] $[ ]
Because the MatriDigm Exchange Ratio is fixed, subject to adjustment in certain
circumstances, changes in the market price of Zitel Common Stock prior to
consummation of the MatriDigm Merger will affect the dollar value of the Zitel
Common Stock to be received by shareholders of MatriDigm in the MatriDigm
Merger. Zitel shareholders and MatriDigm shareholders are urged to obtain
current market quotations for Zitel Common Stock prior to the Zitel Special
Meeting and the date of MatriDigm Written Consents, respectively.
Neither Zitel nor MatriDigm has ever paid cash dividends. Following the
Effective Time of the Mergers, the combined company intends to retain earnings
for the development of its business and not to distribute earnings to
shareholders as dividends. The declaration and payment by the combined company
following the Effective Time of the Mergers of any future dividends and the
amount thereof will depend upon the results of operations, financial condition,
cash requirements, future prospects, limitations imposed by credit agreements
or senior securities and other factors deemed relevant by the board of
directors of the combined company following the Effective Time of the Mergers.
37
ZITEL SPECIAL MEETING
DATE, TIME AND PLACE OF ZITEL SPECIAL MEETING
The Zitel Special Meeting will be held at the offices of Zitel at 47211 Bayside
Parkway, Fremont, California 94538-6517 on [ ] 1998, at [10:00 a.m.] local
time.
PURPOSE
The purpose of the Zitel Special Meeting is to consider and vote upon proposals
to (i) adopt the Agreement of Reorganization and to approve the Zitel Merger
and any related transactions contemplated thereby, and (ii) to approve the
amendment to the Zitel 1990 Stock Option Plan. See "The Mergers and Related
Transactions," "Additional Matters Being Submitted to a Vote of Only Zitel
Shareholders--Proposal No. 2--Amendment to Zitel Stock Option and Purchase
Plans," and "--Proposal No. 3--Amendment to the 1984 Employee Stock Purchase
Plan."
RECORD DATE AND OUTSTANDING SHARES
Only Zitel shareholders of record at the close of business on the Zitel Record
Date are entitled to notice of and to vote at the Zitel Special Meeting. As of
[ ], 1998, officers and directors of Zitel beneficially owned an aggregate of
[ ] shares of Zitel Common Stock representing [ ]% of the issued and
outstanding shares of Zitel Common Stock. As of the Zitel Record Date, there
were approximately [ ] shareholders of record of Zitel Common Stock and [ ]
shares of Zitel Common Stock outstanding, each of which shares will be entitled
to one vote on each matter to be acted upon at the Zitel Special Meeting.
On or about [ ], 1998, a notice meeting the requirements of California law
was mailed to all shareholders of record as of the Zitel Record Date.
VOTE REQUIRED
Each shareholder is entitled to one vote for each share of Zitel Common Stock
on all matters at the Zitel Special Meeting.
Pursuant to the CGCL, the affirmative vote of a majority of the total votes
cast in person or by proxy at the Zitel Special Meeting is required to adopt
the Agreement of Reorganization and to approve the Zitel Merger and any related
transactions contemplated thereby.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Zitel Common Stock entitled to vote at
the Zitel Special Meeting shall constitute a quorum. Abstentions and broker
non-votes will be included for purposes of determining whether a quorum of
shares is present at the Zitel Special Meeting. Broker non-votes will not be
treated as "entitled to vote" and will have no effect on the voting result. A
broker non-vote occurs when a nominee holding shares for a beneficial owner
does not vote on a particular proposal because the nominee does not have
discretionary voting power with respect to that item and has not received
instructions from the beneficial owner.
38
PROXIES
Each of the persons named as proxies in the proxy is an officer of Zitel. All
shares of Zitel Common Stock that are entitled to vote and are represented at
the Zitel Special Meeting either in person or by properly executed proxies
received prior to or at the Zitel Special Meeting and not duly and timely
revoked will be voted at the Zitel Special Meeting in accordance with the
instructions indicated on such proxies. If no such instructions are indicated,
such proxies will be voted for adoption of the Agreement of Reorganization and
approval of the Zitel Merger and any related transactions contemplated thereby.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Zitel at or before the taking of the vote at the Zitel
Special Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of Zitel before the taking of the vote at the
Zitel Special Meeting, or (iii) attending the Zitel Special Meeting and voting
in person (although attendance at the Zitel Special Meeting will not in and of
itself constitute a revocation of a proxy). Any written notice of revocation or
subsequent proxy should be sent so as to be delivered to Zitel at 47211 Bayside
Parkway, Fremont, California 94538-6517, Attention: Secretary, or hand-
delivered to the Secretary of Zitel, in each case at or before the taking of
the vote at the Zitel Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of Zitel shareholders will be borne by Zitel. In
addition, Zitel may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
materials to such beneficial owners. Proxies may also be solicited by certain
Zitel directors, officers and regular employees personally or by telephone,
telegram, letter or facsimile. Such persons will not receive additional
compensation, but may be reimbursed for reasonable out-of-pocket expenses
incurred in connection with such solicitation. In addition, Zitel has retained
MacKenzie Partners, Inc. to assist in the solicitation of proxies from brokers,
nominees, institutions and individuals at an estimated fee of not more than
$7,500 plus reimbursement of reasonable expenses. Arrangements will also be
made with custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and Zitel will reimburse such custodians,
nominees and fiduciaries for reasonable expenses incurred in connection
therewith.
THE MATTERS TO BE CONSIDERED AT THE ZITEL SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE SHAREHOLDERS OF ZITEL. ACCORDINGLY, SHAREHOLDERS ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS/CONSENT SOLICITATION, AND TO COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
RECOMMENDATIONS OF ZITEL BOARD
THE ZITEL BOARD HAS UNANIMOUSLY CONCLUDED THAT THE AGREEMENT OF REORGANIZATION
AND EACH OF THE TRANSACTIONS CONTEMPLATED THEREBY
39
ARE FAIR TO AND IN THE BEST INTERESTS OF ZITEL AND ITS SHAREHOLDERS. THE ZITEL
BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF ZITEL VOTE IN FAVOR OF
THE ADOPTION OF THE AGREEMENT OF REORGANIZATION AND THE APPROVAL OF THE ZITEL
MERGER. See "THE MERGERS AND RELATED TRANSACTIONS--Joint Reasons for the
Merger," "--Zitel's Reasons for the Mergers," and "--Material Contacts and
Board Deliberations."
40
MATRIDIGM CONSENT SOLICITATION
PURPOSE
The Board of Directors of MatriDigm has elected to seek the approval of the
MatriDigm shareholders of a proposal to approve and adopt the Agreement of
Reorganization attached as Annex I hereto, providing for the merger of
Millennium Acquisition I Corp., a wholly owned subsidiary of Holdco with and
into MatriDigm, by written consent (the "Written Consents"). Written Consents
of the MatriDigm shareholders are being sought in lieu of scheduling a special
meeting of the MatriDigm shareholders for the purpose of adopting and approving
the Agreement of Reorganization and the merger of Millennium Acquisition I
Corp. with and into MatriDigm. See "THE MERGER AND RELATED TRANSACTIONS--Joint
Reasons For The Merger," "--MatriDigm Reasons For The Merger."
MEMBERS OF THE BOARD OF DIRECTORS OF MATRIDIGM, ELIGIBLE TO VOTE, UNANIMOUSLY
APPROVED THE AGREEMENT OF REORGANIZATION AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE MATRIDIGM MERGER, AND RECOMMEND A VOTE FOR APPROVAL AND
ADOPTION OF THE AGREEMENT OF REORGANIZATION AND APPROVAL OF THE MATRIDIGM
MERGER BY THE MATRIDIGM SHAREHOLDERS.
CONSENT PROCEDURE
Under the Articles of Incorporation of MatriDigm, each MatriDigm shareholder is
entitled to cast one vote for each share of MatriDigm Common Stock or MatriDigm
Preferred Stock held by such person. The Written Consent is the form by which
this vote will be exercised by MatriDigm shareholders. Only persons who are
record holders of shares of the MatriDigm Common Stock or MatriDigm Preferred
Stock are entitled to vote on the approval and adoption of the Merger Agreement
and approval of the MatriDigm Merger through the execution of a Written
Consent.
Any MatriDigm shareholder who has delivered a Written Consent may revoke it at
any time before MatriDigm has received Written Consent approving the MatriDigm
Merger from MatriDigm shareholders holding a majority of the shares of
MatriDigm Common Stock and of each of the MatriDigm Series A, Series B and
Series D Preferred Stock. Revocation of a Written Consent must be in writing
and will be effective when received by MatriDigm at the following
address: 4777 Hellyer Avenue, San Jose, California 95138, Attention: Secretary.
Upon receipt by MatriDigm of written consents adopting the Agreement of
Reorganization and approving the MatriDigm Merger from MatriDigm shareholders
holding at least a majority of the outstanding shares of MatriDigm Common Stock
and each of the MatriDigm Series A, Series B and Series D Preferred Stock, a
MatriDigm shareholder's right to revoke a previously delivered written consent
approving the MatriDigm Merger will terminate. See "TERMS OF THE MERGERS--
Shareholder Agreements."
VOTE REQUIRED
Pursuant to the Articles of Incorporation and Bylaws of MatriDigm, the
affirmative vote of the holders of at least a majority of the outstanding
shares of the MatriDigm Common Stock and of the
41
MatriDigm Series A, Series B and Series D Preferred Stock voting as separate
classes is required to approve the MatriDigm Merger. If Written Consent from
holders of at least a majority of the outstanding shares of MatriDigm Common
Stock and of the MatriDigm Series A, Series B and Series D Preferred Stock are
obtained, the MatriDigm Merger will be approved. If the other closing
conditions described in the Agreement of Reorganization, including approval by
the Zitel shareholders of the Zitel Merger, are satisfied following approval of
the MatriDigm Merger by the MatriDigm shareholders, the MatriDigm Merger will
be consummated.
As of , 1998, officers and directors of MatriDigm beneficially owned an
aggregate of shares of MatriDigm Common Stock representing % of the issued
and outstanding shares of MatriDigm Common Stock, and shares of MatriDigm
Preferred Stock representing % of the issued and outstanding shares of
MatriDigm Preferred Stock. As of , 1998, there were approximately
shareholders of record of MatriDigm Common Stock and shares of MatriDigm
Common Stock outstanding, approximately shareholders of record of MatriDigm
Preferred Stock and shares of MatriDigm Preferred Stock outstanding, each
of which shares will be entitled to one vote (in the case of shares of
MatriDigm Preferred Stock, upon conversion) on each matter to be acted upon
pursuant to this written consent solicitation. As of , 1998, there were
shares of MatriDigm Common Stock outstanding and , and shares of
the MatriDigm Series A, Series B and Series D Preferred Stock, respectively,
for an aggregate of MatriDigm Shares. Consequently, the holders of not less
than shares of MatriDigm Common Stock and , and shares of the
MatriDigm Series A, Series B and Series D Preferred Stock, respectively, must
deliver written consents approving the MatriDigm Merger in order for it to be
approved. The failure of a MatriDigm shareholder to return a properly executed
Written Consent form will have the same effect as a vote against the MatriDigm
Merger.
As of October 5, 1998, holders of 12,634,974 shares of the MatriDigm Common
Stock and shares of the MatriDigm Preferred Stock, representing
approximately 36% of the votes entitled to be cast shareholders of MatriDigm in
connection with this written consent solicitation, have agreed to deliver
Written Consents approving the MatriDigm Merger. See "TERMS OF THE MERGERS--
Shareholder Agreements," "--Interests of Certain Persons."
Holders of shares of MatriDigm Capital Stock who vote against or abstain from
voting for approval of the MatriDigm Merger may be entitled to dissenters' or
appraisal rights. See "TERMS OF THE MERGERS--Dissenters' Rights" for a
discussion of rights available to MatriDigm shareholders who do not consent to
the adoption of the Agreement of Reorganization or the approval of the
MatriDigm Merger.
SOLICITATION OF CONSENTS; EXPENSES
The Written Consents are being solicited by the Board of Directors of
MatriDigm. This Proxy Statement/Prospectus/Consent Solicitation, the
accompanying notice and the Written Consent are being mailed on or about
, 1998 to the MatriDigm shareholders. The cost of preparing assembling,
printing, filing and mailing the Proxy Statement/Prospectus/Consent
Solicitation will be borne by Holdco in the event that the MatriDigm Merger is
consummated and will be shared equally by MatriDigm and Zitel in the even that
it is not. In addition, in the event that the MatriDigm Merger
42
is not consummated, MatriDigm will share the expenses of preparing, assembling,
printing, filing and mailing the Proxy Statement/Prospectus/Consent
Solicitation to the Zitel shareholders with Zitel.
Certain members of the Board of Directors of MatriDigm and management of
MatriDigm may encourage the return of the Written Consents by telephone or
personal contacts. Such persons will not be additionally compensated for these
activities (other than the regular salaries of members of management of
MatriDigm), but will be reimbursed by MatriDigm for out-of-pocket expenses
incurred, if any.
MatriDigm shareholders are requested to complete, date, sign and promptly
return the accompanying form of the Written Consent in the envelope provided.
Properly executed Written Consents received by MatriDigm and not revoked will
represent affirmative votes for the adoption of the Agreement of Reorganization
and approval of the MatriDigm Merger. Any Written Consent not properly executed
or not properly returned will be treated as a negative vote.
Any Written Consent signed and returned by a MatriDigm shareholder may be
revoked at any time prior to the receipt by MatriDigm of Written Consents
approving the adoption of the Agreement of Reorganization and the MatriDigm
Merger from holders of a majority of the outstanding shares of MatriDigm Common
Stock and of the Series A, Series B and Series D Preferred Stock. See "TERMS OF
THE MERGER--Shareholder Agreements."
43
INFORMATION ABOUT MATRIDIGM
GENERAL
MatriDigm is a privately-held software technology company incorporated August
9, 1995 in California. The Company was co-founded by James Brady ("Brady") and
Franklin Chiang ("Chiang"), utilizing technology developed since 1978 for
Chiang's company, Chiang Labs, which provides the foundation for the MatriDigm
Code Analyzer. MatriDigm maintains its executive offices at 4777 Helyer Avenue,
San Jose, California, 95138, telephone (408) 360-3200.
MatriDigm specializes in software maintenance and re-engineering, utilizing
products and services that include the MatriDigm Advanced Process 2000
("MAP2000"), MatriDigm Analysis of Renovated Code ("MARC2000"), the Millennium
Control System ("MICOS") and the MatriDigm COBOL Analysis Product ("MCAP") that
are made available to customers via the Company's twenty-one Technology
Associates, which provide a full range of assessment, renovation and systems
testing services for the Year 2000 project on a non-exclusive basis.
Background: The Year 2000 Problem, the MAP2000 Solution, and the MARC2000 Tool
Much of the application code written in the past forty years used only two
digits to represent the year field in dates. The year value of most dates seen
by these applications was xx, with the "19" century value being assumed by the
program logic. That program logic, which operates correctly when all two-digit
years are in the range of 1900-1999, will often not work correctly if the year
value of data being processed is outside this fixed 100-year window. As the
millennium approaches, the incidence of program failures due to this fault in
application code has become more frequent. By the time January 1, 2000 arrives,
almost all code with this "Year 2000 intolerance" will exhibit failures. The
need to find and fix (or replace) application codes with this inability to work
correctly in the year 2000 and beyond (Year 2000 bug) is now widely understood.
Many code renovation service offerings and tools have been developed in the
past two years to help customers locate and fix their date-sensitive code in
application programs.
The typical year 2000 conversion project requires six steps:
. Inventory--locate all programs, JCL, and other program assets that may be
affected by the millennium transition requiring analysis.
. Assessment--analyze the collected inventory and determine how much code
and data must be renovated.
. Plan--develop a detailed operational plan for the renovation.
. Renovate--renovate (or replace) date-sensitive code, and convert data
files and databases where required to handle expansion of date fields
from two-digit to four-digit.
. Test--perform the required component, unit, and system testing on the
renovated application code and data to remove errors introduced by the
renovation process.
. Reintegrate--return the renovated and tested code to production through
the reintegration process.
44
The MAP2000 process renovates IBM COBOL application code to perform correctly
within any specified 100-year window. The MAP2000 process is highly automated
and uses technologies developed by MatriDigm to locate all date-sensitive code
and insert appropriate modifications. Customer code is prepared and renovated
through the following steps:
. Code Preparation--performed at the customer location. This step creates,
analyzes, and checks work units for completeness and correctness, then
ships the work unit to a MatriDigm renovation factory.
. Factory Input--receives the work unit, then checks and parses it into a
MatriDigm-developed database structure for renovation processing.
. Find Dates--through a unique four-stage process, this step locates and
classifies all date variables and date constants in the work unit.
. Generate Fixes--create code fragments to correct date-sensitive code and
add necessary windowing logic.
. MicroTest--tests all fixes generated to ensure correct program
transformation.
. Modify Code--applies the fixes generated and MicroTested.
. Verification and Ship--checks and parses the renovated code, generates
reports, and sends the renovated work unit package back to the customer
location.
The MatriDigm Y2K model has a number of quality control steps directed at
reducing the number of bugs inserted by the MAP2000 renovation processes.
The PrepTool application in MatriDigm's MICOS validates the input in the
customer's shop to ensure that MatriDigm receives a complete work unit to
process. Checks are performed on the code, including processing steps
equivalent to compiling the programs to ensure the MatriDigm factory can
process them.
MatriDigm Analysis of Renovated Code 2000 (MARC2000(TM)) provides a valuable
tool for independent audits needed to confirm the effectiveness of completed
COBOL Year 2000 code renovations. MatriDigm's technology used by MARC2000 is
extremely accurate in identifying date variables, date-related constants, and
programs that require modifications to correctly operate beyond 1999.
MARC2000 locates the definition and usage of dates, audits each usage, and
records a quality assessment for faulty and probably faulty code. Using the
event logging features of the Millennium Control System (MICOS(TM)) and the
results of MatriDigm's proven date-finding technology, MARC2000 allows one to
view the faulty and potentially faulty code, and record the activities needed
to demonstrate due diligence in auditing COBOL Year 2000 renovation projects.
COMPETITION
The market for MatriDigm's products and services is intensely competitive and
is characterized by rapid technological change, evolving user needs and
frequent introduction of new products and services. The anticipated growth in
the business of providing software maintenance and reengineering services,
particularly the portion related to modifications to software made necessary by
the approach
45
of the year 2000, has and is expected to continue to attract competition from
existing businesses and new entrants. Because, except for the need for
technical expertise, there are no significant proprietary or other barriers of
entry into the software maintenance and reengineering business, MatriDigm
competitors will continue to increase in number and some of these competitors
may provide products and services equivalent to those provided by MatriDigm.
Some of the competitors may have substantially greater financial and technical
resources and better market recognition than MatriDigm. MatriDigm's competitive
position will also be affected by the ability of its Technology Associates to
compete with other value added integrators and distributors of software
maintenance and reengineering services. Since MatriDigm is entirely dependent
upon its Technology Associates for ultimate sales of its products and services,
it could be adversely impacted by any change in the ability of its Technology
Associates to compete in their respective markets.
MatriDigm is confronted with three distinct levels of competition: other
companies that compete directly with MatriDigm by offering competing products
and services to businesses such as MatriDigm's Technology Associates,
businesses that provide software maintenance and reengineering services
directly to end users and businesses which use their internal technical staff
to provide their own software maintenance and reengineering services. Among
MatriDigm's direct and indirect competitors in the business of providing
products and services to end users and to companies such as MatriDigm's
Technology Associates are International Business Machines, Inc. and Computer
Associates International, Inc. Because MatriDigm does not market its services
directly to end users, it is dependent upon its ability to attract Technology
Associates who can compete effectively with other businesses providing software
maintenance and reengineering services directly and convince end users to
utilize a Technology Associate's services, and thus MatriDigm's products and
services, instead of utilizing their internal technical personnel. In addition,
because it relies upon its Technology Associates, MatriDigm is susceptible to
competition from businesses which may seek to compete with MatriDigm in
providing products and services to MatriDigm's Technology Associates. As a
result, there can be no assurance that MatriDigm or its Technology Associates
will continue to compete effectively in the market for providing software
maintenance and reengineering services or that MatriDigm itself will continue
to compete effectively in the market for providing products and services to
customers such as MatriDigm's Technology Associates.
EMPLOYEES
As of [ ], 1998, the last practicable date prior to mailing this Proxy
Statement/Prospectus/Consent Solicitation, MatriDigm had [ ] employees, of
which [ ] were full-time employees.
PROPERTIES
MatriDigm leases a single facility of approximately 40,000 square feet of
industrial warehouse space under a lease which expires in 2003.
LEGAL PROCEEDINGS
MatriDigm is not currently party to any material legal proceedings.
46
PRINCIPAL MATRIDIGM SHAREHOLDERS
MatriDigm knows of no person owning beneficially more than 5% of MatriDigm's
Common Stock, except for the following persons who beneficially owned, as of
October 5, 1998, the number of shares of Common Stock of MatriDigm set forth
opposite each such person's name in the table below:
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP(1)(2) OF CLASS(1)(2)
- ------------------- ----------------- --------------
Zitel Corporation............................................... 12,287,500(3) 32.8%
47211 Bayside Parkway
Fremont, California 94538-6517
Franklin C. Chiang and Su-Kewn Chiang, individually and as
Trustees
of the Chiang 1997 Living Trust................................ 4,029,211(4) 10.8%
1725 Miller Street
Los Altos, California 94024
BRC Holdings.................................................... 3,715,000 9.9%
111 W. Mockingbird Lane, #1500
Dallas, Texas 75247
JBJ Partners, Ltd............................................... 3,715,000 9.9%
2626 Cole, Suite 700
Dallas, Texas 75204
James T. Brady & Helen Brady, individually and as Trustees of
The Brady 1996 Living Trust.................................... 3,007,474(5) 8.0%
1060 Queensbridge Court
San Jose, CA 95120-4215
The Dawn Constance Chiang, Grace Carina Chiang and
Elizabeth Jen Chiang Trust, Ross Frank, Trustee................ 3,000,000 8.0%
Lynx Venture Partners I, LLC 2601............................... 2,750,000(6) 7.3%
Fair Oaks Blvd., #150
Sacramento, California 95864
The Brady Children Trust, Stephen J. Brady, Trustee ............ 2,000,000 5.3%
P. O. Box 2123
Wrangell, Alaska 99929
- --------
(1) Assumes the conversion into Matridigm Common Stock of 9,600,000 shares of
Series A Preferred Stock, 2,000,000 shares of Series B Preferred Stock and
2,000,000 shares of Series D Preferred Stock pursuant to the Reorganization
Agreement and the exercise of warrants to purchase 1,290,000 shares of
MatriDigm Common Stock pursuant to that certain Warrant Exercise Agreement
dated October 5, 1998.
(2) The nature of the beneficial ownership of the shares by the respective
persons or group is sole voting and investment power unless otherwise
indicated.
(3) Does not include shares held by senior officers of Zitel Corporation in
their individual capacities or shares subject to options in favor of such
officers in their individual capacities. Does not include shares issuable
upon conversion of a December 1997 convertible promissory note.
(4) Does not include 3,000,000 shares held in trust for the benefit of Mr.
Chiang's daughters, as to all of which shares Mr. Chiang disclaims any
beneficial ownership. Includes 500,000 shares owned by Mrs. Chiang as her
separate property. Does not reflect Mr. Chiang's obligation to contribute
shares upon conversion of a June 1997 convertible promissory note held by
Lynx Venture Partners I, LLC.
47
(5) Does not include 2,000,000 shares held by the Brady Children Irrevocable
Trust, as to all of which shares Mr. Brady disclaims any beneficial
ownership. Does not reflect Mr. Brady's obligation to contribute shares
upon conversion of a June 1997 convertible promissory note held by Lynx
Venture Partners I, LLC.
(6) Does not include 100,000 shares held by Lynx Technology Fund, L.P., an
affiliated entity.
OWNERSHIP OF COMMON STOCK BY MANAGEMENT OF MATRIDIGM
The following table sets forth the beneficial ownership (as defined by the
rules of the Securities and Exchange Commission) of Common Stock of MatriDigm
by the incumbent directors, each of the names officers and all directors and
officers as a group, together with the percentage of the outstanding shares
which such ownership represents. Information is stated as of October 5, 1998.
AMOUNT AND NATURE
NAME OR IDENTITY OF BENEFICIAL PERCENT
OF GROUP OWNERSHIP (1)(2) OF CLASS(1)
- ---------------- ----------------- -----------
James T. Brady.................................. 3,007,474(3) 8.0%
Franklin C. Chiang.............................. 4,029,211(4) 10.8%
Henry C. Harris................................ 5,000 *
Jack H. King.................................... 10,000 *
Richard Ormond.................................. 0 *
Robert J. Luth.................................. 26,750 *
Robert J. Luth IRA.............................. 8,000 *
Jim D. Henry.................................... 0 *
All present executive officers and directors as
a group (7 persons)............................ 7,086,435 18.9%
- --------
* Denotes less than 1%
(1) Assumes the conversion into Matridigm Common Stock of 9,600,000 shares of
Series A Preferred Stock, 2,000,000 shares of Series B Preferred Stock and
2,000,000 shares of Series D Preferred Stock pursuant to the Reorganization
Agreement and the exercise of warrants to purchase 1,290,000 shares of
MatriDigm Common Stock pursuant to that certain Warrant Exercise Agreement
dated October 5, 1998.
(2) The nature of the beneficial ownership of the shares by the respective
persons or group is sole voting and investment power unless otherwise
indicated.
(3) Does not include 2,000,000 shares held by the Brady Children Irrevocable
Trust, as to all of which shares Mr. Brady disclaims any beneficial
ownership. Does not reflect Mr. Brady's obligation to contribute shares
upon conversion of a June 1997 convertible promissory note held by Lynx
Venture Partners I, LLC.
(4) Does not include 3,000,000 shares held in trust for the benefit of Mr.
Chiang's daughters, as to all of which shares Mr. Chiang disclaims any
beneficial ownership. Includes 500,000 shares owned by Mrs. Chiang as her
separate property. Does not reflect Mr. Chiang's obligation to contribute
shares upon conversion of a June 1997 convertible promissory note held by
Lynx Venture Partners I, LLC.
48
THE MERGERS AND RELATED TRANSACTIONS
THIS IS PROPOSAL NO. 1 TO BE CONSIDERED AND VOTED ON BY ZITEL SHAREHOLDERS AND
IS THE ONLY PROPOSAL TO BE CONSIDERED AND VOTED ON BY MATRIDIGM SHAREHOLDERS.
The following discussion summarizes the proposed Mergers and related
transactions. The following is not, however, a complete statement of all terms
and provisions relating to the Mergers. Detailed terms of and conditions to the
Mergers are contained in (i) the Agreement and Plan of Reorganization and
Merger, dated as of October 5, 1998 (the "Agreement of Reorganization"), a
conformed copy of which is attached to this Proxy Statement/Prospectus/Consent
Solicitation as Annex A, by and among Zitel, Holdco, Zenith Acquisition,
Millennium Acquisition, and MatriDigm, (ii) the Zitel Agreement of Merger to be
filed pursuant to the CGCL in the Office of the Secretary of State of the State
of California (the "Zitel Merger Agreement"), a copy of which is attached to
this Proxy Statement/Prospectus/Consent Solicitation as Annex B, and (iii) the
MatriDigm Agreement of Merger to be filed pursuant to the CGCL in the Office of
the Secretary of State of the State of California (the "MatriDigm Merger
Agreement", and together with the Zitel Merger Agreement, the "Merger
Agreements"), a copy of which is attached to this Proxy
Statement/Prospectus/Consent Solicitation as Annex C. Reference is also made to
the Forms of Shareholder Agreement, Lock-Up Agreement and Affiliates
Agreements, which are attached to this Proxy Statement/Prospectus/Consent
Solicitation as Annex D, E, F-1 and F-2, respectively, and to the other Annexes
hereto. Statement made in this Proxy Statement/Prospectus/Consent Solicitation
with respect to the terms of the Mergers and such related transactions are
qualified in their entirety by reference to the more detailed information set
forth in the Agreement of Reorganization and the other Annexes hereto. This
discussion contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in Risk
Factors and elsewhere herein or incorporated by reference.
JOINT REASONS FOR THE MERGERS
The Boards of Directors of Zitel and MatriDigm believe that by combining the
two companies, the combined company would have the potential to realize
improved long-term growth and operating and financial results and a stronger
competitive position in the Y2K solutions and other software maintenance and
conversion projects and performance analysis and correlation software segments
of the technology market. Zitel, through its Datametrics business unit, is a
provider of automated performance analysis and correlation software designed to
solve computer performance problems. MatriDigm provides highly automated
factory solutions for the Year 2000 IBM COBOL code problem. Zitel and MatriDigm
believe that by merging, the combined company will be able to offer customers a
broader range of software and services for information systems optimization. In
addition, increased efficiencies in the operations of the combined company may
permit additional investment in research and development that neither company
has had the resources to address independently.
Each of the Boards of Directors of Zitel and MatriDigm has identified
additional potential mutual benefits of the Mergers that they believe will
contribute to the success of the combined company.
49
These potential benefits include principally the following:
. A direct investment by Zitel shareholders and increased visibility of
MatriDigm's business may create an opportunity for Zitel shareholders and
MatriDigm shareholders to enjoy greater liquidity for their investment in
MatriDigm.
. The integration of the companies' product lines may enhance the combined
company's ability to increase market penetration by allowing the combined
company to compete more effectively.
. Combined technological resources may allow the combined company to
compete more effectively against competitors by providing the combined
company with enhanced ability to develop new products and greater
functionality beyond the year 2000 for existing products from
applications.
. The combined experience, size and breadth of product offerings of the
combined company may allow the combined company to respond more quickly
and effectively to technological change, increased competition and market
demands in an industry experiencing rapid innovation and evolution.
Zitel and MatriDigm have each identified additional reasons for the Merger,
which are discussed below. Each Board of Directors has recognized that the
potential benefits of the Merger may not be realized. See "RISK FACTORS."
ZITEL'S REASONS FOR THE MERGER
At its October 5, 1998 board meeting, the Zitel Board unanimously approved the
Agreement of Reorganization and the transactions contemplated thereby. The
Zitel Board unanimously recommends that the Zitel shareholders vote for the
adoption of the Agreement of Reorganization and the transactions contemplated
thereby, including the Zitel Merger.
In addition to the anticipated joint benefits described above, the Zitel Board
believes that the following are additional reasons the Mergers will be
beneficial to Zitel and its shareholders and for Zitel shareholders to vote FOR
the proposals set forth herein:
. Given the technologically complementary nature of the product lines of
Zitel and MatriDigm, the Mergers will enhance the opportunity for the
potential realization of Zitel's strategic objective of achieving greater
scale and presence in its targeted markets.
. Zitel shareholders would own 55.5%, a majority equity interest, of the
combined company following the closing of the Mergers.
. The acquisition of MatriDigm would provide an opportunity for increased
sales to and support of current Zitel and MatriDigm customers by offering
a broader product line and the integration of future products based on
current offerings and the underlying Franklin Chiang's technology.
. The Zitel shareholders would have the opportunity to participate in the
potential for growth of the combined company after the Mergers.
50
The Zitel Board considered a number of factors relating to the Mergers,
including, but not limited to, the following:
. A direct investment in MatriDigm by Zitel shareholders will avoid double
taxation on distributions of any profits generated by MatriDigm in the
future;
. The strategic benefits of the Mergers;
. Historical information concerning Zitel's and MatriDigm's respective
businesses, prospects, financial performance and condition, operations,
technology, management and competitive position, including public reports
concerning results of operations during the most recent fiscal year and
fiscal results for Zitel filed with the Commission;
. Zitel management's view of the financial condition, results of operations
and business of Zitel and MatriDigm before and after giving effect to the
Mergers;
. Current financial condition and historical market prices, volatility and
trading information with respect to Zitel Common Stock;
. The expected impact of the Mergers on Zitel's customers and employees;
. Reports from Zitel's management, legal and financial advisors as to the
results of the due diligence investigation of MatriDigm;
. Current industry, economic and market conditions;
. Presentations by the management of Zitel with respect to Zitel, MatriDigm
and the Mergers;
. The financial presentation of Salomon Smith Barney Inc. ("Salomon Smith
Barney"), including the opinion dated October 5, 1998 of Salomon Smith
Barney to the Zitel Board to the effect that, as of the date of such
opinion and based upon and subject to certain matters stated therein, the
Zitel Exchange Ratio was fair, from a financial point of view, to the
holders of Zitel Common Stock (see--"Opinion of Zitel's Financial
Advisor"); and
. The belief of the Zitel Board that the terms of the Agreement of
Reorganization, including the parties' representations, warranties and
covenants, and the conditions to their respective obligations, are
reasonable.
The Zitel Board also identified and considered a variety of potentially
negative factors in its deliberations concerning the Mergers, including, but
not limited to:
. The risk that the potential benefits sought in the Mergers might not be
fully realized if at all;
. The possibility that the Mergers might not be consummated;
. The effect of public announcement of the Mergers on (a) Zitel's sales and
operating results, (b) Zitel's ability to attract and retain key
management, marketing and technical personnel and (c) progress of certain
development projects;
. The substantial charges that have been incurred and are to be incurred in
connection with the Mergers, including costs of integrating the
businesses and transaction expenses arising from the Mergers;
. The risk that despite the efforts of the combined company, key technical
and management personnel might not remain employed by the combined
company; and
. The risks inherent in the development of the Y2K market beyond the year
2000.
. The potentially substantial obligation of funding the cash and working
capital requirements of MatriDigm's operations.
51
The Zitel Board believes that these risks are outweighed by the potential
benefits of the Mergers.
In view of the wide variety of factors considered, the Zitel Board did not find
it practicable to quantify, or otherwise attempt to assign relative weights to,
the specific factors considered in making its determination. Consequently, the
Zitel Board did not quantify the assumptions and results of its analysis in
making its determination that the Mergers are fair to, and in the best
interests of, Zitel and its shareholders.
THE ZITEL BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF ZITEL
COMMON STOCK VOTE FOR APPROVAL OF THE ZITEL MERGER AND ADOPTION OF THE
AGREEMENT OF REORGANIZATION AND THE TRANSACTIONS CONTEMPLATED THEREBY.
MATRIDIGM'S REASONS FOR THE MATRIDIGM MERGER
The Board of Directors of MatriDigm has approved and adopted the Merger
Agreement. The Board of Directors of MatriDigm believes that the MatriDigm
Merger and the Agreement of Reorganization are fair to and in the best interest
of MatriDigm and its shareholders. Among other reasons, the Board of Directors
of MatriDigm believes that MatriDigm will have greater access to capital on
more favorable terms following the consummation of the MatriDigm Merger. In
addition, the Board of Directors of MatriDigm believes that combining
MatriDigm's current business and their software technology development with
Zitel's existing software business will provide enhanced sales opportunities
for MatriDigm's current and future products and services and permit MatriDigm
to more effectively provide such products and services to its customers. The
Board of Directors of MatriDigm also believes that economies can be obtained by
combining the respective managements of MatriDigm and Zitel, permitting more
effective utilization of such personnel and offering the opportunity for
eliminating redundant personnel. In reaching its decision to approve the Merger
Agreement, the MatriDigm Merger and the Agreement of Reorganization, the
MatriDigm Board considered the following additional factors, among others, all
of which supported their determination: (i) the MatriDigm Merger and the
Agreement of Reorganization provide for the issuance of approximately .65
shares of Holdco Common Stock for each share of MatriDigm Common Stock,
representing a value of approximately $1.99 per share of MatriDigm Common Stock
as of October 5, 1998; (ii) the Holdco Common Stock to be received by MatriDigm
shareholders as a result of the MatriDigm Merger (other than certain persons
deemed to be affiliates of MatriDigm and persons who have executed agreements
restricting their sales of Holdco Common Stock) will be freely tradable
immediately following the consummation of the MatriDigm Merger, providing each
holder an opportunity to choose between liquidating or retaining their
investment; (iii) MatriDigm's current need for and the difficulty in raising
the necessary capital to develop its business; and (iv) the benefits
anticipated from combining MatriDigm's current business with Zitel's existing
Datametrics software business.
The foregoing discussion of the factors considered by the MatriDigm Board in
reaching its decision to approve the Agreement of Reorganization and recommend
adoption thereof by the MatriDigm shareholders is not intended to be exhaustive
but is believed to include all material factors used by the MatriDigm Board in
developing its recommendation. The MatriDigm Board did not quantify or attach
any particular weight to the various factors that it considered in reaching its
determination that
52
the MatriDigm Merger and the Agreement of Reorganization are in the best
interests of the MatriDigm shareholders.
The foregoing discussion of the information and factors considered by the
MatriDigm Board is not intended to be exhaustive but is believed to include all
material factors considered by the MatriDigm Board. In view of the wide variety
of factors considered in connection with its evaluation of the MatriDigm
Merger, the MatriDigm Board did not find it practicable to and did not quantify
or assign any relative weights to the factors considered in reaching its
determination, although individual members may have given different weights to
different factors.
DISINTERESTED MEMBERS OF THE MATRIDIGM BOARD ELIGIBLE TO VOTE UNANIMOUSLY
RECOMMEND THAT THE HOLDERS OF MATRIDIGM COMMON STOCK VOTE FOR APPROVAL OF THE
MATRIDIGM MERGER AND ADOPTION OF THE AGREEMENT OF REORGANIZATION AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
MATERIAL CONTACTS AND BOARD DELIBERATIONS
During October and early November 1997, members of Zitel management held
sporadic discussions with representatives of MatriDigm to explore the
feasibility of a business combination between the two companies. All such
conversations were exploratory in nature and did not progress beyond the
preliminary stage. In November 1997, Zitel engaged Salomon Smith Barney to
assist Zitel in its review, from a financial perspective, of a possible
transaction between the two companies. In late November 1997, Zitel also
retained Skadden, Arps, Slate, Meagher and Flom LLP ("Skadden, Arps"), which
shortly thereafter began conducting a preliminary legal due diligence review.
On December 3, 1997 and December 4, 1997, representatives of Salomon Smith
Barney met with Jack H. King and other members of Zitel senior management to
perform financial due diligence on Zitel's businesses. Separately, on December
3, 1997 and again on December 16, 1997, representatives of Salomon Smith Barney
met with members of MatriDigm's senior management at MatriDigm's offices in San
Jose, California to perform financial diligence on MatriDigm.
At a meeting held on December 8, 1997, the Zitel Board was briefed by members
of Zitel management on the discussions with MatriDigm. Zitel management also
updated the Zitel Board as to current results of operations of Zitel, and
MatriDigm to the extent revealed during discussions with MatriDigm management.
At such meeting, Skadden, Arps also discussed with the Zitel Board the proposed
transaction and alternative transaction structures. After discussion, the Zitel
Board authorized members of senior management to continue discussions with
MatriDigm.
On December 23, 1997, the Zitel Board discussed with Salomon Smith Barney the
progress of the financial diligence review of MatriDigm and discussions with
representatives of MatriDigm.
On January 14, 1998, the Zitel Board met with Zitel's management and
representatives of Salomon Smith Barney to discuss the feasibility and possible
financial terms of a transaction with MatriDigm. At such meeting, the Zitel
Board authorized Zitel management and representatives of Salomon Smith Barney
to proceed with discussions concerning a possible transaction with
representatives of MatriDigm.
53
During late January 1998 through mid-April 1998, representatives of Zitel and
MatriDigm held discussions regarding the financial terms of a possible business
combination involving the companies. No agreement on fundamental terms of the
transaction was reached in these discussions. At a special meeting held on
April 15, 1998, the Zitel Board authorized Catherine P. Lego, Jack H. King and
Henry C. Harris (collectively, the "Zitel Board Representatives") to act on
behalf of the Zitel Board with respect to the negotiations with MatriDigm.
On April 30, 1998, members of Zitel management, together with Zitel's legal and
financial advisors, met with members of MatriDigm management, a representative
of EFO Holdings, Inc. ("EFO Holdings"), financial advisor to MatriDigm, and
representatives of Arter & Hadden, LLP ("Arter & Hadden"), legal counsel to
MatriDigm, to discuss a methodology by which the parties could calculate
mutually acceptable levels of equity ownership in the combined company for each
of Zitel and MatriDigm. The parties failed to reach agreement on this point at
that time.
At special meetings of the Zitel Board held on May 1, 1998, May 15, 1998 and
May 21, 1998, members of the Zitel Board reviewed the status of the discussions
between the parties and discussed the general terms of a possible business
combination with MatriDigm with the Zitel Board Representatives and Zitel's
legal and financial advisors. Following the special meeting on May 21, 1998,
members of Zitel's management, together with Zitel's legal and financial
advisors, met with members of MatriDigm management, the late Bill Esping, then
chairman of MatriDigm, and MatriDigm's legal counsel, to discuss fundamental
business terms of the proposed transaction. The parties agreed on a 38%
ownership level for Zitel in the combined company, but failed to agree on other
fundamental business terms.
On May 27, 1998, the Zitel Board, following an apprisal of the results of the
negotiations with MatriDigm on May 21, 1998, determined to terminate
negotiations with MatriDigm concerning a possible business combination.
At meetings held on July 1, 1998, July 15, 1998 and July 30, 1998, the Zitel
Board, consistent with its past practice of assisting MatriDigm in funding its
working capital needs, resolved to provide MatriDigm funding up to $2.0 million
in the form of debt instruments.
At meetings of the MatriDigm Board held to consider the Zitel funding, Jack H.
King and a representative of EFO Holdings, who also sat on the MatriDigm Board
at that time, informally renewed discussions regarding a possible business
combination between Zitel and MatriDigm. Shortly thereafter in early August
1998, the Zitel Board Representatives and the representative of EFO Holdings
had several preliminary, exploratory discussions regarding a possible business
combination, including discussions regarding possible levels of equity
ownership of Zitel and MatriDigm in the combined company in light of then
recently revised estimates of MatriDigm revenue growth, restrictions of the
transferability of shares of capital stock of certain key shareholders of
MatriDigm, the timing of a possible transaction, and other related matters. The
parties did not reach agreement on any of these matters but agreed to have
further discussions.
On August 12, 1998, the Zitel Board Representatives held a conference call with
Salomon Smith Barney to discuss the potential transaction with MatriDigm and
instructed Salomon Smith Barney to contact MatriDigm's financial advisor to
discuss certain business and financial matters relating to a
54
possible transaction. Following that teleconference, on August 13, 1998,
representatives of Salomon Smith Barney met with representatives of EFO
Holdings to discuss such matters, including (i) the treatment of convertible
securities of MatriDigm in calculating relative ownership, (ii) restrictions on
MatriDigm shareholders in selling stock in the combined company after closing
of the transaction, (iii) the possibility of Zitel funding the working capital
needs of MatriDigm in the interim period between signing of a definitive
agreement and the closing of the transaction and the form of security of such
funding, (iv) the status and terms of the outstanding convertible debt of
MatriDigm, (v) Zitel's near-term ability to raise third-party financing, and
(vi) the relative levels of equity ownership of Zitel and MatriDigm in the
combined company. The discussions did not lead to agreement on these points.
Following this meeting, representatives of Salomon Smith Barney updated the
Zitel Board Representatives, via telephone, as to its meeting with EFO
Holdings.
On August 25, 1998, at the direction of the Zitel Board Representatives,
representatives of Salomon Smith Barney again contacted representatives of EFO
Holdings to discuss further certain financial and business terms of a proposed
transaction, including (i) the treatment of MatriDigm warrants to purchase
preferred stock of MatriDigm, (ii) restrictions on the transferability of
shares of common stock of the combined company to be received by certain
shareholders of MatriDigm in a merger, (iii) certain management issues, (iv) a
target closing date for the transaction, (v) the possibility of Zitel funding
the working capital needs of MatriDigm in the interim period between signing of
a definitive agreement and closing of the transaction in the form of debt
securities, (vi) Zitel's equity ownership level in the combined company, and
(vii) the advisory fee payable to EFO Holdings for providing financial advice
to MatriDigm in the transaction. Following this teleconference, representatives
of Salomon Smith Barney apprised the Zitel Board Representatives of the results
of these discussions with EFO Holdings. The Zitel Board Representatives
authorized Salomon Smith Barney to propose to MatriDigm a 57% equity ownership
level for Zitel in the combined company.
From August 27, 1998 through September 3, 1998, representatives of Zitel and
MatriDigm continued to negotiate mutually acceptable levels of equity ownership
for Zitel and MatriDigm in the combined company, lock-up terms for certain
shareholders of MatriDigm, if and to what extent Zitel could provide MatriDigm
with working capital funds during the interim period between signing of a
definitive agreement and the timing for the transaction, the treatment of
outstanding convertible debt of MatriDigm, and an advisory fee for EFO
Holdings. The parties did not reach agreement on these points. The Zitel Board
met on August 31, 1998 to review the status of these discussions with
MatriDigm.
On September 5, 1998, the parties further discussed, without reaching
agreement, the outstanding issues and, in addition, the board constitution for
the combined company, certain specific terms of the definitive agreement, and
the treatment of outstanding warrants to purchase MatriDigm capital stock.
During the month of September, representatives of Zitel and MatriDigm and their
advisors continued to meet to discuss due diligence, the terms of the
definitive agreements and other related matters. During special meetings held
in September, the Zitel Board Representatives reviewed the progress of the
negotiations between the parties and preliminary drafts of the Agreement of
Reorganization and ancillary documents which were prepared and distributed to
the Zitel Board by Zitel's legal counsel.
55
Negotiations between Zitel and MatriDigm continued through October 4, 1998,
culminating in Zitel and MatriDigm agreeing upon the form of definitive
Agreement of Reorganization, the Shareholder Agreements and other ancillary
definitive documentation, to be presented for review at separate meetings of
the Boards of Directors of Zitel and MatriDigm scheduled for October 5, 1998.
On the morning of October 5, 1998, the MatriDigm Board held a special meeting
to review, with the advice and assistance of MatriDigm's management and legal
and financial advisors, the proposed final terms and conditions of the
transaction with Zitel. At the meeting, Arter & Hadden advised the MatriDigm
Board of directors on the final terms of the definitive agreements, the results
of legal diligence of Zitel, and the responsibilities of the MatriDigm board of
directors. The MatriDigm Board reviewed the informal opinion of Robert E.
LaBlanc to the effect that, as of October 5, 1998 and based on and subject to
certain matters stated in such opinion, the Millennium Exchange Ratio (as
defined in the Agreement of Reorganization) was fair, from a financial point of
view, to holders of MatriDigm Common Stock and MatriDigm Preferred Stock. See
"--Opinion of MatriDigm's Financial Advisor." After discussion and recusal of
Messrs. King and Harris, the members of MatriDigm Board eligible to vote on the
matters unanimously approved the terms of the Agreement of Reorganization and
the transactions contemplated thereunder, and directed the officers of
MatriDigm to finalize and execute the Agreement of Reorganization and all other
applicable ancillary documentation.
On the morning of October 5, 1998, the Zitel Board also held a special meeting
to review, with the advice and assistance of Zitel's management and legal and
financial advisors, the proposed final terms and conditions of the transaction
with MatriDigm. At the meeting, Skadden, Arps advised the Zitel Board on the
final terms of the definitive agreements, the results of legal diligence of
MatriDigm, and the responsibilities of the Zitel Board. Salomon Smith Barney
then rendered to the Zitel Board its oral opinion (which opinion was
subsequently confirmed by delivery of a written opinion dated October 5, 1998)
to the effect that, as of such date and based on and subject to certain matters
stated in such opinion, the Zitel Exchange Ratio (as defined in the Agreement
of Reorganization) was fair, from a financial point of view, to the holders of
Zitel Common Stock, and reviewed with the Zitel Board the financial analyses
performed by Salomon Smith Barney in connection with such opinion. (See "--
Opinion of Zitel's Financial Advisor.") After discussion, the Zitel Board
unanimously approved the terms of the Agreement of Reorganization and the
transactions contemplated thereunder, and directed the officers of Zitel to
finalize and execute the Agreement of Reorganization and all other applicable
ancillary documentation.
The definitive Agreement of Reorganization and related documents were executed
after the close of the stock market on October 5, 1998 and the proposed Mergers
were publicly announced before the commencement of the business day on October
6, 1998.
OPINION OF ZITEL'S FINANCIAL ADVISOR
Salomon Smith Barney was retained by Zitel to act as its financial advisor in
connection with the proposed Mergers. In connection with such engagement, Zitel
requested that Salomon Smith Barney evaluate the fairness, from a financial
point of view, to the holders of Zitel Common Stock of the consideration to be
received by such holders in the Zitel Merger. On October 5, 1998, at a meeting
of the Zitel Board held to evaluate the proposed Mergers, Salomon Smith Barney
delivered an oral
56
opinion (which opinion was subsequently confirmed by delivery of a written
opinion dated October 5, 1998) to the Zitel Board to the effect that, as of the
date of such opinion and based upon and subject to certain matters stated
therein, the Zitel Exchange Ratio was fair, from a financial point of view, to
the holders of Zitel Common Stock.
In arriving at its opinion, Salomon Smith Barney reviewed the Agreement of
Reorganization and held discussions with certain senior officers, directors and
other representatives and advisors of Zitel and certain senior officers and
other representatives and advisors of MatriDigm concerning the businesses,
operations and prospects of Zitel and MatriDigm. Salomon Smith Barney examined
certain publicly available business and financial information relating to Zitel
and certain available business and financial information relating to MatriDigm
as well as certain financial forecasts and other information and data for Zitel
and MatriDigm which were provided to or otherwise discussed with Salomon Smith
Barney by the respective managements of Zitel and MatriDigm, including
information relating to certain strategic implications and operational benefits
anticipated to result from the Mergers. Salomon Smith Barney reviewed the
financial terms of the Mergers as set forth in the Agreement of Reorganization
in relation to, among other things: current and historical market prices and
trading volumes of Zitel Common Stock; the historical and projected earnings
and other operating data of Zitel and MatriDigm; and the capitalization and
financial condition of Zitel and MatriDigm. Salomon Smith Barney considered, to
the extent publicly available, the financial terms of certain other
transactions recently effected which Salomon Smith Barney considered relevant
in evaluating the Mergers and analyzed certain financial, stock market and
other publicly available information relating to the businesses of other
companies whose operations Salomon Smith Barney considered relevant in
evaluating those of Zitel and MatriDigm. Salomon Smith Barney also evaluated
the potential pro forma financial impact of the Mergers on Holdco. In addition
to the foregoing, Salomon Smith Barney conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as Salomon Smith Barney deemed appropriate in arriving at its opinion. Salomon
Smith Barney noted that its opinion was necessarily based upon information
available, and financial, stock market and other conditions and circumstances
existing and disclosed, to Salomon Smith Barney as of the date of its opinion.
In rendering its opinion, Salomon Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Salomon Smith Barney. With respect to financial
forecasts and other information and data provided to or otherwise reviewed by
or discussed with Salomon Smith Barney, the managements of Zitel and MatriDigm
advised Salomon Smith Barney that such forecasts and other information and data
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the managements of Zitel and MatriDigm as to the
future financial performance of Zitel and MatriDigm and the strategic
implications and operational benefits anticipated to result from the Mergers.
Salomon Smith Barney assumed, with the consent of the Zitel Board, that the
Mergers will be treated as non-recognition transfers for federal income tax
purposes. The opinion of Salomon Smith Barney relates to the relative values of
Zitel and MatriDigm. Salomon Smith Barney did not express any opinion as to
what the value of the Holdco Common Stock actually will be when issued pursuant
to the Mergers or the price at which the Holdco Common Stock will trade or
otherwise be transferable subsequent to the Mergers. Salomon Smith Barney did
not make and was not provided with an independent
57
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Zitel or MatriDigm nor did Salomon Smith Barney make any physical inspection
of the properties or assets of Zitel or MatriDigm. In connection with its
engagement, Salomon Smith Barney was not requested to, and did not, solicit
third party indications of interest in the possible acquisition of Zitel, nor
was Salomon Smith Barney requested to consider, and its opinion does not
address, the relative benefits of the Mergers as compared to any alternative
business strategies that might exist for Zitel or the effect of any other
transaction in which Zitel might engage. Although Salomon Smith Barney
evaluated the Zitel Exchange Ratio from a financial point of view, Salomon
Smith Barney was not asked to and did not recommend the specific consideration
payable in the Mergers, which was determined through negotiation between Zitel
and MatriDigm. No other limitations were imposed by Zitel on Salomon Smith
Barney with respect to the investigations made or procedures followed by
Salomon Smith Barney in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SALOMON SMITH BARNEY, DATED OCTOBER 5,
1998, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX H AND SHOULD BE READ
CAREFULLY IN ITS ENTIRETY. THE OPINION OF SALOMON SMITH BARNEY IS DIRECTED TO
THE ZITEL BOARD AND RELATES ONLY TO THE FAIRNESS OF THE ZITEL EXCHANGE RATIO
FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE
MERGERS OR RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE ON ANY MATTER RELATING TO
THE PROPOSED MERGERS. THE SUMMARY OF THE OPINION OF SALOMON SMITH BARNEY SET
FORTH IN THIS PROXY STATEMENT/PROSPECTUS/CONSENT SOLICITATION IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion, Salomon Smith Barney performed a variety of financial
and comparative analyses, including those described below. The summary of such
analyses does not purport to be a complete description of the analyses
underlying Salomon Smith Barney's opinion. The preparation of a fairness
opinion is a complex analytic process involving various determinations as to
the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Accordingly,
Salomon Smith Barney believes that its analyses must be considered as a whole
and that selecting portions of its analyses and factors, without considering
all analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and opinion. In its analyses, Salomon Smith
Barney made numerous assumptions with respect to Zitel, MatriDigm, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Zitel and MatriDigm. The
estimates contained in such analyses and the valuation ranges resulting from
any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. Salomon Smith Barney's opinion and analyses were only one of many
factors considered by the Zitel Board in its evaluation of the Mergers and
should not be viewed as determinative of the views of the Zitel Board or
management with respect to the Exchange Ratios or the proposed Mergers.
58
The following is a summary of the material financial analyses performed by
Salomon Smith Barney in connection with its opinion dated October 5, 1998:
INTRODUCTION.
Given the fact that Zitel currently holds an approximately 31.3% equity
interest in MatriDigm (assuming conversion of all outstanding warrants and
convertible debt), Salomon Smith Barney analyzed the Zitel Exchange Ratio both
by (i) comparing the equity value for MatriDigm implied by the Exchange Ratios
with the implied equity reference ranges for MatriDigm derived from the
valuation methodologies described below under the caption "MatriDigm" and
(ii) analyzing the economic interest in Datametrics and ZSS that Zitel would
exchange in the Mergers for the increased economic interest that Zitel would
obtain as a result of the Mergers (see "Exchange Analysis" described below)
based on the implied reference ranges for MatriDigm, Datametrics and ZSS
derived from the valuation methodologies described below under the captions
"MatriDigm," "Datametrics" and "ZSS."
MATRIDIGM.
Salomon Smith Barney derived implied equity and enterprise reference ranges for
MatriDigm based on a discounted cash flow analysis, a selected company analysis
and implied valuations of MatriDigm based on the private placement of MatriDigm
Common Stock effected in September 1998 and the stock price of Zitel Common
Stock. Salomon Smith Barney then compared the selected equity reference range
for MatriDigm resulting from such analyses with the equity value implied for
MatriDigm by the Exchange Ratios. These analyses indicated selected enterprise
and equity reference ranges for MatriDigm of approximately $40.0 million to
$400.0 million and $30.4 million to $390.4 million, respectively, as compared
to the equity value for MatriDigm implied by the Exchange Ratios of
approximately $87.5 million. Such analyses are described below.
Discounted Cash Flow Analysis. Salomon Smith Barney performed a discounted cash
flow analysis of the projected, unlevered free cash flow of MatriDigm for
fiscal years 1999 through 2001, based on (i) the internal estimates of the
management of MatriDigm ("Management Estimates"), (ii) certain adjustments so
that projected revenues from certain product offerings were not taken into
consideration ("Case I") and (iii) certain adjustments to the Case I estimates,
which adjustments assumed more conservative revenue growth than Case I ("Case
II"). The stand-alone discounted cash flow analysis of MatriDigm was determined
by (i) adding (x) the present value of the projected, unlevered free cash flows
of MatriDigm over the three-year period from 1999 to 2001 and (y) the present
value of the estimated terminal value of MatriDigm in year 2001 and
(ii) subtracting the current net debt of MatriDigm. The range of estimated
terminal values for MatriDigm at the end of the three-year period was
calculated by applying a terminal value multiple of 10.0x to the projected 2001
net income of MatriDigm for the Management Estimates and assumed no terminal
value for Case I and Case II. The cash flows and terminal values of MatriDigm
were discounted to present value using discount rates ranging from 20% to 30%.
Utilizing such terminal multiples and discount rates, this analysis resulted in
enterprise reference ranges for MatriDigm of approximately $813 million to
$1,016 million (Management Estimates), $93 million to $103 million (Case I) and
$13 million (Case II). Applying the midpoint discount rate of 25% resulted in
an enterprise reference range for MatriDigm of approximately $13.1 million to
$906.7 million.
59
MatriDigm Selected Companies Analysis. Using publicly available information,
Salomon Smith Barney analyzed the market values and trading multiples of the
following selected publicly traded companies in the Year 2000 software
industry: Alydaar Software Corporation; Accelr8 Technology Corporation;
Cognicase Inc.; Peritus Software Services, Inc.; Sapiens International
Corporation N.V.; SEEC, Inc.; Unicomp, Inc.; and Viasoft, Inc. (collectively,
the "MatriDigm Selected Companies"). Salomon Smith Barney compared market
values as a multiple of, among other things, estimated calendar 1998 and 1999
price to earnings, and enterprise values (equity market value, plus debt, less
cash) as a multiple of, among other things, latest quarter annualized revenue,
latest 12 months revenue and estimated calendar 1999 revenue. All multiples
were based on closing stock prices on September 30, 1998. Estimated financial
data for the MatriDigm Selected Companies were based on estimates of selected
investment banking firms. A reference range for estimated calendar year 1998
price to earnings was not considered meaningful due to the negative operating
statistic of MatriDigm for such operating measure. Applying a range of selected
multiples for the MatriDigm Selected Companies of estimated calendar 1999 price
to earnings and latest quarter annualized revenue, latest 12 months revenue and
estimated calendar 1999 revenue of 1.5x to 10.0x, 0.3x to 3.3x, 0.2x to 4.7x
and 0.3x to 1.2x, respectively, to corresponding financial data for MatriDigm
resulted in an enterprise reference range for MatriDigm of approximately $10.0
million to $300.0 million.
No company or business used in the "MatriDigm Selected Companies Analysis" as a
comparison is identical to MatriDigm. Accordingly, an analysis of the results
of the foregoing is not entirely mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics and other factors that could affect the public trading or other
values of the MatriDigm Selected Companies or the business segment or company
to which they are being compared.
Latest Financing Analysis. Salomon Smith Barney reviewed the equity and
enterprise valuations implied for MatriDigm based on the private placement of
MatriDigm Common Stock effected in September 1998. For purposes of such
analysis, Salomon Smith Barney multiplied the number of the outstanding shares
of MatriDigm Common Stock prior to the financing by the price per share paid in
the financing. This calculation resulted in equity and enterprise reference
values for MatriDigm of approximately $77.7 million and $87.3 million,
respectively.
Implied Valuation based on Zitel Common Stock. Salomon Smith Barney calculated
an implied valuation range for MatriDigm based on the market price of Zitel
Common Stock by multiplying the number of fully diluted outstanding shares of
Zitel Common Stock by the per share closing stock price for Zitel Common Stock
on September 30, 1998. Salomon Smith Barney then subtracted the enterprise
reference ranges for Datametrics and ZSS as discussed further below to obtain
an implied valuation range for Zitel's ownership in MatriDigm of approximately
$34.3 million to $65.4 million. Based on Zitel's 31.3% equity ownership
interest in MatriDigm, Salomon Smith Barney arrived at an implied enterprise
reference range for MatriDigm of approximately $119.6 million (utilizing the
high end of the enterprise reference range for Datametrics and ZSS) to $218.7
million (utilizing the low end of the enterprise reference range for
Datametrics and ZSS).
60
DATAMETRICS.
Salomon Smith Barney arrived at a selected enterprise reference range for
Datametrics of approximately $13.0 million to $40.0 million based on a selected
merger and acquisition transactions analysis and a selected company analysis.
Such analyses are described below.
Datametrics Selected Merger and Acquisition Transactions Analysis. Using
publicly available information, Salomon Smith Barney analyzed, among other
things, the implied purchase prices and transaction value multiples paid in
selected transactions in the systems management software industry, consisting
of (acquiror/target): Peregrine Systems, Inc./Innovative Tech Systems, Inc.;
Sterling Commerce, Inc./XcelleNet, Inc.; PLATINUM technology, inc./Logic Works,
Inc; BMC Software, Inc./BGS Systems, Inc.; International Business Machines
Corporation/Software Artistry, Inc.; AXENT Technologies, Inc./Raptor Systems,
Inc.; McAfee Associates, Inc./Network General Corporation; International
Business Machines Corporation/Unison Software, Inc.; BMC Software,
Inc./DataTools, Inc.; International Business Machines Corporation/Tivoli
Systems Inc.; VERITAS Software Corporation/OpenVision Technologies, Inc.; AXENT
Technologies, Inc./AssureNet Pathways, Inc.; Computer Associates International,
Inc./Cheyenne Software, Inc.; Computer Associates International, Inc./Legent
Corporation; PLATINUM technology, inc./RELTECH Group, Inc.; and PLATINUM
technology, inc./Trinzic Corporation (collectively, the "Datametrics Selected
Transactions"). Salomon Smith Barney compared purchase prices as a multiple of
latest 12 months net income, and transaction values (equity market value, plus
debt, less cash) as multiples of, among other things, latest 12 months revenue
and earnings before interest and taxes ("EBIT"). All multiples for the
Datametrics Selected Transactions were based on information available at the
time of announcement of the relevant transaction. Reference ranges for latest
12 months net income and EBIT were not considered meaningful due to negative
operating statistics of Datametrics for such operating measures. Applying a
range of selected multiples for the Datametrics Selected Transactions of latest
12 months revenue of 1.0x to 4.0x to corresponding financial data for
Datametrics resulted in a reference range for Datametrics of approximately
$13.0 million to $40.0 million.
Datametrics Selected Companies Analysis. Using publicly available information,
Salomon Smith Barney analyzed the market values and trading multiples of the
following selected publicly traded companies in the systems management software
industry: BMC Software, Inc.; Boole & Babbage, Inc.; Compuware Corporation;
Legato Systems, Inc.; Micromuse Inc., Novadigm, Inc.; PLATINUM technology,
inc.; SOFTWORKS, Inc.; and VERITAS Software Corporation (collectively, the
"Datametrics Selected Companies"). Salomon Smith Barney compared market values
as a multiple of estimated calendar 1998 and 1999 price to earnings and
enterprise values (equity market value, plus debt, less cash) as a multiple of,
among other things, latest quarter annualized revenue and latest 12 months
revenue. All multiples were based on closing stock prices on September 30,
1998. Estimated financial data for the Datametrics Selected Companies were
based on estimates of selected investment banking firms. A reference range for
estimated calendar 1998 price to earnings was not considered meaningful due to
the negative operating statistic of Datametrics for such operating measure.
Applying a range of selected multiples for the Datametrics Selected Companies
of estimated calendar 1999 price to earnings, latest quarter annualized revenue
and latest 12 months revenue of 8.0x to 20.0x, 1.0x to 2.5x and 1.0x to 2.5x,
respectively, to corresponding financial data for Datametrics resulted in an
enterprise reference range for Datametrics of approximately $15.0 million to
$37.0 million.
61
No company, transaction or business used in the "Datametrics Selected Companies
Analysis" or "Datametrics Selected Merger and Acquisition Transactions
Analysis" as a comparison is identical to Datametrics or the Mergers.
Accordingly, an analysis of the results of the foregoing is not entirely
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics and other
factors that could affect the acquisition, public trading or other values of
the Datametrics Selected Companies, Datametrics Selected Transactions or the
business segment, company or transaction to which they are being compared.
ZSS.
Salomon Smith Barney arrived at a selected enterprise reference range for ZSS
of approximately $1.0 million to $5.0 million based on a selected merger and
acquisition transactions analysis and a selected company analysis. Such
analyses are described below.
ZSS Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Salomon Smith Barney analyzed, among other things, the
implied purchase prices and transaction value multiples paid in selected
transactions in the information technology service industry, consisting of
(acquiror/target): Keane, Inc./Icon Systems, Inc.; Complete Business Solutions,
Inc./Claremont Technology Group, Inc.; The Registry, Inc./The Hunter Group,
Inc.; Peritus Software Services, Inc./Millennium Dynamics, Inc.; The Registry,
Inc./Renaissance Solutions, Inc.; Computer Sciences Corporation/Continuum,
Inc.; Vanstar Corporation/Dataflex Corporation; Interim Services Inc./Brandon
Systems Corporation; Heritage Media Corporation/DIMAC Corporation; and Trans
Union Corporation/DATEQ Information Network, Inc. (collectively, the "ZSS
Selected Transactions"). Salomon Smith Barney compared purchase prices as a
multiple of latest 12 months net income, and transaction values (equity market
value, plus debt, minus cash) as multiples of, among other things, latest 12
months revenue and EBIT. All multiples for the ZSS Selected Transactions were
based on information available at the time of announcement of the relevant
transaction. Reference ranges for latest 12 months net income and EBIT were not
considered meaningful due to negative operating statistics of ZSS for such
operating measures. Applying a range of selected multiples for the ZSS Selected
Transactions of latest 12 months revenue of 0.5x to 5.0x to corresponding
financial data for ZSS resulted in an enterprise reference range for ZSS of
approximately $0 to $2.0 million.
ZSS Selected Companies Analysis. Using publicly available information, Salomon
Smith Barney analyzed the market values and trading multiples of the following
selected publicly traded companies in the information technology service
industry: American Management Systems, Incorporated; Cambridge Technology
Partners, Inc.; CIBER, Inc.; Complete Business Solutions, Inc.; Computer
Horizons Corp.; Data Dimensions, Inc.; ECsoft Group plc; Information Management
Resources, Inc.; Keane, Inc.; Mastech Corporation; Technology Solutions
Company; TSR, Inc.; and Whittman-Hart, Inc. (collectively, the "ZSS Selected
Companies"). Salomon Smith Barney compared market values as a multiple of
estimated calendar 1998 and 1999 price to earnings, and enterprise values
(equity market value, plus debt, less cash) as multiples of, among other
things, latest quarter annualized revenue, latest 12 months revenue and latest
12 months EBIT. All multiples were based on closing stock prices on September
30, 1998. Estimated financial data for the ZSS Selected Companies were based on
estimates of selected investment banking firms. Reference ranges for estimated
calendar year 1998 price to earnings and latest 12 months EBIT were not
considered meaningful due to
62
negative operating statistics of ZSS for such operating measures. Applying a
range of selected multiples for the ZSS Selected Companies of estimated
calendar 1999 price to earnings, latest quarter annualized revenue and latest
12 months revenue of 3.0x to 5.0x, 0.5x to 2.0x and 0.5x to 4.0x, respectively,
to corresponding financial data for ZSS resulted in an enterprise reference
range for ZSS of approximately $1.0 million to $5.0 million.
No company, transaction or business used in the "ZSS Selected Companies
Analysis" or "ZSS Selected Merger and Acquisition Transactions Analysis" as a
comparison is identical to ZSS or the Mergers. Accordingly, an analysis of the
results of the foregoing is not entirely mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the ZSS Selected Companies, ZSS Selected
Transactions or the business segment, company or transaction to which they are
being compared.
EXCHANGE ANALYSIS. Salomon Smith Barney compared the economic interest in
Datametrics and ZSS that Zitel would exchange in the Mergers for the increased
economic interest in MatriDigm that Zitel would obtain as a result of the
Mergers. Based on the Exchange Ratios, Zitel would exchange a 44.5% economic
interest in Datametrics and ZSS for an additional 24.2% economic interest in
MatriDigm. Based on the valuation methodologies discussed above, Salomon Smith
Barney calculated enterprise reference ranges for Datametrics, ZSS and
MatriDigm of approximately $13.0 million to $40.0 million, $1.0 million to $5.0
million and $40.0 million to $400.0 million, respectively. Salomon Smith Barney
then multiplied 44.5% (the economic percentage interest to be exchanged by
Zitel in Datametrics and ZSS) by the estimated enterprise reference ranges of
Datametrics and ZSS and the cash and debt Zitel was contributing to Holdco and
multiplied 24.2% (the increased economic percentage interest in MatriDigm that
Zitel would obtain as a result of the Mergers) by the estimated enterprise
reference range of MatriDigm and the cash and debt MatriDigm was contributing
to Holdco. After adding the resulting cash and subtracting the resulting debt
of Zitel and MatriDigm, respectively, to the resulting enterprise reference
ranges, this analysis indicated that Zitel would exchange an aggregate economic
interest in Datametrics and ZSS of approximately $5.4 million to $19.2 million
for an aggregate economic interest in MatriDigm of approximately $7.4 million
to $94.5 million, resulting in a net economic gain to Zitel of approximately
$1.9 million to $75.3 million.
PRO FORMA MERGER ANALYSIS. Salomon Smith Barney analyzed certain pro forma
effects resulting from the Mergers, including, among other things, the impact
of the Mergers on the projected earnings per share ("EPS") of Zitel in fiscal
year 1999, based on internal estimates of the managements of Zitel and
MatriDigm. The results of the pro forma merger analysis suggested that the
Mergers would be accretive to the EPS of Zitel in fiscal year 1999. The actual
results achieved by the combined company may vary from projected results and
the variations may be material.
CONTRIBUTION ANALYSIS. Salomon Smith Barney analyzed the respective
contributions of Zitel and MatriDigm to the estimated revenues, operating
income and net income of the pro forma combined company for fiscal years 1998
and 1999, based on internal estimates of the managements of Zitel and
MatriDigm. This analysis indicated that (i) in fiscal year 1998, Zitel would
contribute approximately 71.9% of revenues and MatriDigm would contribute
approximately 28.1% of revenues, of the combined company, and (ii) in fiscal
year 1999, Zitel would contribute approximately 41.1% of
63
revenues, 7.2% of operating income and 7.6% of net income, and MatriDigm would
contribute approximately 58.9% of revenues, 92.8% of operating income and 92.4%
of net income, of the combined company. Contribution results for fiscal year
1998 with respect to operating income and net income were not considered
meaningful due to the operating losses and net losses of Zitel and MatriDigm.
Based on the Exchange Ratios, current stockholders of Zitel and MatriDigm would
own approximately 55.5% and 44.5%, respectively, of the equity value of the
combined company upon consummation of the Mergers.
OTHER FACTORS AND COMPARATIVE ANALYSES. In rendering its opinion, Salomon Smith
Barney considered certain other factors and conducted certain other comparative
analyses, including, among other things, a review of (i) the historical and
projected financial results of Datametrics, ZSS and MatriDigm, (ii) the history
of trading prices and volume of Zitel Common Stock and (iii) the pro forma
ownership of the combined company.
MISCELLANEOUS. Pursuant to the terms of Salomon Smith Barney's engagement,
Zitel has agreed to pay Salomon Smith Barney for its services in connection
with the Mergers an aggregate financial advisory fee of $3.6 million, a portion
of which will be payable in Holdco Common Stock. Zitel has also agreed to
reimburse Salomon Smith Barney for reasonable travel and other out-of-pocket
expenses incurred by Salomon Smith Barney in performing its services, including
the reasonable fees and expenses of its legal counsel, and to indemnify Salomon
Smith Barney and related persons against certain liabilities, including
liabilities under the federal securities laws, arising out of Salomon Smith
Barney's engagement.
Salomon Smith Barney has advised Zitel that, in the ordinary course of
business, Salomon Smith Barney and its affiliates may actively trade or hold
the securities of Zitel for their own account or for the account of customers
and, accordingly, may at any time hold a long or short position in such
securities. In addition, Salomon Smith Barney and its affiliates (including
Citigroup Inc. and its affiliates) may maintain relationships with Zitel and
MatriDigm and their respective affiliates.
Salomon Smith Barney is an internationally recognized investment banking firm
and was selected by Zitel based on its experience, expertise and familiarity
with Zitel and its business. Salomon Smith Barney regularly engages in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
OPINION OF MATRIDIGM'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated May 22, 1998, Robert E. LaBlanc
Associates, Inc. ("LaBlanc") was retained by MatriDigm to act as its financial
advisor in connection with the MatriDigm Merger and the Agreement of
Reorganization. MatriDigm retained LaBlanc for the purpose of evaluating and
rendering a written opinion to the MatriDigm Board regarding the fairness, from
a financial point of view, to the holders of the MatriDigm Common Stock of the
consideration to be received by such holders in the MatriDigm Merger. On
October 5, 1998, the MatriDigm Board was advised of LaBlanc's opinion that the
consideration to be received by the holders of the MatriDigm Common Stock,
subject to certain assumptions and matters stated therein, is fair, from a
financial point of view, to the holders of shares of the MatriDigm Common
Stock. LaBlanc's initial,
64
informal opinion dated September 17, 1998 was updated in a written opinion
dated as of October 5, 1998.
THE FULL TEXT OF THE WRITTEN OPINION OF ROBERT E. LABLANC ASSOCIATES, INC.,
DATED AS OF OCTOBER 5, 1998, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS
ANNEX I AND SHOULD BE READ CAREFULLY IN ITS ENTIRETY. THE OPINION OF LABLANC IS
DIRECTED TO THE MATRIDIGM BOARD AND RELATES ONLY TO THE FAIRNESS OF THE
MATRIDIGM EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS THE
OTHER ASPECT OF THE MERGERS OR RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY MATRIDIGM STOCKHOLDER REGARDING THE EXECUTION OR DELIVERY
OF ANY WRITTEN CONSENT. THE SUMMARY OF THE OPINION OF LABLANC IN THIS PROXY
STATEMENT/PROSPECTUS/CONSENT SOLICITATION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In rendering its opinion, LaBlanc, among other things, (i) reviewed the
Agreement of Reorganization, (ii) held discussions with senior officers,
directors and advisors of MatriDigm concerning the business, operations and
prospects of MatriDigm, (iii) examined publicly available business and
financial information relating to MatriDigm and certain available business and
financial information relating to Zitel, (iv) certain financial forecasts and
other information and data for MatriDigm and (v) information relating to
certain strategic implications and operational benefits anticipated to result
from the Mergers provided by management of MatriDigm. In conducting its review,
LaBlanc reviewed the financial terms of the Mergers as set forth in the
Agreement of Reorganization in relation to, among other things: current and
historical market prices and trading volumes of the Zitel common stock; the
historical and projected earnings and other operating data of MatriDigm and
publicly available projections and operating data of Zitel; and the
capitalization and financial condition of MatriDigm and Zitel. LaBlanc
considered, to the extent publicly available, the financial terms of certain
other transactions which it considered relevant in evaluating the Mergers and
analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations it
considered relevant in evaluating those of MatriDigm and Zitel. LaBlanc also
evaluated the potential pro forma financial impact of the Mergers on Holdco. In
addition to the foregoing, LaBlanc conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as it deemed appropriate in arriving at its opinion. LaBlanc is a private
professional services organization providing financial and technical consulting
for the information industry, including management and marketing consulting,
investment banking, venture capital advisory services and strategic planning.
Since 1981, principals of LaBlanc have advised major institutional investors
regarding investment and management strategy, and have assisted large and small
technology companies in connection with capital raising efforts, formulation of
product and marketing plans and mergers and acquisitions. LaBlanc has advisory
relationships with venture capital firms and groups of private investors to
whom it provides a variety of investment banking and financial intermediary
services, including financial evaluation, fairness opinions, placement of
unwanted or divested divisions or subsidiaries, advice concerning mergers and
acquisitions and capital raising activities and studies regarding cost of
capital for various enterprises.
65
On the basis of the expertise and experience of LaBlanc and LaBlanc's ability
and willingness to undertake representation of MatriDigm on a timely and cost
effective basis, the MatriDigm Board selected LaBlanc to analyze whether the
consideration to be received by the MatriDigm shareholders in connection with
the MatriDigm Merger is fair from a financial point of view to the MatriDigm
Shareholders.
Pursuant to the engagement letter between MatriDigm and LaBlanc, MatriDigm
agreed to pay LaBlanc a fee of $25,000, regardless of whether or not the
MatriDigm Merger is consummated. As part of the engagement letter, MatriDigm
also entered into an indemnification agreement providing for the
indemnification of LaBlanc and its members, employees, agents, affiliates and
controlling persons against certain expenses and liabilities in connection with
its services.
In arriving at its opinion, LaBlanc engaged in discussions with certain
senior officers and other representatives and advisors of MatriDigm, reviewed,
analyzed and relied upon publicly available information relating to companies
whose businesses were believed by LaBlanc to be generally comparable, in whole
or in part, to the businesses conducted by MatriDigm and Zitel, reviewed formal
financial projections provided by MatriDigm to LaBlanc and undertook such
additional studies and analyses as it deemed appropriate under the
circumstances. LaBlanc reviewed the financial terms of the Mergers, and in
particular the MatriDigm Exchange Ratio as it related to, among other things,
the current and historical market prices and trading values for Zitel Common
Stock, the historical and projected earnings and other operating data of Zitel
and MatriDigm, the financial condition of MatriDigm and its results of
operations, the capitalization and financial condition of MatriDigm and Zitel
and MatriDigm's prospects for raising capital under current market conditions.
LaBlanc relied, among other things, upon information regarding public and
private transactions available to it and its understanding of the public and
private capital markets for securities of businesses such as Zitel and
MatriDigm. In addition to the foregoing, LaBlanc conducted such other analyses
and examinations and considered such other market and industry related criteria
as it deemed appropriate. In rendering its opinion, LaBlanc assumed and relied
upon, without independent verification, the accuracy and completeness of all
financial and other information made available to it by MatriDigm or otherwise
available to it through public sources. With respect to financial forecasts
provided by MatriDigm or available with respect to Zitel, LaBlanc assumed that
such forecasts were reasonably prepared utilizing the best available estimates
and judgments and that the bases upon which they were made were reasonable. In
rendering its opinion, LaBlanc assumed the consummation of each of the Mergers,
in that its opinion relates, primarily, to the relative values of Zitel and
MatriDigm and the relative ownership of Holdco to be received by holders of the
MatriDigm Common Stock (other than Zitel) when compared to the ownership to be
received by holders of the Zitel Common Stock outstanding prior to the Zitel
Merger. LaBlanc did not make and was not provided with an independent
evaluation or appraisal of the assets or liabilities of either MatriDigm or
Zitel, nor did LaBlanc make any physical inspection of Zitel's properties.
LaBlanc did not provide investment banking services or financial advisory
services in connection with the negotiation of the Agreement of Reorganization
and did not solicit the interest of any third party in any potential
transaction with MatriDigm. No limitations were imposed by MatriDigm on the
activities of LaBlanc, or on the procedures undertaken by LaBlanc, in
connection with rendering its opinion.
66
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Zitel Merger
The following is a summary of certain Federal income tax consequences of the
Zitel Merger to the holders of Zitel Common Stock that exchange such stock for
Holdco Common Stock pursuant to the Zitel Merger. This summary addresses only
such shareholders who hold their Zitel Common Stock as a capital asset and will
hold Holdco Common Stock received in exchange therefor as a capital asset. This
does not address all Federal income tax considerations that may be relevant to
particular shareholders in light of their individual circumstances or to
shareholders that are subject to special rules, such as financial institutions,
tax-exempt organizations, insurance companies, dealers in securities, foreign
shareholders, to shareholders who hold Zitel Common Stock as part of a
straddle, hedging, or conversion transaction, to shareholders who acquired
their Zitel Common Stock pursuant to the exercise of employee stock options or
otherwise as compensation, and persons who hold, directly or indirectly 10% of
more of Zitel Common Stock. The following summary is based upon the provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), applicable
Treasury Regulations thereunder, judicial decisions and current administrative
rulings, as of the date hereof, all of which are subject to change, possibly on
a retroactive basis. Tax consequences under state, local, foreign, and other
laws are not addressed herein. Each shareholder is advised to consult his or
her tax advisor as to the particular facts and circumstances which may be
unique to such shareholder and also as to any estate, gift, state, local or
foreign tax considerations arising out of the Zitel Merger.
No rulings have been or will be requested from the Internal Revenue Service
with respect to any of the matters discussed herein. There can be no assurance
that future legislation, regulations, administrative rulings or court decisions
would not alter the tax consequences set forth below. It is a condition to the
obligation of Zitel to consummate the Zitel Merger that Zitel receive an
opinion from its counsel, Skadden, Arps, Slate, Meagher & Flom LLP, to the
effect that, based upon certain facts, representations, and assumptions, the
Zitel Merger will be treated as a nonrecognition transfer (except to the extent
of cash, if any, in lieu of fractional shares and amounts paid to dissenters)
of Zitel Common Stock by the holders thereof to Holdco for shares of Holdco
Common Stock. The issuance of such opinion is conditioned, among other things,
on the receipt by Skadden, Arps, Slate, Meagher & Flom LLP of representation
letters, which will be reconfirmed prior to the closing of the Mergers, from
each of Zitel and Holdco, in each case, in form and substance reasonably
satisfactory to Skadden, Arps, Slate, Meagher & Flom LLP. The following summary
assumes that the Mergers will be consummated as described in the Agreement of
Reorganization and this Proxy Statement/Prospectus/Consent Solicitation and
that the Zitel Merger will be treated as a nonrecognition transfer (except to
the extent of cash, if any, in lieu of fractional shares and amounts paid to
dissenters) of Zitel Common Stock by the holders thereof to Holdco for shares
of Holdco Common Stock.
Treatment of Zitel, Holdco, and Zenith Acquisition. No gain or loss will be
recognized by Zitel, Holdco, or Zenith Acquisition as a result of the Zitel
Merger.
Exchange of Zitel Common Stock for Holdco Common Stock. A holder of Zitel
Common Stock whose shares of Zitel Common Stock are exchanged in the Zitel
Merger into Holdco Common Stock will not recognize gain or loss, except to the
extent of cash, if any, received in lieu of fractional
67
shares. See "--Cash in Lieu of Fractional Shares" below. The aggregate tax
basis of the Holdco Common Stock received by such holder will be equal to the
aggregate tax basis of the Zitel Common Stock exchanged therefor (excluding any
portion of the holder's basis allocated to fractional shares), and the holding
period of Holdco Common Stock received will include the holding period of the
Zitel Common Stock exchanged therefor.
Cash in Lieu of Fractional Shares. A holder of Zitel Common Stock who receives
cash in lieu of fractional shares of Holdco Common Stock will be treated as
having received such fractional shares pursuant to the Zitel Merger and then as
having exchanged such fractional shares for cash in a redemption by Holdco. Any
gain or loss attributable to fractional shares will generally be capital gain
or loss if such Zitel Common Stock has been held by the holder for more than
one year at the time of the consummation of the Zitel Merger. The amount of
such gain or loss will be equal to the difference between the ratable portion
of the tax basis of the Zitel Common Stock exchanged in the Zitel Merger that
is allocated to such fractional shares and the cash received in lieu thereof.
Any such capital gain or loss will constitute long-term capital gain or loss if
such Zitel Common Stock has been held by the holder for more than one year at
the time of the consummation of the Zitel Merger. Generally, capital gain on
assets held by individuals for more than 12 months will be subject to tax at a
rate not to exceed 20%.
Dissenting Holders of Zitel Common Stock. A holder of Zitel Common Stock that
receives solely cash in exchange for such stock in the Zitel Merger pursuant to
the exercise of dissenter's rights under section 1300 et seq. of the CGCL will
recognize capital gain or loss at the time of the consummation of the Zitel
Merger equal to the difference between the tax basis of the Zitel Common Stock
surrendered and the amount of cash received therefor. Such capital gain or loss
will constitute long-term capital gain or loss if such Zitel Common Stock has
been held by the holder for more than one year at the time of the consummation
of the Zitel Merger. Generally, capital gain on assets held by individuals for
more than 12 months will be subject to tax at a rate not to exceed 20%.
Reporting Requirements. Each holder of Zitel Common Stock that receives Holdco
Common Stock in the Zitel Merger will be required to retain records and file
with such shareholder's Federal income tax return a statement setting forth
certain facts relating to the Zitel Merger.
MatriDigm Merger
The following is a summary of certain federal income tax consequences of the
MatriDigm Merger to holders of the MatriDigm Common Stock who will receive
Holdco Common Stock as a result of the MatriDigm Merger. This summary does not
address all federal income tax consequences that may be relevant to a
particular shareholder, as a result of individual circumstances, or to
shareholders who are subject to special considerations or rules, including
financial institutions, tax-exempt organizations, foreign shareholders,
shareholders who are engaged in straddle, hedging or similar transactions,
dealers in securities, insurance companies, holders of more than ten percent of
the MatriDigm Common Stock, or persons who have received MatriDigm Common Stock
as a result of the exercise of employee stock options or as compensation. In
addition, the tax consequences applicable under state, local, foreign or other
laws are not addressed below and no consideration is given to the impact of
converting shares of MatriDigm Preferred Stock or any warrants to purchase
MatriDigm Common Stock, into MatriDigm Common Stock. MatriDigm stockholders are
advised to
68
consult their respective tax advisors regarding their individual facts and
circumstances, and in particular to any estate, gift, local or foreign tax
consequences arising out of the MatriDigm Merger or the consummation of the
transactions contemplated in the Agreement of Reorganization.
The following summary is based upon the provisions of the Code, applicable
Treasury Regulations thereunder, judicial decisions and administrative rulings,
in each case, as applicable on the date hereof, all of which statutes,
regulations, decisions and rulings are subject to change, in some cases on a
retroactive basis.
No ruling has been or will be requested from the Internal Revenue Service with
respect to any of the matters discussed herein and there can be no assurance
that future legislation, regulations, administrative rulings or court decisions
will not alter the tax consequences set forth below. It is a condition to the
obligation of MatriDigm to consummate the MatriDigm Merger that it receive an
opinion from its counsel, Arter & Hadden, to the effect that, based upon
certain facts, representations and assumptions, the MatriDigm Merger will be
treated as a non-recognition transfer (except to the extent of cash, if any, in
lieu of fractional shares and amounts paid to dissenters) of MatriDigm Common
Stock by holders thereof to Holdco for shares of Holdco Common Stock. The
issuance of such opinion is conditioned, among other things, on the receipt by
Arter & Hadden of representation letters, which will be reconfirmed prior to
the Closing of the Mergers, from each of MatriDigm and Holdco, in form and
substance reasonably satisfactory to Arter & Hadden. The following summary
assumes that the Mergers will be consummated as described in the Agreement of
Reorganization and in this Proxy Statement/Prospectus/Consent Solicitation and
that the MatriDigm Merger will be treated as a non-recognition transfer (except
to the extent of cash, if any, in lieu of fractional shares and amounts paid to
dissenters) of MatriDigm Common Stock by holders thereof to Holdco for shares
of Holdco Common Stock.
Exchange of MatriDigm Common Stock for Holdco Common Stock. Holders of
MatriDigm Common Stock who receive shares of Holdco Common Stock for their
MatriDigm Common Stock as a result of the MatriDigm Merger will not recognize
gain or loss, except to the extent of cash, if any, received in lieu of
fractional shares. See "--Cash In Lieu of Fractional Shares" below. The
aggregate tax basis of Holdco Common Stock received by such holders will be
equal to the aggregate tax basis of their respective shares of MatriDigm Common
Stock exchanged therefor (excluding any portion of basis allocated to
fractional shares), and the holding period of Holdco Common Stock received will
include the holding period of the MatriDigm Common Stock exchanged therefor.
Cash In Lieu of Fractional Shares. A holder of MatriDigm Common Stock who
receives cash in lieu of fractional shares of Holdco Common Stock otherwise
issuable as a result of the MatriDigm Merger will be treated as having received
fractional shares and then as having exchanged such fractional shares for cash
in a redemption by Holdco. Any gain or loss attributable to fractional shares
will generally be capital gain or loss. The amount of such gain or loss will be
equal to the difference between the ratable portion of the tax basis of the
MatriDigm Common Stock exchanged in the MatriDigm Merger that is allocated to
the fractional shares and the cash received in lieu thereof. Any capital gain
or loss will constitute long-term capital gain or loss if the MatriDigm Common
Stock in question has been held by the holder for more than a year at the time
of the consummation of the MatriDigm Merger. Generally, capital gain on assets
held by individuals for more than 12 months will be subject to a tax rate not
to exceed 20%.
69
Dissenting Holders of MatriDigm Common Stock. A holder of MatriDigm Common
Stock receiving only cash in exchange for MatriDigm Common Stock as a result of
the MatriDigm Merger because such holder exercised dissenter's rights under
Section 1300 et. seq. of the CGCL will recognize capital gain or loss at the
time of the consummation of the MatriDigm Merger equal to the difference
between the tax basis of the MatriDigm Common Stock surrendered and the amount
of cash received therefor. Such capital gain or loss will constitute long-term
capital gain or loss if the MatriDigm Common Stock that was the subject of the
exercise of dissenter's rights was held by the holder thereof for more than one
year at the time of the consummation of the MatriDigm Merger. Generally,
capital gain or assets held by individuals for more than 12 months will be
subject to a tax rate not to exceed 20%.
Reporting Requirements. Each holder of MatriDigm Common Stock receiving Holdco
Common Stock as a result of the MatriDigm Merger will be required to retain
records and file a statement with that person's federal income tax return
setting forth facts relating to the MatriDigm Merger.
THIS FEDERAL INCOME TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY AND MAY NOT
APPLY TO ALL HOLDERS OF ZITEL COMMON STOCK OR MATRIDIGM CAPITAL STOCK.
SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGERS.
GOVERNMENTAL AND REGULATORY APPROVALS
Zitel and MatriDigm are not aware of any material governmental approvals that
may be required for consummation of the Merger other than compliance with the
federal securities laws and applicable securities and "blue sky" laws of the
state of New York. Should any other approval or action be required, it is
presently contemplated that such approval or action would be sought. There can
be no assurance, however, that any such approval or action, if needed, could be
obtained and would not be conditioned in a manner that would cause the parties
to abandon the Mergers.
ACCOUNTING TREATMENT
The Mergers will be accounted for as a "purchase" for accounting purposes in
accordance with generally accepted accounting principles, whereby the purchase
price will be allocated based on the fair values of the assets acquired and the
liabilities assumed. Any excess of such purchase price over the amounts so
allocated will be allocated to goodwill.
70
RIGHTS OF DISSENTING SHAREHOLDERS
RIGHTS OF DISSENTING ZITEL SHAREHOLDERS
The rights of Zitel shareholders who dissent in connection with the adoption of
the Agreement of Reorganization, including the Zitel Merger, are governed by
the specific legal provisions contained in Chapter 13 of the California General
Corporation Law (the "CGCL"). The following summary of the provisions of
Chapter 13 of the CGCL is not intended to be a complete statement of such
provisions and is qualified in its entirety by reference to the full text of
Chapter 13 of the CGCL, a copy of which is attached hereto as Annex G and is
incorporated herein by reference. THE REQUIRED PROCEDURE SET FORTH IN CHAPTER
13 OF THE CGCL MUST BE FOLLOWED EXACTLY OR ANY DISSENTERS' RIGHTS WILL BE LOST.
Because Zitel Common Stock is traded on the Nasdaq National Market, dissenters'
rights will be available to the shareholders of Zitel only if the holders of
five percent (5%) or more of Zitel Common Stock make a written demand upon
Zitel for the purchase of dissenting shares in accordance with Chapter 13 of
the CGCL. If this condition is satisfied and the Zitel Merger is consummated,
any shares of Zitel Common Stock as to which dissenters' rights are properly
exercised (the "Dissenting Zitel Shares") will not be converted by virtue of
the Zitel Merger into the right to receive shares of Holdco Common Stock
pursuant to the Agreement of Reorganization but instead will be converted into
the right to receive in cash the "fair market value" of such shares, determined
as of October 5, 1998, the last trading day before the announcement of the
proposed Mergers, and excluding any appreciation or depreciation in consequence
of the Zitel Merger. The high, low and closing sales prices for Zitel Common
Stock on October 5, 1998 were $3 5/32, $2 29/32 and $3 1/16, respectively.
For shares of Zitel Common Stock to qualify as Dissenting Zitel Shares, the
holders of such shares must have (i) voted "AGAINST" adoption of the Agreement
of Reorganization, including the Zitel Merger, (ii) made a written demand upon
MatriDigm for the purchase of dissenting shares and payment to such shareholder
in cash of the fair market value of such dissenting shares and (iii) submitted
stock certificates for endorsement (as described below).
For shares of Zitel Common Stock to qualify as Dissenting Zitel Shares, a
shareholder of Zitel must vote "AGAINST" adoption of the Agreement of
Reorganization, including the Zitel Merger. Accordingly, any shareholder who
wishes to dissent and executes and returns a proxy in the accompanying form
must specify that his or her shares are to be voted "AGAINST" adoption of the
Agreement of Reorganization, including the Zitel Merger. If the shareholder
returns a proxy without voting instructions or with instructions to vote "FOR"
adoption of the Agreement of Reorganization, including the Zitel Merger, the
shareholder will lose any dissenters' rights. In addition, if the shareholder
abstains from voting his, her or its shares, the shareholder will lose his or
her dissenters' rights.
Further, in order to preserve his, her or its dissenters' rights, a Zitel
shareholder must make a written demand upon Zitel for the purchase of
dissenting shares and payment to such shareholder in cash of the fair market
value of the dissenting shares, specifying the number of shares held of record
by such shareholder and a statement of what the shareholder claims to be the
fair market value of those shares as of October 5, 1998. Such demand must be
addressed to the Zitel Corporation care of
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Skadden, Arps, Slate, Meagher & Flom, LLP, 525 University Avenue, Suite 220,
Palo Alto, California 94301, Attention: Kenton J. King, Esq., and must be
received not later than the date of the Zitel Special Meeting. A vote "AGAINST"
adoption of the Agreement of Reorganization, including the Zitel Merger, does
not constitute such written demand.
A dissenting shareholder may not withdraw his, her or its dissent or demand for
payment unless Zitel consents to such withdrawal.
If the holders of five percent (5%) or more of the outstanding shares of Zitel
Common Stock have submitted a written demand of Zitel to purchase their shares
and these demands are received by Zitel on or before the date of the Zitel
Special Meeting and the Agreement of Reorganization, including the Zitel
Merger, is approved by the Zitel shareholders, Zitel will have ten days after
such approval to send to those Zitel shareholders who have voted against the
adoption of the Agreement of Reorganization, including the Zitel Merger,
written notice (the "Notice of Approval") of such approval accompanied by a
copy of Chapter 13 of the CGCL, a statement of the price determined by Zitel to
represent the fair market value of the dissenting shares as of October 5, 1998
and a brief description of the procedure to be followed if a shareholder
desires to exercise dissenters' rights. Within 30 days after the date on which
the Notice of Approval of the Zitel Merger is mailed, the dissenting
shareholder must surrender to Zitel at the office designated in the notice of
approval, the certificates representing the dissenting shares to be stamped or
endorsed with a statement that they are Dissenting Zitel Shares or to be
exchanged for certificates of appropriate denomination so stamped or endorsed.
Any shares of Zitel Common Stock that are transferred prior to their submission
for endorsement lose their status as Dissenting Zitel Shares.
If Zitel and the dissenting shareholder agree that the surrendered shares are
Dissenting Zitel Shares and agree upon the price of the shares, the dissenting
shareholder will be entitled to the agreed price with interest thereon at the
legal rate on judgments from the date of such agreement. Payment of the fair
market value of the dissenting shares shall be made within 30 days after the
amount thereof has been agreed upon or 30 days after any statutory or
contractual conditions to the Zitel Merger have been satisfied, whichever is
later, subject to the surrender of the certificates therefor, unless provided
otherwise by agreement.
If Zitel denies that the shares surrendered are Dissenting Zitel Shares, or
Zitel and the dissenting shareholder fail to agree upon a fair market value of
such shares of Zitel Common Stock, then the dissenting shareholder of Zitel
must, within six months after the notice of approval is mailed, file a
complaint in the Superior Court of the proper county requesting the court to
make such determinations or intervene in any pending action brought by any
other dissenting shareholder. If the complaint is not filed or intervention in
a pending action is not made within the specified six-month period, the
dissenters' rights are lost. If the fair market value of the dissenting shares
is at issue, the court will determine, or will appoint one or more impartial
appraisers to determine, such fair market value.
The court action to determine the fair market value of the shares will be
suspended if litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing the Agreement of Reorganization,
including the Zitel Merger. Furthermore, no shareholder who is entitled to
assert dissenters' rights under Chapter 13 of the CGCL shall have any right to
attack the
72
validity of the Agreement of Reorganization, including the Zitel Merger, or to
have the Zitel Merger set aside or rescinded, except in an action to test
whether the number of shares required to authorize or approve the Agreement of
Reorganization, including the Zitel Merger, has been legally voted in favor of
such Agreement of Reorganization.
Dissenting Zitel shares may lose their status and the right to demand payment
will terminate, among other reasons, if (i) the Zitel Merger is abandoned; (ii)
the shares are transferred before being submitted for endorsement or are
surrendered for conversion into shares of another class; (iii) the dissenting
shareholder and Zitel do not agree upon the status of the shares as Dissenting
Zitel Shares or upon the price of such shares and the dissenting shareholders
fails to file suit against Zitel or intervene in a pending action within six
months following the date on which the Notice of Approval was mailed to the
shareholder; or (iv) the dissenting shareholder withdraws his or her demand for
the purchase of the Dissenting Zitel Shares with the consent of Zitel.
It is a condition to MatriDigm's and Zitel's obligation to close the Mergers
pursuant to the Agreement of Reorganization that the respective shareholders of
MatriDigm and Zitel have not asserted in accordance with Chapter 13 of the CGCL
dissenters' rights for their shares of MatriDigm Capital Stock or Zitel Capital
Stock, respectively, for a material amount.
RIGHTS OF DISSENTING MATRIDIGM SHAREHOLDERS
The rights of MatriDigm shareholders who dissent in connection with the
MatriDigm Merger are governed by specific legal provisions contained in Chapter
13 of the California General Corporation Law (the "CGCL"). The following
summary of the provisions of Chapter 13 of the CGCL is not intended to be a
complete statement of such provisions and is qualified in its entirety by
reference to the full text of Chapter 13 of the CGCL, a copy of which is
attached hereto as Annex G and is incorporated herein by reference. THE
REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 OF THE CGCL MUST BE FOLLOWED EXACTLY
OR ANY DISSENTERS' RIGHTS MAY BE LOST.
Under Chapter 13 of the CGCL, if the MatriDigm Merger is completed, any shares
of MatriDigm Common Stock as to which dissenters' rights are properly exercised
("Dissenting MatriDigm Shares") will not be converted by virtue of the
MatriDigm Merger into the right to receive shares of Holdco Common Stock
pursuant to the Agreement of Reorganization but instead will be converted into
the right to receive in cash the "fair market value" of such shares, determined
as of October 5, 1998, the last trading day before the first announcement of
the proposed Mergers, and excluding any appreciation or depreciation in
consequence of the MatriDigm Merger. For shares of MatriDigm Common Stock to
qualify as Dissenting MatriDigm Shares, the holders of such shares (i) must not
have executed a written consent in respect of such shares for approval of the
Agreement of Reorganization, including the MatriDigm Merger, (ii) must have
made a written demand upon MatriDigm for the purchase of dissenting shares and
payment to such shareholder in cash of their fair market value and (iii) must
have submitted stock certificates for endorsement (as described below).
If the Agreement of Reorganization, including the MatriDigm Merger, is approved
through the execution of sufficient MatriDigm written consents, MatriDigm will,
within ten days after such approval, mail to any shareholder who may have a
right to require MatriDigm to purchase his, her or
73
its shares for cash as a result of such shareholder's making a demand to
exercise such right in accordance with Chapter 13 of the CGCL (as described
below), a notice that the required shareholder approval of the Agreement of
Reorganization, including the MatriDigm Merger, was obtained (the "Notice of
Approval"), accompanied by a copy of Chapter 13 of the CGCL. The Notice of
Approval will set forth the price determined by MatriDigm to represent the
"fair market value" of any Dissenting MatriDigm Shares (which shall constitute
an offer by MatriDigm to purchase such Dissenting MatriDigm Shares at such
stated price) and will set forth a brief description of the procedures to be
followed by such shareholders who wish to exercise their dissenters' rights.
Within 30 days after the date on which the Notice of Approval was mailed,
dissenting MatriDigm shareholders must make a written demand upon MatriDigm for
the purchase of dissenting shares and payment to such shareholder in cash of
their fair market value, which is required by law to contain a statement
concerning the number and class of shares of MatriDigm Common Stock held of
record by such dissenting shareholder and what the shareholder claims to be the
fair market value of the Dissenting MatriDigm Shares as of the close of
business on October 5, 1998 (the statement of fair market value in such demand
by the dissenting shareholder constitutes an offer by the dissenting
shareholder to sell the Dissenting MatriDigm Shares at such price). Such demand
must be addressed to MatriDigm Corporation care of Arter & Hadden, 1717 Main
Street, Suite 4100, Dallas, Texas 75201, Attention: Jeffrey M. Sone, Esq. A
dissenting shareholder may not withdraw his, her, or its dissent or demand for
payment unless MatriDigm consents to such approval.
Within 30 days after the Notice of Approval was mailed, the dissenting
MatriDigm shareholder also must submit MatriDigm stock certificate(s)
representing the dissenting shares to MatriDigm at MatriDigm's principal
office. The MatriDigm stock certificate(s) will be stamped or endorsed with a
statement that the shares are Dissenting MatriDigm Shares or will be exchanged
for MatriDigm stock certificates of appropriate denomination so stamped or
endorsed. If the price contained in the Notice of Approval is acceptable to the
dissenting shareholder, the dissenting shareholder may demand the same price.
This would constitute an acceptance of the offer by MatriDigm to purchase the
dissenting shareholder's stock at the price stated in the Notice of Approval.
If MatriDigm and a dissenting shareholder agree upon the price to be paid for
the Dissenting MatriDigm Shares, upon the dissenting shareholder's surrender of
the MatriDigm stock certificates representing the Dissenting MatriDigm Shares,
such price (together with interest thereon at the legal rate on judgments from
the date of the agreement between MatriDigm and the dissenting shareholder) is
required by law to be paid to the dissenting shareholder within 30 days after
such agreement or within 30 days after any statutory or contractual conditions
to the MatriDigm Merger are satisfied, whichever is later, subject to the
surrender of the MatriDigm stock certificates therefor.
If MatriDigm and a dissenting shareholder disagree as to the price for such
Dissenting MatriDigm Shares or disagree as to whether such Dissenting MatriDigm
Shares are entitled to be classified as Dissenting MatriDigm Shares, such
holder may, within six months after the Notice of Approval is mailed, file a
complaint in the Superior Court of the proper county requesting the court to
make such determinations or, alternatively, may intervene in any pending action
brought by another dissenting shareholder. Costs of such an action (including
compensation of appraisers) are required to be
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assessed as the court considers equitable but must be assessed against
MatriDigm if the appraised value determined by the court exceeds the price
offered by MatriDigm.
The court action to determine the fair market value of the shares will be
suspended if litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing the Agreement of Reorganization,
including the MatriDigm Merger. Furthermore, no shareholder who is entitled to
assert dissenters' rights under Chapter 13 of the CGCL shall have any right to
attack the validity of the Agreement of Reorganization, including the MatriDigm
Merger, or to have the MatriDigm Merger set aside or rescinded, except in an
action to test whether the number of shares required to authorize or approve
the Agreement of Reorganization, including the MatriDigm Merger, has been
legally voted in favor of the Agreement of Reorganization.
Dissenting MatriDigm shares may lose their status and the right to demand
payment will terminate, among other reasons, if (i) the MatriDigm Merger is
abandoned; (ii) the shares are transferred before being submitted for
endorsement or are surrendered for conversion into shares of another class;
(iii) the dissenting shareholder and MatriDigm do not agree upon the status of
the shares as Dissenting MatriDigm Shares or upon the price of such shares and
the dissenting shareholders fails to file suit against MatriDigm or intervene
in a pending action within six months following the date on which the Notice of
Approval was mailed to the shareholder; or (iv) the dissenting shareholder
withdraws his or her demand for the purchase of the Dissenting MatriDigm Shares
with the consent of MatriDigm.
It is a condition to MatriDigm's and Zitel's obligation to close the Mergers
pursuant to the Agreement of Reorganization that the respective shareholders of
MatriDigm and Zitel have not asserted in accordance with the CGCL dissenters'
rights for their shares of MatriDigm Capital Stock or Zitel Capital Stock,
respectively, for a material amount.
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PROPOSAL 2
APPROVAL OF AMENDMENT OF THE 1990 STOCK OPTION PLAN
In October 1998, Zitel's Board of Directors adopted an amendment to reflect the
assumption of its rights and obligations under the 1990 Stock Option Plan (the
"1990 Option Plan") by Holdco and the conversion of Zitel and MatriDigm shares
into Holdco Shares and, subject to shareholder approval, to increase the number
of Holdco shares reserved for issuance under the 1990 Option Plan by 1,200,000
shares. The Board adopted this amendment to ensure that Holdco can assume
outstanding options to purchase Zitel and MatriDigm shares and grant stock
options to employees of Zitel and MatriDigm at levels determined appropriate by
the Board and the Compensation Committee and to provide incentives for such
persons to exert maximum efforts for the success of the Company.
Shareholders are requested in this Proposal 2 to approve the 1990 Option Plan,
as amended. The following summary of the Amended and Restated 1990 Option Plan
is qualified in its entirety by reference to the Amended and Restated 1990
Option Plan attached hereto as Annex J-1. The affirmative vote of the holders
of a majority of the outstanding shares of Zitel Common Stock present in person
or represented by proxy and voting at the Annual Meeting will be required to
approve the adoption of the amendment to the 1990 Option Plan. For purposes of
the vote, abstentions and broker non-votes will not be counted for any purpose
in determining whether this matter has been approved.
THE BOARD RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 2
The essential features of the 1990 Option Plan are outlined below.
GENERAL
In September 1990, Zitel's Board of Directors adopted the 1990 Option Plan,
effective on October 1, 1990. The 1990 Option Plan was approved by the
shareholders in January, 1991. A total of 3,650,000 shares were reserved for
issuance under the 1990 Option Plan. In October 1991, Zitel's Board of
Directors adopted an amendment to increase the number of shares reserved under
the 1990 Option Plan from 3,650,000 shares to 4,150,000 shares. This amendment
was approved by the shareholders in January 1992. In September 1994, Zitel's
Board of Directors adopted an amendment to increase the number of shares
reserved under the 1990 Option Plan from 4,150,000 to 4,650,000. This amendment
was approved by the shareholders in January 1995. In November 1996, Zitel's
Board of Directors adopted an amendment to increase the number of shares
reserved under the 1990 Option Plan from 4,650,000 to 5,450,000. This amendment
was approved by the shareholders in February 1997. In October 1997, Zitel's
Board of Directors adopted an amendment, subject to shareholder approval to
increase the number of shares reserved under the 1990 Option Plan from
5,450,000 to 6,200,000. This amendment was approved by the shareholders in
January 1998.
The 1990 Option Plan provides for the grant of both incentive and supplemental
stock options. Incentive stock options granted under the 1990 Option Plan are
intended to qualify as "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"). Supplemental
stock options granted under the 1990 Option Plan are intended not to qualify as
incentive stock options under the Code. See "Federal Income Tax Information"
for a discussion of the tax treatment of incentive and supplemental stock
options.
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PURPOSE
The 1990 Option Plan was adopted to provide a means by which selected officers,
directors and employees of and consultants to Zitel and its affiliates could be
given an opportunity to purchase stock in Zitel, to assist in retaining the
services of employees holding key positions, to secure and retain the services
or persons capable of filling such positions, and to provide incentives for
such persons to exert maximum efforts for the success of the Company.
ADMINISTRATION
The 1990 Option Plan will be administered by the Board of Directors of Holdco.
The Board of Directors of Holdco (the "Board") will have the power to construe
and interpret the 1990 Option Plan and, subject to the provisions of the 1990
Option Plan, to determine the persons to whom and the dates on which options
will be granted, the number of shares to be subject to each option, the time or
times during the term of each option within which all or a portion of such
option may be exercised, the exercise price, the type of consideration, and
other terms of the option. The Board is authorized to delegate administration
of the 1990 Option Plan to a committee composed of not fewer than two members
of the Board.
ELIGIBILITY
Under the 1990 Option Plan, incentive stock options may be granted only to key
employees of Holdco and its subsidiaries. A director of Holdco is not eligible
to receive incentive stock options unless such director is also an employee
(including an officer) of Holdco or its subsidiaries. Supplemental stock
options under the 1990 Option Plan may only be granted to directors of, key
employees (including officers) of, sales representatives for, or consultants to
Holdco and its subsidiaries. A director of Holdco is not eligible to receive a
supplemental stock option unless such director is expressly declared eligible
to participate in the 1990 Option Plan by appropriate action of the Board. No
employee may be granted an option or options during any calendar year to
require more than 1,000,000 shares of stock.
No incentive stock option may be granted under the 1990 Option Plan to any
person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of Holdco or any
affiliate of Holdco, unless the option exercise price is at least 110% of the
fair market value of the stock subject to the option on the date of grant, and
the term of the option does not exceed five years from the date of grant. For
incentive stock options granted under the 1990 Option Plan after 1986, the
aggregate fair market value, determined at the time of grant, of the shares of
Holdco Common Stock with respect to which such options are exercisable for the
first time by an optionee during any calender year (under all such plans of the
Holdco and its affiliates) may not exceed $100,000.
STOCK SUBJECT TO THE 1990 OPTION PLAN
If options granted under the 1990 Option Plan expire or otherwise terminate
without being exercised, the Holdco Common Stock not purchased pursuant to such
options again becomes available for issuance under the 1990 Option Plan.
The terms of outstanding options to purchase shares of Zitel and MatriDigm
shares that will be assumed by Holdco in connection with the Mergers will
continue unchanged except that the options will represent the right to purchase
Holdco Common Stock.
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TERMS OF OPTIONS
The following is a description of the permissible terms of options under the
1990 Option Plan. Individual option grants may be more restrictive as to any or
all of the permissible terms described below.
Exercise Price; Payment. The exercise price of incentive stock options under
the 1990 Option Plan may not be less than the fair market value of the Common
Stock subject to the option on the date of the option grant and, in some cases
(see "Eligibility," above), may not be less than 110% of such fair market
value. The exercise price of supplemental options under the 1990 Option Plan
may not be less than 85% of the fair market value of Holdco Common Stock
subject to the option on the date of the option grant. However, if options were
granted with exercise prices below market value, deductions for compensation
attributable to the exercise of such options could be limited by Section
162(m). See "Federal Income Tax Information."
At [latest available date], the closing price of the Zitel Common Stock as
reported on the Nasdaq National Market System was $[ ] per share.
The exercise price of options granted under the 1990 Option Plan must be paid
either: (a) in cash at the time the option is exercised; or (b) at the
discretion of the Board, (i) by delivery of other Holdco Common Stock, (ii)
pursuant to a deferred payment arrangement; or (c) in any other form of legal
consideration acceptable to the Board.
Option Exercise. Options granted under the 1990 Option Plan may become
exercisable in cumulative increments ("vest") as determined by the Board. The
Board has the power to accelerate the time during which an option may be
exercised. In addition, options granted under the 1990 Option Plan may permit
exercise prior to vesting, but in such event the optionee may be required to
enter into an early exercise stock purchase agreement that allows the Company
to repurchase shares not yet vested, at their exercise price, should the
optionee leave the employ of Holdco before vesting. To the extent provided by
the terms of an option, an optionee may satisfy any federal, state or local tax
withholding obligation relating to the exercise of such option by a cash
payment upon exercise, by authorizing Holdco to withhold a portion of the stock
otherwise issuable to the optionee, by delivering already-owned stock of
Holdco, or by a combination of these means.
Term. The maximum term of options under the 1990 Option Plan is 10 years,
except that in certain cases (see "Eligibility"), the maximum term is 5 years.
Options under the 1990 Option Plan terminate three months after termination of
the optionee's employment or relationship as a consultant, sales representative
or director of Holdco or any affiliate of Holdco, unless (a) such termination
is due to such person's permanent and total disability (as defined in the
Code), in which case the option may, but need not, provide that it may be
exercised at any time within one year of such termination; (b) the optionee
dies while employed by or serving as a consultant, sales representative or
director to Holdco or any affiliate of Holdco, or within three months after
termination of such relationship, in which case the option may, but need not,
provide that it may be exercised (to the extent the option was exercisable at
the time of the optionee's death) within eighteen months of the optionee's
death by the person or persons to whom the rights to such option pass by will
or by the laws of descent and distribution; or (c) the option, by its terms,
specifically provides otherwise. Individual options, by their terms, may
provide for exercise within a longer
78
period of time following termination of employment or the consulting
relationship. The option term may also be extended in the event that exercise
of the option within these periods is prohibited for specified reasons.
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the 1990 Option Plan or subject
to any option granted under the 1990 Option Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
1990 Option Plan and options outstanding thereunder will be appropriately
adjusted as to the class and the maximum number of shares subject to such plan
and the class, number of shares and price per share of stock subject to such
outstanding options.
EFFECT OF CERTAIN CORPORATE EVENTS
The 1990 Option Plan provides that, [at the discretion of the Board, ]in the
event of a dissolution or liquidation of the Company, or a specified type of
merger or other corporate reorganization, to the extent permitted by law, any
surviving corporation will be required to either assume options outstanding
under the 1990 Option Plan or substitute similar options for those outstanding
under such Plans, or, at the discretion of the Board, (a) such outstanding
options will continue in full force and effect, (b) the time during which such
options may be exercised will be accelerated and the options terminated if not
exercised during such time or (c) the options will be terminated. The
acceleration of an option in the event of an acquisition or similar corporate
event may be viewed as an antitakeover provision, which may have the effect of
discouraging a proposal to acquire or otherwise obtain control of Holdco.
DURATION, TERMINATION AND AMENDMENT
The Board may suspend or terminate the 1990 Option Plan without shareholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the 1990 Option Plan will terminate on September 27, 2000.
The Board may also amend the 1990 Option Plan at any time or from time to time.
However, no amendment will be effective unless approved by the shareholders of
the Company within twelve months before or after its adoption by the Board if
the amendment would: (a) modify the requirements as to eligibility for
participation (to the extent such modification requires shareholders approval
in order for the Plan to satisfy Section 422 of the Code, if applicable, or
applicable law; (b) increase the number of shares reserved for issuance upon
exercise of options; or (c) change any other provision of the Plan in any other
way if such modification requires shareholder approval in order to comply
applicable law or satisfy the requirements of Section 422 of the Code.
RESTRICTIONS ON TRANSFER
Under the 1990 Option Plan, an option may not be transferred by the optionee
otherwise than by will or by the laws of descent and distribution. During the
lifetime of an optionee, an option may be exercised only by the optionee. In
addition, shares subject to repurchase by Holdco under an early
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exercise stock purchase agreement may be subject to restrictions on transfer
which the Board deems appropriate.
FEDERAL INCOME TAX INFORMATION
Incentive Stock Options. Incentive stock options under the 1990 Option Plan are
intended to be eligible for the favorable federal income tax treatment accorded
"incentive stock options" under the Code.
There generally are no federal income tax consequences to the optionee or
Holdco by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
one year from the date on which the shares are transferred to the optionee upon
exercise of the option, any gain or loss on a disposition of such stock will be
capital gain or loss, which will be long-term if the stock was held for more
than one year, and short-term if held for twelve months or less. Generally, if
the optionee disposes of the stock before the expiration of either of these
holding periods (a "disqualifying disposition"), at the time of disposition,
the optionee will realize taxable ordinary income equal to the less of (a) the
excess of the stock's fair market value on the date of exercise over the
exercise price of (b) the optionee's actual gain, if any, on the purchase and
sale. The optionee's additional gain or any loss upon the disqualifying
disposition will be a capital gain or loss, which will be long-term if the
stock was held for more than one year, and short-term if held for twelve months
or less. Slightly different rules may apply to optionees who acquire stock
subject to certain repurchase options or who are subject to Section 16(b) of
the Securities Exchange Act of 1934 (the "Exchange Act").
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, Holdco will be entitled (subject to the requirement
of reasonableness, the provisions of Section 162(m) of the Code and the
satisfaction of a tax reporting obligation) to a corresponding business expense
deduction in the tax year in which the disqualifying disposition occurs.
Supplemental Stock Options. Supplemental stock options granted under the 1990
Option Plan generally have the following federal income tax consequences:
There are no tax consequences to the optionee or Holdco by reason of the grant
of a supplemental stock option. Upon exercise of a supplemental stock option,
the optionee normally will recognize taxable ordinary income equal to the
excess of the stock's fair market value on the date of exercise over the option
exercise price. Generally, with respect to employees, Holdco will be required
to withhold from regular wages or supplemental wage payments an amount based on
the ordinary income recognized. Subject to the requirement of reasonableness,
the provisions of Section 162(m) of the Code and the satisfaction of a tax
reporting obligation, Holdco will generally be entitled to a business expense
deduction equal to the taxable ordinary income realized by the optionee. Upon
disposition of the stock, the optionee will recognize a capital gain or loss
equal to the difference between the selling price and the sum of the amount
paid for such stock plus any amount recognized as ordinary income upon exercise
of the option, which will be long-term if the stock was held for
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more than one year, and short-term if held for twelve months or less. Slightly
different rules may apply to optionees who acquire stock subject to certain
repurchase options or who are subject to Section 16(b) of the Exchange Act.
POTENTIAL LIMITATION ON COMPANY DEDUCTIONS. As part of the Omnibus Budget
Reconciliation Act of 1993, the U.S. Congress amended the Code to add Section
162(m), which denies a deduction to any publicly held corporation for
compensation paid to certain employees in a taxable year to the extent that
compensation exceeds $1,000,000 for a covered employee. It is possible that
compensation attributable to stock options, when combined with all other types
of compensation received by a covered employee from the Company, may cause this
limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m), compensation
attributable to stock options will qualify as performance-based competition,
provided that: (i) the option plan contains a per-employee limitation on the
number of shares for which options may be granted during a specified period;
(ii) the per-employee limitation is approved by the shareholders; (iii) the
option is granted by a compensation committee comprised solely of "outside
directors"; and (iv) either the exercise price of the option is no less than
the fair market value of the stock on the date of grant, or the option is
granted (or exercisable) only upon the achievement (as certified by the
compensation committee) of an objective performance goal established in writing
by the compensation committee while the outcome is substantially uncertain.
PROPOSAL 3
APPROVAL OF AMENDMENT TO THE 1984 EMPLOYEE STOCK PURCHASE PLAN
In October 1998, Zitel's Board of Directors adopted an amendment to reflect the
assumption of its rights and obligations under the 1984 Employee Stock Purchase
Plan (the "Purchase Plan") by Holdco and the conversion of Zitel shares into
Holdco shares and, subject to shareholder approval, to increase the number of
Holdco shares reserved for issuance under the Purchase Plan by 188,789 shares.
The Board believes that the sale of stock under the Purchase Plan will play an
important role in Holdco's efforts to attract, employ and retain outstanding
employees and to provide incentives for such persons to exert maximum efforts
for the success of Holdco. The Board adopted this amendment to ensure that
Holdco can meet these goals under the Purchase Plan with respect to employees
of Holdco, Zitel and MatriDigm.
Shareholders are requested in this Proposal 3 to approve the Purchase Plan, as
amended. The following summary of the proposed amendment to the Purchase Plan
is qualified in its entirety by reference to the proposed Amended and Restated
Stock Purchase Plan attached hereto as Annex J-2. The affirmative vote of the
holders of a majority of the outstanding shares of Zitel Common Stock present
in person or represented by proxy and voting at the Annual Meeting will be
required to approve the adoption of the amendment to the Purchase Plan. For
purposes of the vote, abstentions and broker non-votes will not be counted for
any purpose in determining whether this matter has been approved.
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THE BOARD RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 3
The essential features of the 1998 Purchase Plan are outlined below.
GENERAL
The Purchase Plan is intended to qualify under the provisions of Sections 423
of the Internal Revenue Code of 1986, as amended (the "Code") . The Purchase
Plan is not a qualified deferred compensation plan under Section 401(a) of the
Code and is not subject to provisions of the Employee Retirement Income
Security Act of 1974. On January 18, 1984, the Zitel Board of Directors adopted
the Purchase Plan and reserved 200,000 shares of common stock for issuance
under the Purchase Plan. The Purchase Plan was approved by the shareholders in
February 1984. In November 1987, September 1989, October 1991 and September
1994, respectively, the Zitel Board of Directors adopted amendments to increase
the number of shares reserved under the Purchase Plan from 200,000 shares to
350,000 shares to 550,000 shares to 750,000 shares to 1,000,000 shares. The
amendments were approved by the shareholders in January 1988, January 1990,
January 1992 and January 1995, respectively.
The Purchase Plan will be administered by the compensation committee of
Holdco's Board of Directors (the "Board"). Members of the Board will receive no
compensation for their services in connection with the administration of the
Purchase Plan.
OFFERINGS
The Purchase Plan provides for offering periods, having a duration of up to 27
months, in which eligible employees may purchase Common Stock at 85% of the
fair market value of the Common Stock on the first or last days of the offering
period, whichever is less. An eligible employee may apply up to 10% of his
compensation to purchase Common Stock under an offering under the Purchase
Plan. Zitel has implemented the Purchase Plan through six-month offerings.
ELIGIBILITY
Any person who is customarily employed at least twenty hours per week and five
months per calendar year by Holdco (including Zitel, MatriDigm and a designated
parent or subsidiary) is eligible to participate in the Purchase Plan, provided
such person has been in the continuous employ of Holdco for a minimum period
prior to the offering, as set by the Board, which must be less than two years.
No employee is eligible for the grant of any rights under the Purchase Plan if,
immediately after those rights are granted, the employee would own stock of
Holdco (including stock he could purchase under outstanding options) possessing
5% or more of the total combined voting power or value of all classes of stock
of Holdco or of any parent or subsidiary of Holdco. In addition, no option may
be granted which would permit an employee to buy more than $25,000 worth of
stock (determined at the time the rights are granted) under all Holdco's
employee stock purchase plans in any calendar year.
A director of Holdco is not eligible for the benefits of the Purchase Plan
unless he is also an employee of Holdco or of any parent or subsidiary, as
described above. A director must also be expressly declared eligible to
participate by action of the Board of Directors.
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PURCHASE PRICE; WITHDRAWAL
The purchase price of stock acquired pursuant to rights granted under the
Purchase Plan will be not less than the lower of:
(i) 85% of the fair market value of the stock on the date of commencement of
the offering (for the particular employee); or
(ii) 85% of the fair market value of the stock on the exercise date such stock
is purchased.
The purchase price of the shares is accumulated by payroll deductions over the
offering period. The deductions may not exceed 10% of a participant's base
compensation. The payroll deductions made for each participant are credited to
an account established for the participant and deposited with the general funds
of Holdco. At any time during the purchase period, a participant may reduce or
terminate the payroll deductions, but may not increase or begin payroll
deductions after the beginning of any purchase period, or, in the case of
employees becoming eligible during the offering, after the beginning of the
first exercise period within an offering for which an employee is eligible
under the Plan. No contributions may be made into a participant's account apart
from the authorized payroll deductions.
While each participant in the Purchase Plan is required to sign an agreement
authorizing payroll deductions, the participant may withdraw from a given
offering by signing and delivering to Holdco a notice of withdrawal from the
offering. A withdrawal may be elected at any time prior to the expiration of
the applicable purchase period. Any withdrawal by the employee of the
accumulated payroll deductions for a given offering automatically terminates
the employee's interest in that offering. In effect, therefore, the employee is
given an option which the employee may or may not exercise during the offering
period.
Rights granted in any offering under the Purchase Plan will terminate
immediately upon cessation of any participant's employment for any reason other
than death. If the participant dies while in the employ of Holdco or a
subsidiary less than six (6) months prior to the first business day after the
end of a given purchase period, the person or persons to whom the participant's
rights under the Purchase Plan legally pass at death may continue as a
participant in such offering.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the Purchase Plan at any time. Unless sooner
terminated, the Purchase Plan will terminate on December 31, 2003.
The Board may amend the Purchase Plan at any time. Any amendment of the Plan
must be approved by the majority vote or by the unanimous written consent of
the outstanding shares, within twelve (12) months of its adoption by the Board,
if the amendment would: (i) increase the number of shares reserved for rights
under the Plan; (ii) materially modify the eligibility requirements for
participation in the Plan; or (iii) materially increase the benefits accruing
to participants in the Plan.
Rights granted before amendment, suspension, or termination of the Purchase
Plan will not be altered or impaired by any amendment, suspension, or
termination of the Plan without consent of the person to whom such rights were
granted.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a brief summary of the principal federal income tax
consequences under current federal income tax laws relating to awards under the
Purchase Plan. This summary is not intended to be exhaustive and, among other
things, does not describe state, local or foreign income and other tax
consequences.
PARTICIPATION IN THE PURCHASE PLAN
Assuming the Purchase Plan's qualification as an "employee stock purchase plan"
within the meaning of section 423 of the Code, a participant will not recognize
any taxable income as a result of participating in the Purchase Plan,
purchasing shares of Common Stock pursuant to the Purchase Plan or receiving
the shares of Common Stock so purchased, nor will Holdco be entitled to a tax
deduction as a result of such events. A participant may, however, be required
to recognize taxable income as described below.
QUALIFYING TRANSFERS
If a participant disposes of any shares of Common Stock purchased pursuant to
the Purchase Plan after the later to occur of (i) two years after the first day
of the calendar year during which the shares of were purchased and (ii) one
year after the date of such purchase (such disposition, a "qualifying
transfer"), or if the participant dies while owning any share purchased under
the Purchase Plan, the participant generally will recognize compensation
income, for the taxable year in which such disposition occurs or closing with
his death, in an amount equal to the lesser of (i) the excess of the market
value of the disposed share at the time of such disposition over its issue
price (the "realized spread"), and (ii) 10% of the fair market value of the
disposed share on the first day of the calendar year in which the share was
purchased (July 1, 1995 with respect to shares purchased in 1995). In the case
of a qualifying transfer, (a) the basis of the disposed share will be increased
by an amount equal to the amount of compensation income so recognized, and (b)
the participant will recognize a capital gain or loss, as the case may be,
equal to the difference between the amount realized from the disposition of the
shares and the basis for such shares. Holdco will not be entitled to any tax
deduction with respect to a qualifying transfer by participants of shares
purchased pursuant to the Purchase Plan or a transfer of shares purchased under
the Purchase Plan after the death of a participant by the estate of the
decedent.
OTHER TRANSFERS
If the participant disposes of any share other than by a qualifying transfer,
the participant will generally recognize, in the year of disposition,
compensation income in an amount equal to the realized spread. In such event,
Holdco will be entitled to a tax deduction equal to the amount of compensation
income recognized by the participant.
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TERMS OF THE MERGERS
The following discussion summarizes the material terms of the proposed Mergers
and related transactions. The following is not, however, a complete statement
of all provisions of the Agreement of Reorganization and related documents.
Detailed terms of and conditions to the Mergers and certain related
transactions are contained in the Agreement of Reorganization, which is
incorporated herein by reference. Statements made in this Proxy
Statement/Prospectus/Consent Solicitation are qualified in their entirety by
reference to the more detailed information set forth in the Agreement of
Reorganization.
EFFECTIVE TIME
Pursuant to the Agreement of Reorganization and on the terms and subject to the
conditions set forth in the Agreement of Reorganization, (i) Zenith Acquisition
will be merged with and into Zitel, with Zitel remaining as the Zitel Surviving
Corporation, and (ii) and Millennium Acquisition will be merged with and into
MatriDigm, with MatriDigm remaining as the MatriDigm Surviving Corporation.
Following the Mergers, Zitel and MatriDigm will each become a wholly-owned
subsidiary of Holdco.
The Zitel Merger will become effective at the time specified in the Zitel
Merger Agreement filed with the Secretary of State of the State of California
and the Certificate of Merger relating to the Zitel Merger filed with the
Secretary of State of the State of Delaware. See "Terms of the Mergers--
Conditions to the Mergers." The MatriDigm Merger will become effective at the
time specified in the MatriDigm Merger Agreement filed with the Secretary of
State of the State of California and the Certificate of Merger relating to the
MatriDigm Merger filed with the Secretary of State of the State of Delaware.
See "Terms of the Mergers--Conditions to the Mergers." It is anticipated that,
if the Zitel Merger is approved at the Zitel Special Meeting and the MatriDigm
Merger is approved pursuant to the Consent Solicitation, and all other
conditions to the Mergers have been fulfilled or waived, the Zitel Merger
Agreement, the MatriDigm Merger Agreement, and the Certificates of Merger
relating to each of the Mergers will be filed on or about [ ], 1998.
Subject to the conditions set forth in the Agreement of Reorganization, the
closing of the Mergers (the "Closing") will occur at the offices of Skadden,
Arps, Slate, Meagher & Flom LLP on a date to be specified by the parties, which
will be no later than the second business day after the satisfaction or waiver
of the conditions to the Merger, set forth below, or on such other date as the
parties may agree (the "Closing Date").
MANNER AND BASIS OF CONVERTING SHARES
Zitel Merger
In accordance with the Agreement of Reorganization and the Zitel Merger
Agreement, as of the Effective Time of the Mergers, by virtue of the Zitel
Merger and without any action on the part of any holders of any shares of Zitel
Common Stock or any shares of common stock of Zenith Acquisition, each issued
and outstanding share of Zitel Common Stock (other than shares, if any, as to
which dissenters' rights have been exercised pursuant to California law (see
"Terms of the Mergers--Dissenters' Rights")) shall be converted into one fully
paid and nonassessable share of
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Holdco Common Stock (the "Zitel Exchange Ratio"). All such shares of Zitel
Common Stock shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist. As of the Effective Time of the Mergers,
each certificate theretofor representing shares of Zitel Common Stock, without
any action on the part of Holdco, Zitel or the holder thereof, shall be deemed
to represent an equal number of shares of Holdco Common Stock. Each holder of a
certificate representing any shares of Zitel Common Stock shall cease to have
any rights with respect thereto, except the right to receive, upon the
surrender of any such certificates, certificates representing the shares of
Holdco Common Stock and any cash in lieu of fractional shares of Holdco Common
Stock to be issued or paid in consideration therefor upon surrender of such
certificate in accordance with the terms of the Agreement of Reorganization,
without interest.
Each share of common stock, par value $0.01 per share, of Zenith Acquisition
outstanding immediately prior to the Effective Time of the Mergers will be
converted into one fully paid and nonassessable share of common stock, par
value $0.01 per share, of the Zitel Surviving Corporation.
As of the Effective Time of the Mergers, Holdco will assume all options to
purchase Zitel Common Stock then outstanding under the Zitel Stock Plans
described below under "Terms of the Mergers--Employee Benefits." No later than
two (2) business day(s) after the Effective Time of the Mergers, Holdco will
file a registration statement on Form S-8 under the Securities Act covering the
shares of Holdco Common Stock issuable upon the exercise of options or rights
to purchase shares of Zitel Common Stock to be assumed by Holdco at the
Effective Time.
MatriDigm Merger
Immediately prior to the Effective Time of the Mergers, each issued and
outstanding share of MatriDigm Preferred Stock will be converted into MatriDigm
Common Stock. In accordance with the Agreement of Reorganization and the
MatriDigm Merger Agreement, as of the Effective Time of the Mergers, by virtue
of the MatriDigm Merger and without any action on the part of any holders of
any shares of MatriDigm Common Stock or any shares of common stock of
Millennium Acquisition, (i) each issued and outstanding share of MatriDigm
Common Stock (other than shares, if any, as to which dissenters' rights have
been exercised pursuant to California law (see "Terms of the Mergers--
Dissenters' Rights") and shares held by Zitel) shall be converted into
approximately .65 of a fully paid and nonassessable share of Holdco Common
Stock (the "MatriDigm Exchange Ratio"), subject to adjustment for any options
to purchase MatriDigm or Zitel Common Stock exercised from October 5, 1998
through the date of this Proxy Statement/Prospectus/Consent Solicitation, and
(ii) each issued and outstanding share of MatriDigm Common Stock held by Zitel,
Holdco or any of their subsidiaries (including any such shares acquired by
Holdco simultaneously with the Effective Time of the Mergers and any such
shares held by corporations (other than the MatriDigm) that become subsidiaries
of Holdco simultaneously with the Effective Time of the Mergers shall be
converted into approximately .65 of a fully paid and nonassessable share of
common stock of the surviving corporation of the MatriDigm Merger. As of the
Effective Time of the Mergers, all such shares of MatriDigm Capital Stock shall
no longer be outstanding and shall automatically be canceled and retired and
shall cease to exist. As of the Effective Time of the Mergers, each certificate
theretofor representing shares of MatriDigm Common Stock, without any action on
the part of Holdco, MatriDigm or the holder thereof, shall be deemed to
represent that number of shares of
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Holdco Common Stock determined by multiplying the shares of MatriDigm Capital
Stock by the MatriDigm Exchange Ratio. Each holder of a certificate
representing any shares of MatriDigm Capital Stock shall cease to have any
rights with respect thereto, except the right to receive, upon the surrender of
any such certificates, certificates representing the shares of Holdco Common
Stock and any cash in lieu of fractional shares of Holdco Common Stock to be
issued or paid in consideration therefor upon surrender of such certificate in
accordance with the terms of the Agreement of Reorganization, without interest.
Each share of common stock, par value $0.01 per share, of Millennium
Acquisition outstanding immediately prior to the Effective Time of the Mergers
will be converted into approximately .65 of a fully paid and nonassessable
share of common stock, par value $0.01 per share, of the MatriDigm Surviving
Corporation.
As of the Effective Time of the Mergers, Holdco will assume all options to
purchase MatriDigm Common Stock then outstanding under the MatriDigm Stock
Plans described below under "Terms of the Mergers--Employee Benefits." No later
than two (2) business day(s) after the Effective Time of the Mergers, Holdco
will file a registration statement on Form S-8 under the Securities Act
covering the shares of Holdco Common Stock issuable upon the exercise of
options or rights to purchase shares of MatriDigm Common Stock to be assumed by
Holdco at the Effective Time.
As of the Effective Time of the Mergers, any securities convertible into shares
of MatriDigm Common Stock immediately prior to the Effective Time of the
Mergers, including without limitation that certain $5,000,000 Convertible
Promissory Note and Agreement, dated June 11, 1997, as amended and
supplemented, from time to time, other than warrants to purchase MatriDigm
Capital Stock ("MatriDigm Convertible Securities") shall thereafter entitle the
holder thereof to receive, upon the exercise thereof that number of shares of
Holdco Common Stock determined by multiplying the number of shares of MatriDigm
Common Stock subject to such MatriDigm Convertible Security immediately prior
to the Effective Time of the Mergers by the Millennium Exchange Ratio, at an
exercise price for each full share of Holdco Common Stock subject to such
Company Convertible Security equal to the quotient obtained by dividing the
exercise price per share of MatriDigm Common Stock subject to such MatriDigm
Convertible Security by the Millennium Exchange Ratio, which exercise price per
share shall be rounded up to the nearest two-place decimal.
General
Each holder of shares of Zitel Common Stock or MatriDigm Capital Stock
converted pursuant to the Mergers who would otherwise have been entitled to
receive a fraction of a share of Holdco Common Stock shall receive, in lieu
thereof, cash (without interest) in an amount equal to (i) such fraction
multiplied by (ii) the average of the closing price of a share of Zitel Common
Stock for the ten most recent trading days that Zitel Common Stock has traded
ending on the trading day immediately prior to the Effective Time of the
Mergers, as reported on the Nasdaq.
Promptly after the Effective Time of the Mergers, Holdco, acting through the
Exchange Agent, will deliver to each MatriDigm shareholder of record as of the
Effective Time of the Mergers a letter of transmittal with instructions to be
used by such shareholder in surrendering certificates which, prior to the
Mergers, represented shares of MatriDigm Common Stock. CERTIFICATES SHOULD NOT
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BE SURRENDERED BY THE HOLDERS OF MATRIDIGM COMMON STOCK UNTIL SUCH HOLDERS
RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. At the Effective
Time, each then outstanding option or right to purchase MatriDigm Common Stock
will be assumed by Holdco without any action on the part of the holder thereof.
OPTION AND STOCK PURCHASE AGREEMENTS NEED NOT BE SURRENDERED.
STOCK OWNERSHIP FOLLOWING THE MERGERS
Zitel Merger
Based on the capitalization of Zitel as of the close of business on [ ], 1998
(including the number of shares of Zitel Common Stock outstanding and the
number of shares issued on exercise of outstanding options to purchase Zitel
Common Stock), an aggregate of approximately [ ] shares of Holdco Common
Stock will be issued to Zitel shareholders in the Zitel Merger, and Holdco will
assume options for up to approximately [ ] additional shares of Zitel Common
Stock. Based on the number of shares of Zitel Common Stock issued and
outstanding as of [ ], 1998, and after giving effect to the issuance of
Holdco Common Stock as described in the previous sentence, the former holders
of Zitel Common Stock would hold, and have voting power with respect to 55.5%
of Holdco's total issued and outstanding shares immediately after the Effective
Time of the Mergers, and holders of former Zitel stock options would hold
options to acquire approximately [ ]% of Holdco's total issued and outstanding
shares immediately after the Effective Time. The foregoing numbers of shares
and percentages are subject to change in the event that the capitalization of
Zitel changes subsequent to [ ], 1998, and prior to the Effective Time, and
there can be no assurance as to the actual capitalization of Zitel at the
Effective Time or of Holdco at any time following the Effective Time.
MatriDigm Merger
Based on the capitalization of MatriDigm as of the close of business on [ ],
1998 (including the number of shares of MatriDigm Common Stock outstanding
(including after giving effect to the conversion of all shares of MatriDigm
Preferred Stock to shares of MatriDigm Common Stock and the conversion of
certain warrants to purchase MatriDigm Common Stock and MatriDigm Preferred
Stock to MatriDigm Common Stock)) and the number of shares issuable on exercise
of outstanding options to purchase MatriDigm Common Stock), an aggregate of
approximately [ ] shares of Holdco Common Stock will be issued to MatriDigm
shareholders in the MatriDigm Merger, and Holdco will assume options for up to
approximately [ ] additional shares of MatriDigm Common Stock. Based on the
number of shares of MatriDigm Common Stock issued and outstanding as of [ ],
1998 (including after giving effect to the conversion of all shares of
MatriDigm Preferred Stock to shares of MatriDigm Common Stock and the
conversion of certain warrants to purchase MatriDigm Common Stock and MatriDigm
Preferred Stock to MatriDigm Common Stock), and after giving effect to the
issuance of Holdco Common Stock as described in the previous sentence, the
former holders of MatriDigm Capital Stock would hold, and have voting power
with respect to 44.5% of Holdco's total issued and outstanding shares
immediately after the Effective Time of the Mergers, and holders of former
MatriDigm stock options would hold options to acquire approximately [ ]% of
Holdco's total issued and outstanding shares immediately after the Effective
Time. The foregoing numbers of shares and percentages are subject to change in
the event
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that the capitalization of MatriDigm changes subsequent to [ ], 1998, and
prior to the Effective Time, and there can be no assurance as to the actual
capitalization of MatriDigm at the Effective Time or of Holdco at any time
following the Effective Time.
CONDUCT FOLLOWING THE MERGER
Pursuant to the Agreement of Reorganization, Zenith Acquisition and Millennium
Acquisition will cease to exist as corporations, and will be merged with and
into Zitel and MatriDigm, respectively. All property, rights, privileges,
powers and franchises of Zenith Acquisition and Millennium Acquisition will
vest in the Zitel Surviving Corporation and the MatriDigm Surviving
Corporation, respectively, and all debts, liabilities and duties of Zenith
Acquisition and Millennium Acquisition will become the debts, liabilities and
duties of the Zitel Surviving Corporation and the MatriDigm Surviving
Corporation, respectively. Each of the Surviving Corporations in the Mergers
will be a wholly-owned subsidiary of Holdco.
Pursuant to the Agreement of Reorganization, the directors of Zitel and
MatriDigm at the Effective Time of the Mergers shall be the directors of Zitel
Surviving Corporation and MatriDigm Surviving Corporation, respectively. The
directors of Holdco at the Effective Time of the Mergers shall be seven members
consisting of three members elected or appointed from designees of MatriDigm,
three members elected or appointed from designees of Zitel, and one member to
be mutually agreed upon by MatriDigm and Zitel, which person shall be
unaffiliated with either entity.
Except as provided below, the officers of Zitel and MatriDigm at the Effective
Time of the Mergers shall be the officers of Zitel Surviving Corporation and
MatriDigm Surviving Corporation, respectively. Immediately following the
Effective Time of the Mergers, Jack H. King will assume the position of
president of Zitel Surviving Corporation and become a member of the Board of
Directors of Holdco, and Richard Ormond will assume the position of president
and chief executive officer of Holdco and become a member of the Board of
Directors of Holdco. Pursuant to the Agreement of Reorganization, Holdco will
take all action necessary to elect additional members of management and
executive officers of Holdco.
CONDUCT OF ZITEL'S BUSINESS AND MATRIDIGM'S BUSINESS PRIOR TO THE MERGERS
Pursuant to the Agreement of Reorganization, until the earlier of the
termination of the Agreement of Reorganization and the Effective Time of the
Mergers, Zitel, Holdco and MatriDigm each agreed (except to the extent
expressly contemplated by the Agreement of Reorganization or with the prior
written consent of the other party):
(a) to not, directly or indirectly, split, combine or reclassify the
outstanding MatriDigm Common Stock or MatriDigm Preferred Stock, in the
case of MatriDigm, or Zitel Common Stock or Holdco Common Stock, in the
case of Zitel;
(b) to not (i) amend its articles or certificate of incorporation or by-
laws, (ii) declare, set aside or pay any dividend or other distribution
payable in cash, stock or property with respect to its capital stock;
(c) to not (i) change any of the accounting principles used by it unless
required by GAAP, or (ii) take or knowingly allow to be taken any action
which would jeopardize qualification of the
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MatriDigm Merger as a nonrecognition transfer under the Code, or the Zitel
Merger as a reorganization within the meaning of Section 368(a) of the
Code;
(d) to not take, or agree to commit to take, any action that would make any
representation or warranty of such party contained herein inaccurate in any
respect at, or as of any time prior to, the Effective Time of the Mergers;
and
(e) to not enter into an agreement, contract, commitment or arrangement to
do any of the foregoing, or to authorize, recommend, propose or announce an
intention to do any of the foregoing.
In addition to the foregoing, pursuant to the Agreement of Reorganization,
until the earlier of the termination of the Agreement of Reorganization and the
Effective Time of the Mergers, MatriDigm agreed (except to the extent expressly
contemplated by the Agreement of Reorganization or with the prior written
consent of Zitel):
(a) to conduct its business only in the ordinary and customary course
consistent with past practice, and will use its best efforts to preserve
its business organization intact and to maintain its existing relations
with customers, suppliers, employees, creditors and business partners;
(b) to not (i) issue, sell, transfer, pledge, dispose of or encumber any
additional shares of, or securities convertible into or exchangeable for,
or options, warrants, calls, commitments or rights of any kind to acquire,
any shares of its capital stock, other than issuances pursuant to the
exercise of any outstanding warrant or option to purchase MatriDigm Common
Stock, (ii) transfer, lease, license, sell, mortgage, pledge, dispose of,
or encumber any material assets other than in the ordinary and usual course
of business and consistent with past practice, or (iii) redeem, purchase or
otherwise acquire directly or indirectly any of its capital stock;
(c) to not modify, amend or terminate any of its material agreements, or
waive, release or assign any material rights or claims, except in the
ordinary course of business and consistent with past practice;
(d) to not permit any material insurance policy naming MatriDigm as a
beneficiary or a loss payable payee to be canceled or terminated without
notice to MatriDigm, except in the ordinary course of business and
consistent with past practice;
(e) to not (i) incur or assume any long-term debt, except for amounts not
in excess of $50,000 in the aggregate, or except in the ordinary course of
business consistent with past practice, incur or assume any short-term
indebtedness in amounts not consistent with past practice, (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other
person, except in the ordinary course of business and consistent with past
practice, (iii) make any loans, advances or capital contributions to, or
investments in, any other person (other than customary loans or advances to
employees in accordance with past practice), or (iv) enter into any
material commitment or transaction (including, but not limited to, any
borrowing, capital expenditure or purchase, sale or lease of assets) and
other than capital expenditures pursuant to MatriDigm's capital
expenditures budget previously delivered to Zitel, and other capital
expenditures that do not exceed $25,000 in the aggregate since June 30,
1997;
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(f) to not pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction of any such claims, liabilities
or obligations (i) in the ordinary course of business and consistent with
past practice, or claims, liabilities or obligations reflected or reserved
against in, or contemplated by, the financial statements (or the notes
thereto) of MatriDigm, or (ii) which are legally required to be paid,
discharged or satisfied (provided that if such claims, liabilities or
obligations referred to in this clause (ii) are legally required to be paid
and are also not otherwise payable in accordance with clause (i) above,
MatriDigm will notify Zitel in writing if such claims, liabilities or
obligations exceed, individually or in the aggregate, $50,000 in value,
reasonably in advance of their payment);
(g) to not adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization (other than the MatriDigm Merger);
(h) to not voluntarily make or agree to make any changes in tax accounting
methods or any material tax election, waive or consent to the extension of
any statute of limitations with respect to taxes, or consent to any
assessment of taxes, or settle or compromise any audit;
(i) to not (i) make any change in the compensation payable or to become
payable to any of its officers, directors, employees, agents or consultants
(other than general increases in wages to employees who are not officers or
directors or affiliates in the ordinary course consistent with past
practice as previously disclosed to Zitel and Holdco), or to persons
providing management services, (ii) enter into or amend any employment,
severance, consulting, termination or other agreement or employee benefit
plan, or (iii) make any loans to any of its officers, directors, employees,
affiliates, agents or consultants or make any change in its existing
borrowing or lending arrangements for or on behalf of any of such persons,
whether pursuant to an employee benefit plan or otherwise;
(j) to not (i) pay or agree to pay or make any accrual or arrangement for
payment of any pension, retirement allowance or other employee benefit
pursuant to any existing plan, agreement or arrangement to any officer,
director, employee or affiliate, (ii) pay or agree to pay or make any
accrual or arrangement for payment to any officers, directors, employees or
affiliates of such party of any amount relating to unused vacation days,
except payments and accruals made in the ordinary course consistent with
past practice, (iii) adopt or pay, grant, issue, accelerate or accrue
salary or other payments or benefits pursuant to any pension, profit-
sharing, bonus, extra compensation, incentive, deferred compensation, stock
purchase, stock option, stock appreciation right, group insurance,
severance pay, retirement or other employee benefit plan, agreement or
arrangement, or any employment or consulting agreement with or for the
benefit of any director, officer, employee, agent or consultant, whether
past or present, or (iv) amend in any material respect any such existing
plan, agreement or arrangement in a manner inconsistent with the foregoing;
(k) to not effectuate (i) a "plant closing" (as defined in the WARN Act)
affecting any site of employment or one or more facilities or operating
units within any site of employment of MatriDigm, or (ii) a "mass layoff"
(as defined in the WARN Act) affecting any site of employment of MatriDigm,
without complying fully with any and all notice obligations (and/or pay and
benefits in lieu of notice) under the WARN Act or any similar obligation
under applicable state or local law requiring notice (and/or pay and
benefits in lieu of notice) to
91
employees in the event of a plant closing or layoff; or For purposes of the
WARN Act and this Agreement, the Effective Time of the Mergers is and shall
be the same as the "effective date" within the meaning of the WARN Act; and
(l) to not enter into an agreement, contract, commitment or arrangement to
do any of the foregoing, or to authorize, recommend, propose or announce an
intention to do any of the foregoing.
CONDITIONS TO THE MERGERS
The respective obligations of Zitel, Holdco, Zenith Acquisition, Millennium
Acquisition and MatriDigm to consummate and effect the Mergers are subject to
the satisfaction or waiver at or prior to the Effective Time of the following
conditions: (a) the Agreement of Reorganization shall have been adopted and the
MatriDigm Merger and the transactions related thereto shall have been approved
pursuant to the Consent Solicitation by the shareholders of MatriDigm in
accordance with the CGCL; (b) the Agreement of Reorganization shall have been
adopted and the Zitel Merger, the issuance of Holdco Common Stock in the
Mergers and transactions related thereto shall have been approved by the
shareholders of Zitel in accordance with the rules of the Nasdaq and the CGCL,
and the shares of Holdco Common Stock to be so issued shall have been
authorized for listing on the Nasdaq, upon official notice of issuance; (c) no
court, arbitrator or governmental body, agency or official shall have issued
any order, and there shall not be any statute, rule or regulation, restraining
or prohibiting the consummation of the Mergers or the effective operation of
the business of Zitel Surviving Corporation or MatriDigm Surviving Corporation
following the Effective Time of the Mergers; (d) all action by or in respect of
or filings with any governmental body, agency official, or authority required
to permit the consummation of the Mergers shall have been obtained, other than
any consent, approval, clearance or confirmation the failure to obtain which
would not have a material adverse effect on Zitel or, following the Effective
Time of the Mergers, a material adverse effect on the Zitel Surviving
Corporation or the MatriDigm Surviving Corporation; and (e) this Proxy
Statement/Prospectus shall have become effective under the Securities Act, and
no stop order suspending effectiveness of this Proxy
Statement/Prospectus/Consent Solicitation shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the SEC.
In addition, the obligations of Zitel, Holdco, Zenith Acquisition and
Millennium Acquisition to consummate and effect the Mergers are subject to the
satisfaction or waiver by Zitel at or prior to the Effective Time of each of
the following conditions:
(a) The representations and warranties of MatriDigm shall be true and
correct in all material respects, MatriDigm shall have performed in all
material respects all of its obligations under the Agreement of
Reorganization and Zitel shall have received an officer's certificate from
MatriDigm, dated as of the Closing Date, to the effect that such conditions
have occurred;
(b) MatriDigm shall have obtained, and there shall be in full force and
effect, the consents required to consummate the MatriDigm Merger;
(c) There shall not have occurred any event, change or effect having, or
which could have a material adverse effect on MatriDigm;
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(d) All of the issued and outstanding MatriDigm Preferred Stock shall have
been converted to MatriDigm Common Stock, and there shall be no class or
series of any capital stock of MatriDigm outstanding other than MatriDigm
Common Stock;
(e) MatriDigm shall have caused all warrants to purchase MatriDigm Common
Stock and MatriDigm Preferred Stock including, without limitation, the
warrants granted in accordance with the Agreement to Guarantee, dated April
6, 1998, by and among the Company, BRC Holdings, Inc., Parent and JBJ
Partners, Inc., and the Warrant to Purchase Series C Preferred Stock, dated
as of May 17, 1996, held by JBJ Partners, Ltd., to be converted into that
number of shares of MatriDigm Common Stock equal to the net number of
shares of MatriDigm Common Stock into which each such warrant would have
been convertible pursuant to a cashless exercise procedure immediately
prior to the Effective Time of the MatriDigm Merger;
(f) Any default under the terms and provisions of the Promissory Note and
related loan documentation, each dated as of April 2, 1998, between the
Company and Wells Fargo Bank (Texas), National Association, shall have been
cured or waived prior to the Effective Time of the Mergers;
(g) The respective shareholders of Zitel and MatriDigm shall not have
asserted in accordance with the CGCL appraisal rights for their shares of
MatriDigm Capital Stock and Zitel Common Stock, respectively, for a
material amount;
(h) The persons identified on Exhibit H to the Agreement of Reorganization
shall have entered into Employment Agreements with MatriDigm, in form and
substance satisfactory to Zitel, and as of the Effective Time, at least 80%
of the remaining persons employed by MatriDigm as of October 5, 1998 shall
have consented to assume comparable positions in the MatriDigm Surviving
Corporation upon consummation of the MatriDigm Merger, such consents to be
in form and substance satisfactory to Zitel; and
(i) Zitel shall have received an opinion of Skadden, Arps, Slate, Meagher &
Flom LLP, legal counsel to Zitel, in form and substance reasonably
satisfactory to Zitel, substantially to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion, for
Federal income tax purposes, the Zitel Merger will be treated as a
nonrecognition transfer of Zitel Common Stock by those holders thereof to
Holdco for shares of Holdco Common Stock.
In addition, the obligations of MatriDigm to consummate and effect the
MatriDigm Merger are subject to the satisfaction or waiver by MatriDigm at or
prior to the Effective Time of each of the following conditions:
(a) The representations and warranties of Zitel, Holdco, Zenith Acquisition
and Millennium Acquisition shall be true and correct in all material
respects, each of Zitel, Holdco, Zenith Acquisition and Millennium
Acquisition shall have performed in all material respects all of the
respective obligations under the Agreement of Reorganization, and MatriDigm
shall have received an officer's certificate from Zitel, dated as of the
Closing Date, to the effect that such conditions have occurred;
(b) There shall not have occurred any event, change or effect having, or
which would be reasonably likely to have a material adverse effect on
Zitel; and
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(c) MatriDigm shall have received an opinion of Arter & Hadden, legal
counsel to MatriDigm, in form and substance reasonably satisfactory to
MatriDigm, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion, for Federal
income tax purposes, the MatriDigm Merger will be treated as a
nonrecognition transfer of MatriDigm Common Stock by those holders thereof
(other than Zitel) to Holdco for shares of Holdco Common Stock.
Currently, both Zitel and MatriDigm anticipate that they will satisfy all
conditions to the Mergers at or prior to the Effective Time.
TERMINATION OF THE AGREEMENT OF REORGANIZATION
The Agreement of Reorganization provides that it may be terminated at any time
prior to the Effective Time of the Mergers, whether before or after approval of
the Mergers by the shareholders of Zitel and MatriDigm:
(a) By the mutual consent of the Zitel Board and the MatriDigm Board; (b)
by either the Zitel Board or the MatriDigm Board: (i) if the Mergers shall
not have occurred on or prior to March 31, 1999, provided that the right to
terminate the Agreement of Reorganization pursuant to this provision is not
available to any party whose failure to fulfill any obligation under the
Agreement of Reorganization has been the cause of, or resulted in, the
failure of the Mergers to occur on or prior to such date; or (ii) if any
governmental entity shall have issued an order, decree or ruling or taken
any other action, in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by the Agreement of
Reorganization, and such order, decree, ruling or other action shall have
become final and non-appealable; (c) by the MatriDigm Board: (i) if Zitel,
Holdco, Zenith Acquisition or Millennium Acquisition breaches or fails in
any material respect to perform or comply with any of its material
covenants and agreements contained in the Agreement of Reorganization, or
breaches its representations and warranties in any material respect and, in
each case, such breach or failure cannot be or has not been cured within 30
days after giving written notice to the breaching party of such breach or
failure; or (ii) if the approval of the shareholders of Zitel has not been
obtained by reason of the failure to obtain the required vote at a duly
held meeting of such shareholders or any adjournment thereof; or (d) by the
Zitel Board: (i) if MatriDigm breaches or fails in any material respect to
perform or comply with any of its material covenants and agreements
contained in the Agreement of Reorganization, or breaches its
representations and warranties in any material respect and, in each case,
such breach or failure cannot be or has not been cured within 30 days after
giving written notice to the breaching party of such breach or failure;
(ii) if the approval of the shareholders of MatriDigm has not been obtained
by reason of the failure to obtain the required vote in the Consent
Solicitation; or (iii) if the Zitel Board determines, in its good faith
judgment following advice of its legal and financial advisors, that failure
to terminate the Agreement of Reorganization could result in the violation
of the fiduciary duties of the members of the Zitel Board under applicable
law.
In the event of the termination of the Agreement of Reorganization pursuant to
any of the provisions outlined above, written notice thereof is to be given to
the other party or parties specifying the provision pursuant to which such
termination is made, and the Agreement of Reorganization shall
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thereafter become null and void, and there shall be no further liability on the
part of Zitel, Holdco, Zenith Acquisition, Millennium Acquisition or MatriDigm,
except (a) for fraud or for willful breach of the Agreement of Reorganization,
and (b) with respect to the allocation of fees and expenses relating to the
transactions contemplated by the Agreement of Reorganization in accordance with
the Engagement Letter, dated December 15, 1997, between Zitel and Salomon Smith
Barney Inc.
SHAREHOLDER AGREEMENTS
The following is a brief summary of material terms of the form of Shareholder
Agreement, which is attached as Exhibit D to this Proxy
Statement/Prospectus/Consent Solicitation and incorporated herein by this
reference. This summary is qualified in its entirety by reference to the
Shareholder Agreement. Shareholders of Zitel and MatriDigm are urged to read
the Shareholder Agreement in its entirety for a more complete description of
the rights and obligations of the parties thereunder.
Each of Lynx Venture Partners I, LLC and Lynx Technology Fund, L.P.
(collectively, "Lynx"), The Brady Children Trust and The Brady 1996 Living
Trust (collectively, "Brady"), JBJ Partners, Ltd. ("JBJ"), and BRC Holdings,
Inc. ("BRC") (collectively, the "MatriDigm Shareholders") has entered into a
Shareholder Agreement with Zitel. As of October 5, 1998, the MatriDigm
Shareholders beneficially own an aggregate of 12,634,974 of the outstanding
shares of MatriDigm Capital Stock, representing approximately 36% of the votes
entitled to be cast by the holders of MatriDigm Common Stock issued and
outstanding as of October 5, 1998.
Pursuant to its respective Shareholder Agreement, each of the MatriDigm
Shareholders agreed to vote in favor of the adoption of the Agreement of
Reorganization and the approval of the MatriDigm Merger, and granted Zitel and
Jack H. King and Henry C. Harris or any of them in their respective capacities
as officers of Zitel, a proxy to grant consent or approval of the MatriDigm
Merger in connection with the Consent Solicitation. In addition, each of the
MatriDigm Shareholders agreed not to, directly or indirectly, offer for sale,
sell, transfer, tender, pledge, encumber, assign or otherwise dispose of, or
enter into any contract, option or other arrangement or understanding with
respect to, or consent to the offer for sale, sale, transfer, tender, pledge,
encumbrance, assignment or other disposition of, or grant any proxy other than
as contemplated by the Shareholder Agreement with respect to, any of the shares
of MatriDigm Common Stock beneficially owned by such MatriDigm Shareholder.
In addition, to the extent such MatriDigm Shareholder beneficially owns shares
of MatriDigm Preferred Stock, such MatriDigm Shareholder agreed to deliver or
cause to be delivered to MatriDigm all such shares of MatriDigm Preferred
Stock, together with written instructions directing MatriDigm to cause such
shares to be converted into shares of MatriDigm Common Stock in accordance with
the applicable provisions of MatriDigm's Articles of Incorporation and in full
satisfaction of all rights pertaining to such shares of MatriDigm Preferred
Stock, such conversion to be effective no later than the business day
immediately preceding the Effective Time of the MatriDigm Merger.
Pursuant to each Shareholder Agreement, (i) promptly following receipt thereof,
each MatriDigm Shareholder agreed to promptly execute and file such
Shareholder's written consent to the MatriDigm Merger with the Secretary of
MatriDigm in accordance with the terms of the Consent Solicitation,
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and (ii) promptly following the execution of such Shareholder Agreement and in
any event no later than 10 days from the date of such agreement, each MatriDigm
Shareholder (other than Lynx) agreed to execute and deliver to Zitel an
Affiliates Agreement. See "TERMS OF THE MERGERS--Affiliate Agreements."
In addition to the foregoing, (i) the Shareholder Agreement executed by JBJ
included an agreement by such MatriDigm Shareholder to take all actions
necessary to convert the Warrant to Purchase Series C Preferred Stock, dated as
of May 17, 1996 (the "Series C Warrant"), held by JBJ into that number of
shares of MatriDigm Common Stock equal to the net number of shares of MatriDigm
Common Stock into which such warrant would have been convertible pursuant to a
cashless exercise procedure immediately prior to the Effective Time of the
MatriDigm Merger, and (ii) the Shareholder Agreement executed by JBJ and BRC
included an agreement by such MatriDigm Shareholders to execute all documents
and to take all actions necessary to convert the warrants granted in accordance
with the Agreement to Guarantee, dated April 6, 1998, by and among MatriDigm,
Zitel, and each of such MatriDigm Shareholders, held by MatriDigm Shareholders
into that number of shares of MatriDigm Common Stock equal to the net number of
shares of MatriDigm Common Stock into which such warrant would have been
convertible pursuant to a cashless exercise procedure immediately prior to the
Effective Time of the MatriDigm Merger.
LOCK-UP AGREEMENTS
The following is a brief summary of material terms of the form of Lock-Up
Agreement, which is attached as Exhibit E to this Proxy
Statement/Prospectus/Consent Solicitation and incorporated herein by this
reference. This summary is qualified in its entirety by reference to the Lock-
Up Agreement. Shareholders of Zitel and MatriDigm are urged to read the Lock-Up
Agreement in its entirety for a more complete description of the rights and
obligations of the parties thereunder.
Each of Lynx, JBJ, BRC, Brady, Lawrence J. Thoman, and Franklin C. Chiang, Su-
Kewn Chiang, The Chiang 1997 Living Trust and the Dawn Constance Chiang, Grace
Carina Chiang and Elizabeth Jen Chiang Trust (collectively, "Chiang")
(collectively, the "Lock-Up Signatories") has executed a Lock-Up Agreement
addressed to Holdco.
Pursuant to its respective Lock-Up Agreement, the Lock-Up Signatories agreed,
during the period commencing on October 5, 1998 and ending (i) if the MatriDigm
is consummated prior to January 29, 1999, on the second trading day following
the public announcement of the consolidated results of operations of Zitel and
MatriDigm for the fiscal quarter ended March 31, 1999, and (ii) if the
MatriDigm Merger is consummated after January 29, 1999, on the second trading
day following the public announcement of the consolidated results of operations
of Zitel and MatriDigm for the fiscal quarter ended June 30, 1999, not to (x)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Holdco Common Stock or any
securities convertible into or exercisable or exchangeable for Holdco Common
Stock (including, without limitation, shares of Holdco Common Stock or
securities convertible into or exercisable or exchangeable for Holdco Common
Stock which may be deemed to be beneficially owned by the undersigned in
accordance with the rules and regulations of the Commission), or (y) enter into
any swap or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any
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Holdco Common Stock (regardless of whether any of the transactions described in
clause (x) or (y) is to be settled by the delivery of Holdco Common Stock, or
such other securities, in cash or otherwise).
Notwithstanding the foregoing, the Lock-Up Agreements provide that during such
period (i) the Lock-Up Signatories may make gifts of shares of Holdco Common
Stock or securities convertible into Holdco Common Stock upon the condition
that the donees agree to be bound by the foregoing restriction in the same
manner as it applies to the Lock-Up Signatories, and (ii) with respect to
securities convertible into or exercisable or exchangeable for Holdco Common
Stock, the Lock-Up Signatories may distribute such securities to any of their
respective partners or members, as the case may be, if applicable, so long as
the recipients of such securities agree to be bound by the foregoing
restriction in the same manner as it applies to the Lock-Up Signatories, and
(iii) to the extent any of the provisions of any of the Lock-Up Agreements in
favor of any of the Lock-Up Signatories are amended, modified or waived by
Holdco or Zitel and, in connection therewith, any of the Lock-Up Signatories
are permitted to take any of the actions with respect to the Holdco Common
Stock held by it or them as set forth in clauses (x) and (y) in the immediately
preceding paragraph, the other Lock-Up Signatories shall be permitted to take
such actions as and to the same extent, on a pro rata basis with all other
Lock-Up Signatories, with respect to the shares of Holdco Common Stock held by
them.
In addition to the foregoing, the Lock-Up Agreement executed by Chiang included
a provision that during the applicable period in question, Franklin C. Chiang
would be entitled to sell that number of shares of Holdco Common Stock required
to extinguish the mortgage loan existing as of October 5, 1998 on such Lock-Up
Signatory's primary residence, it being understood that such proceeds would be
used solely to extinguish such mortgage loan and not for any other purpose
whatsoever.
AFFILIATE AGREEMENTS
The following is a brief summary of material terms of the Affiliate Agreements,
copies of forms of which are attached as Annex F-1 and Annex F-2 to this Proxy
Statement/Prospectus/Consent Solicitation and incorporated herein by this
reference. This summary is qualified in its entirety by reference to the
Affiliate Agreements. Shareholders of Zitel and MatriDigm are urged to read the
Affiliate Agreements in their entirety for a more complete description of the
rights and obligations of the parties thereunder.
"Affiliates" (within the meaning of Rule 145 under the Securities Act) of
MatriDigm and Zitel have entered into agreements that prohibit the sale,
transfer or other disposition of Holdco Common Stock received by such person in
the Mergers, unless (a) such transaction is permitted under Rule 145 under the
Securities Act, (b) counsel reasonably satisfactory to the other party shall
have advised such party in a written opinion letter satisfactory to such party
and such party's legal counsel and on which such party and its legal counsel
may rely that no registration under the Securities Act would be required in
connection with the proposed sale, transfer or other disposition, (c) such
sale, transfer or other disposition is effected pursuant to an effective
registration statement under the Securities Act, or (d) an authorized
representative of the Commission shall have rendered written advice to such
person (with a copy delivered to the other party) to the effect that the
Commission would take no action, or that the Commission staff would not
recommend that the Commission take action, with
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respect to the proposed disposition. Such agreements are intended to comply
with the requirements of applicable federal securities and tax law.
EMPLOYEE BENEFITS
At the Effective Time, Holdco will assume each outstanding option to purchase
shares of Zitel Common Stock under the Zitel stock option plans, whether such
option is vested or unvested. Each Zitel stock option assumed by Holdco will
continue to have and be subject to substantially the same terms and conditions
as applied under the Zitel stock option plans and related documents, except
that each such Zitel stock option shall thereafter entitle the holder thereof
to receive, upon the exercise thereof, that number of shares of Holdco Common
Stock equal to the number of shares of Zitel Common Stock subject to such
option immediately prior to the Effective Time of the Mergers, at an exercise
price for each full share of Holdco Common Stock subject to such option equal
to the exercise price per share of Zitel Common Stock subject to such option.
The vesting of the Zitel stock options will not accelerate by reason of the
Zitel Merger. The parties intend that the Zitel stock options assumed by Holdco
will thereafter continue to qualify as incentive stock options under Section
422 of the Internal Revenue Code, to the extent such options qualified as such
immediately prior to the Effective Time.
At the Effective Time, Holdco will assume each outstanding option to purchase
shares of MatriDigm Common Stock under the MatriDigm stock option plans,
whether such option is vested or unvested. Each MatriDigm stock option assumed
by Holdco will continue to have and be subject to substantially the same terms
and conditions as applied under the MatriDigm stock option plans and related
documents, except that each such MatriDigm stock option shall thereafter
entitle the holder thereof to receive, upon the exercise thereof that number of
shares of Holdco Common Stock determined by multiplying the number of shares of
MatriDigm Common Stock subject to such option immediately prior to the
Effective Time of the Mergers by the MatriDigm Exchange Ratio, at an exercise
price for each full share of Holdco Common Stock subject to such option equal
to the quotient obtained by dividing the exercise price per share of MatriDigm
Common Stock subject to such option by the MatriDigm Exchange Ratio, which
exercise price per share shall be rounded up to the nearest two-place decimal.
The vesting of the MatriDigm stock options will not accelerate by reason of the
MatriDigm Merger. The parties intend that the MatriDigm stock options assumed
by Holdco will thereafter continue to qualify as incentive stock options under
Section 422 of the Internal Revenue Code, to the extent such options qualified
as such immediately prior to the Effective Time.
In addition to the foregoing, at the Effective Time, any securities convertible
into shares of MatriDigm Common Stock immediately prior to the Effective Time
of the Mergers, including without limitation that certain $5,000,000
Convertible Promissory Note and Agreement, dated June 11, 1997, as amended and
supplemented, from time to time, other than warrants to purchase MatriDigm
Capital Stock ("MatriDigm Convertible Securities") shall thereafter entitle the
holder thereof to receive, upon the exercise thereof that number of shares of
Holdco Common Stock determined by multiplying the number of shares of MatriDigm
Common Stock subject to such MatriDigm Convertible Security immediately prior
to the Effective Time of the Mergers by the MatriDigm Exchange Ratio, at an
exercise price for each full share of Holdco Common Stock subject to such
MatriDigm Convertible Security equal to the quotient obtained by dividing the
exercise price per share of MatriDigm Common Stock subject to such MatriDigm
Convertible Security by the
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MatriDigm Exchange Ratio, which exercise price per share shall be rounded up to
the nearest two-place decimal.
No later than two business days after the Closing Date, Holdco will file a
registration statement on Form S-8 under the Securities Act covering the shares
of Holdco Common Stock issuable pursuant to outstanding options and rights to
purchase Zitel Common Stock and MatriDigm Common Stock assumed by Holdco
pursuant to the Mergers.
INTERESTS OF CERTAIN PERSONS
In considering the recommendation of the Zitel Board and the MatriDigm Board
with respect to the Merger, shareholders of Zitel and MatriDigm, respectively,
should be aware that certain officers and directors of Zitel and MatriDigm have
interests in the Mergers in addition to those of the shareholders generally,
including those referred to below. The MatriDigm Board and the Zitel Board were
aware of these interests and considered them in their respective deliberations
concerning the Mergers.
From and after the Effective Time, Holdco will, or will cause the MatriDigm
Surviving Corporation to, defend, exculpate, indemnify and reimburse expenses
for acts or omissions occurring prior to the Effective Time by the current or
former directors, officers, employees or agents of MatriDigm, Zitel, any of
their respective subsidiaries or affiliates, or any of their respective
successors or assigns, on the same terms provided as of October 5, 1998 in the
Articles of Incorporation or Bylaws of MatriDigm or Zitel, as the case may be,
or in any indemnification agreement existing on such date, subject to
limitations of applicable law. If any of such indemnified parties is involved
in any actual or threatened action, suit, claim, proceeding or investigation in
connection with any matter existing or occurring at or prior to the Effective
Time, including, without limitation, matters relating to the Agreement of
Reorganization or the transactions contemplated thereby, Holdco will, or will
cause the MatriDigm Surviving Corporation or the Zitel Surviving Corporation
to, advance to such indemnified party, as incurred, expenses incurred in
connection with such action or claim, provided that the indemnified party
undertakes to repay such advances if it is ultimately determined by independent
legal counsel that such party was not entitled to such indemnification.
For six years after the Effective Time, Holdco will, or will cause the
MatriDigm Surviving Corporation to, maintain in effect Zitel's and MatriDigm's
current directors' and officers' liability insurance (or policies with
substantially the same coverage with terms and conditions no less advantageous)
covering the persons covered by Zitel's and MatriDigm's respective directors'
and officers' liability insurance policies as of October 5, 1998.
Except as noted above, no officer or director of Zitel or MatriDigm has any
interest in the Zitel Merger or the MatriDigm Merger, respectively, that is in
addition to his interest as a shareholder of Zitel or MatriDigm.
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COMPARISON OF CAPITAL STOCK
DESCRIPTION OF HOLDCO CAPITAL STOCK
The following summary of the capital stock of Holdco is qualified in its
entirety by reference to the complete text of Holdco's Certificate of
Incorporation and Bylaws. Attached hereto as Annex K and incorporated herein by
reference is a copy of Holdco's Certificate of Incorporation. Attached hereto
as Annex L and incorporated by reference is copy of Holdco's Bylaws.
AUTHORIZED CAPITAL STOCK
Holdco's Certificate of Incorporation authorizes Holdco's Board of Directors to
issue a total of 65,000,000 shares of stock, of which (i) 60,000,000 shares
will be designated as "Common Stock," each having a par value of $.001, and
(ii) 5,000,000 shares will be "Preferred Stock," each having a par value of
$.001.
Holdco's Board of Directors is authorized to issue shares of Holdco Preferred
Stock in one or more series, and to fix for each such series voting powers,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof as are permitted by
the DGCL.
The additional shares of authorized stock available for issuance by Holdco may
be issued at such times and under such circumstances as to have a dilutive
effect on earnings per share and on the equity ownership of the holders of
Holdco capital stock. The ability of Holdco's Board of Directors to issue
additional shares of stock could enhance the ability of Holdco's Board of
Directors to negotiate on behalf of the stockholders in a takeover situation.
However, Holdco's Board of Directors could authorize the issuance of additional
shares of Holdco Common Stock or Holdco Preferred Stock with terms and
conditions that could make a change in control more difficult or discourage a
takeover or other transaction in which such holders might receive a premium for
their shares of stock over the then market price of such shares that holders of
some or a majority of shares of Holdco Common Stock might believe to be in
their best interests.
HOLDCO COMMON STOCK
The holders of Holdco Common Stock will be entitled to receive dividends when,
as and if declared by Holdco's Board of Directors out of funds legally
available therefor, subject to the rights of any shares of Holdco Preferred
Stock at the time outstanding. The holders of Holdco Common Stock will be
entitled to one vote for each share on all matters voted on by stockholders
under Holdco's certificate of incorporation, including elections of directors.
The holders of Holdco Common Stock do not have any cumulative voting,
conversion, redemption or preemptive rights. In the event of dissolution,
liquidation or winding up of Holdco, holders of the Holdco Common Stock will be
entitled to share ratably with all other holders of Holdco Common Stock in any
assets remaining after the satisfaction in full of the prior rights of
creditors, including holders of Holdco indebtedness, and subject to the
aggregate liquidation preference and participation rights of any Holdco
Preferred Stock then outstanding.
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COMPARISON OF RIGHTS OF STOCKHOLDERS OF HOLDCO
AND SHAREHOLDERS OF MATRIDIGM
Holdco is incorporated under the laws of the State of Delaware and MatriDigm is
incorporated under the laws of the State of California. As a result of the
MatriDigm Merger, holders of MatriDigm Common Stock, which will include former
holders of MatriDigm's Series A, B, and D Preferred Stock that was converted to
MatriDigm Common Stock immediately preceding the MatriDigm Merger, will become
stockholders of Holdco, and the rights of all such former MatriDigm
shareholders will be governed by the applicable provisions of Delaware law,
Holdco's Certificate of incorporation and Holdco's Bylaws. The rights of the
holders of MatriDigm Common Stock are currently governed by the applicable
provisions of California law, MatriDigm's Amended and Restated Articles of
Incorporation and MatriDigm's Bylaws.
MatriDigm shareholders should carefully review the following summary that sets
forth the material differences between the rights of MatriDigm shareholders and
Holdco stockholders in order to understand how certain of their rights as
shareholders will be affected upon completion of the MatriDigm Merger. This
summary does not purport to be a complete statement of the rights of MatriDigm
shareholders under the applicable California laws, MatriDigm's Amended and
Restated Articles of Incorporation and MatriDigm's Bylaws, as compared with the
rights of Holdco stockholders under the applicable Delaware laws, Holdco's
Certificate of Incorporation and Holdco's Bylaws, or a complete description of
the specific provisions thereof as referred to herein. The identification of
specific differences is not meant to indicate that other equally or more
significant differences do not exist. This summary is qualified in its entirety
by reference to the CGCL and the Delaware General Corporation Law (the "DGCL")
and the governing corporate instruments of MatriDigm and Holdco to which such
MatriDigm shareholders are referred.
CHANGES OF CONTROL AND BUSINESS COMBINATIONS
Certain provisions of MatriDigm's Amended and Restated Articles of
Incorporation and Bylaws, and Holdco's Articles of Incorporation and Bylaws, as
well as certain provisions of the CGCL and DGCL, may have the effect of
discouraging certain transactions that involve an actual or threatened change
of control of MatriDigm or Holdco.
State Antitakeover Statutes
Section 203 of the DGCL provides that, subject to certain exceptions, a
corporation may not engage in any business combination with any "interested
stockholder" for a three year period following the time that such stockholder
becomes an interested stockholder, unless (i) prior to such time, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding shares held by directors who are also
officers and employee stock purchase plans in which employee participants do
not have the right to determine confidentially whether plan shares will be
tendered in a tender or exchange offer) or (iii) at or subsequent to such time,
the business combination is approved by the board of directors of the
corporation and by the
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affirmative vote at an annual or special meeting, and not by written consent,
of at least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder. Except as specified in Section 203 of the DGCL, an
interested stockholder is defined to include (i) any person that is the owner
of 15% or more of the outstanding voting stock of the corporation or is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within three years
immediately prior to the relevant date, and (ii) the affiliates and associates
of any such person.
Under certain circumstances, Section 203 of the DGCL may make it more difficult
for a person who would be an "interested stockholder" to effect various
business combinations with a corporation for a three year period. It is
anticipated that the provisions of Section 203 of the DGCL may encourage
companies interested in acquiring Holdco to negotiate in advance with Holdco's
Board of Directors, since the stockholder approval requirement would be avoided
if a majority of the directors then in office approve either the business
combination or the transaction that results in the stockholder becoming an
interested stockholder.
A Delaware corporation will be subject to the provisions of Section 203 of the
DGCL unless it expressly elects to opt out of Section 203 of the DGCL. Holdco
has not made such an election and, accordingly, is subject to the terms of
Section 203 of DGCL unless and until Holdco's stockholders approve an amendment
to Holdco's Certificate of Incorporation or Bylaws expressly electing not to be
governed by Section 203 of the DGCL by the affirmative vote of a majority of
shares entitled to vote.
There is no provision in the CGCL equivalent to Section 203 of the DGCL.
However, under the CGCL, if a party that makes a tender offer or proposes to
acquire a corporation by a reorganization or certain sales of assets is
controlled by such corporation or is controlled by an officer or director of
such corporation, or if a director or executive officer of such corporation has
a material financial interest in such party (each an "Interested Party
Proposal"), (i) an affirmative opinion in writing as to the fairness of the
consideration to the shareholders of such corporation must be delivered to
shareholders of such corporation, and (ii) such shareholders must be (a)
informed of certain later tender offers or written proposals for a
reorganization or sale of assets made by other persons, and (b) afforded a
reasonable opportunity to withdraw any vote, consent or proxy previously given
or shares previously tendered in connection with the Interested Party Proposal.
The CGCL also provides generally that if a corporation that is party to a
merger, or its parent, owns more than 50% but less than 90% of the voting power
of the other corporation that is party to such merger, the nonredeemable shares
of common stock of the controlled corporation may be converted only into
nonredeemable shares of the surviving corporation or a parent unless all of the
shareholders of each class consents.
Certain Voting Rights
Under the DGCL, any merger, consolidation or sale of all or substantially all
of the assets of a corporation requires the approval of the holders of a
majority (unless the certificate of incorporation requires a higher percentage)
of the outstanding shares of such corporation entitled to vote thereon.
Holdco's Certificate of Incorporation does not require a higher percentage.
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Under Delaware law, the stockholders of the surviving corporation are not
required to approve a merger if certain conditions are satisfied. Unless
required by a company's certificate of incorporation, a merger need not be
approved by stockholders of the surviving corporation where (i) the agreement
of merger does not amend the certificate of incorporation of the surviving
corporation, (ii) each share of stock of the surviving corporation immediately
prior to the merger is identical to each share of stock of the surviving
corporation after the merger, and (iii) either no new shares of common stock of
the surviving corporation or securities convertible into such stock are to be
issued under the plan of merger or any such shares to be issued in the merger
plus the shares initially issuable upon conversion of any such convertible
securities issued in the merger will not exceed 20% of the number of shares
outstanding immediately prior to the merger. The DGCL further provides that no
stockholder approval is required in a merger of a corporation with or into a
single direct or indirect wholly-owned subsidiary of such corporation for the
purpose of effecting a holding company reorganization, if certain conditions
are met, including: (i) as a result of the merger, the corporation or its
successor becomes or remains a direct or indirect wholly-owned subsidiary of
the new holding company, (ii) stockholders of the corporation receive in the
merger the same number of shares of the new holding company as they owned in
the corporation prior to the merger, which stock has the same designations,
rights, powers and preferences, and the qualifications, limitations and
restrictions thereof, with respect to the holding company as such stock had
with respect to the corporation prior to the merger, (iii) the certificate of
incorporation and by-laws of the new holding company contain provisions
identical to the certificate of incorporation and by-laws of the corporation
immediately prior to the effective time of the merger (except for provisions
that could have been amended or deleted without stockholder approval), (iv) the
directors of the new holding company will be the same as the directors of the
corporation immediately prior to the merger, (v) the certificate of
incorporation of the corporation or its successor immediately following the
merger is identical in all substantive respects to the certificate of
incorporation of the corporation immediately prior to the merger, provided that
the certificate of incorporation of the corporation or its successor shall be
amended in the merger to contain a provision requiring that any act or
transaction by or involving such corporation that requires for its adoption
under the DGCL or its certificate of incorporation the approval of the
stockholders of such corporation shall require, in addition, the approval of
the stockholders of the new holding company or any successor thereto by merger
and (vi) the merger is tax-free for Federal income tax purposes to the
stockholders of the corporation. Holdco's Certificate of Incorporation does not
require stockholder authorization for mergers of the type described in this
paragraph.
Similarly, Delaware law permits a merger of a 90% owned subsidiary corporation
into its parent without stockholder approval so long as the resolution of the
board of directors of the parent providing for the merger states the terms and
conditions of the merger, including the consideration to be given by the parent
in exchange for the subsidiary shares not owned by the parent, if any.
The CGCL generally requires approval of any reorganization (which includes a
merger, certain exchange reorganizations and certain sale-of-asset
reorganizations) or sale of all or substantially all of the assets of a
corporation by the affirmative vote of the holders of a majority (unless the
articles of incorporation require a higher percentage) of the outstanding
shares of each class of capital stock of the corporation entitled to vote
thereon. MatriDigm's Amended and Restated Articles of Incorporation do not
require a higher percentage.
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Subject to certain conditions, under the CGCL, no approval of a reorganization
is required by the holders of the outstanding shares of any corporation if such
corporation, or its shareholders immediately before such reorganization, or
both, own, immediately after such reorganization, equity securities (other than
warrants or rights) of the surviving or acquiring corporation, or the parent of
either of the constituent corporations, possessing more than five-sixths of the
voting power of such surviving or acquiring corporation or such parent.
MatriDigm's Amended and Restated Articles of Incorporation do not require a
higher percentage.
Like Delaware law, under the CGCL, a parent corporation may, without
shareholder approval, merge into itself a subsidiary of which it owns at least
90% of the outstanding shares of each class of stock.
Rights Agreements; Preferred Stock
Pursuant to Holdco's Certificate of Incorporation, Holdco's Board of Directors
is authorized, subject to the limitations prescribed by law and Holdco's
Certificate of Incorporation, to provide for the issuance of shares of Holdco
Preferred Stock in one or more series, and to fix for each such series voting
powers, preferences and relative, participating, optional or other special
rights and such qualifications, limitations or restrictions thereof as are
permitted by the DGCL. The authorized shares of Holdco Preferred Stock are
available for issuance without further action by Holdco stockholders, unless
such action is required by applicable law or the rules of any stock exchange or
automated quotation system on which Holdco securities may be listed or traded.
Although Holdco's Board of Directors has no intention at the present time of
doing so, it could issue a series of Holdco Preferred Stock that could,
depending on the terms of such series, delay or prevent the completion of a
merger, tender offer or other takeover attempt. Holdco's Board of Directors
will make any determination to issue such shares based on its judgment as to
the best interests of Holdco and its stockholders. Holdco's Board of Directors,
in so acting, could issue Holdco Preferred Stock having terms that discourage
an acquisition attempt through which an acquirer may be able to change the
composition of Holdco's Board of Directors, including a tender offer or other
transaction that some, or a majority, of Holdco's stockholders might believe to
be in their best interests or in which stockholders might receive a premium for
their stock over the then current market price of such stock. Holdco currently
has no stockholder rights plan.
Pursuant to the Agreement of Reorganization, immediately preceding MatriDigm
Merger, all outstanding shares of MatriDigm Preferred Stock will be converted
to MatriDigm Common Stock. As a result, no shares of MatriDigm Preferred Stock
will be outstanding at the time of the MatriDigm Merger.
ELECTION AND NUMBER OF DIRECTORS; FILLING VACANCIES; REMOVAL OF DIRECTORS
Number of Directors
Holdco's Bylaws state that the number of directors is to be fixed in accordance
with Holdco's Certificate of Incorporation, which states that the number of
directors shall be fixed by resolution of the Board of Directors. The Agreement
of Reorganization requires an initial board of seven directors, with each of
MatriDigm and Zitel to appoint three directors and the appointment of the
seventh director to be agreed upon by MatriDigm and Zitel to serve as an
independent director.
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MatriDigm's Bylaws state that the number of directors is to be no less than
five and no more than seven. An amendment reducing the fixed number of
directors to less than five cannot be adopted if the votes cast against such an
amendment exceed 16 2/3% of the outstanding shares. Subject to revision within
the foregoing limits, MatriDigm's Bylaws, as currently in effect, set the
number of directors at seven.
Cumulative Voting
Under the DGCL, cumulative voting in the election of directors is not available
unless specifically provided for in a company's certificate of incorporation.
Holdco's Certificate of Incorporation and Bylaws do not provide for cumulative
voting rights in elections of directors.
Under the CGCL (unless a listed corporation's articles of incorporation or
bylaws provide otherwise), any shareholder of a corporation is entitled to
cumulate his or her votes for the election of directors provided that at least
one shareholder has given notice at the meeting prior to the voting of such
shareholder's intention to cumulate his or her votes. Cumulative votes may only
be cast for candidates who have been nominated before the voting. MatriDigm's
Amended and Restated Articles of Incorporation do not restrict cumulative
voting as provided under the CGCL.
Classified Board of directors
Under the DGCL, a corporation may have a classified Board of Directors, divided
into as many as three classes. Subject to the rights of the holders of any
series of Holdco Preferred Stock to elect additional directors under specified
circumstances, Holdco's Certificate of Incorporation and Bylaws do not provide
for the division of Holdco's Board of Directors into classes.
The CGCL generally requires that directors be elected annually but does permit
a "classified" board of directors if the corporation is "listed." A listed
corporation is defined under the CGCL as one which (i) is listed on the New
York Stock Exchange or American Stock Exchange or (ii) has a class of
securities designated as a national market systems security on the NASDAQ (or
any successor national market system) if the corporation has at least 800
holders of its equity securities. If eligible for the classes, the CGCL permits
corporations to provide for a board of directors divided into as many as three
classes by adopting an amendment to their articles of incorporation or bylaws,
which amendment must be approved by the stockholders.
Because MatriDigm's securities are not publicly traded, MatriDigm is not a
"listed" company as defined by Section 301.5(d) of the CGCL. Accordingly,
MatriDigm's Amended and Restated Articles of Incorporation and Bylaws are
prohibited from and do not provide for a classified board of directors.
Removal of Directors
Under the DGCL, unless otherwise provided in a corporation's certificate of
incorporation, any director or the entire board of directors may be removed,
with or without cause, by the holders of a majority of the voting shares;
provided, however, that directors of a corporation with a classified board may
be removed only for cause and, provided, further, that in the case of a
corporation having cumulative voting, if less than the entire board is removed,
a director is to be removed only for cause
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if the votes cast against his or her removal would be sufficient to elect him
or her if then cumulatively voted at an election of the entire board of
directors.
Subject to the rights of the holders of any series of Holdco Preferred Stock to
elect additional directors under specified circumstances, Holdco's Certificate
of Incorporation and Bylaws do not provide for the division of Holdco's Board
of Directors into classes and, accordingly, directors of Holdco are permitted
to be removed without cause. Holdco's Certificate of Incorporation further
provides that subject to the rights of the holders of any series of Preferred
Stock, Holdco's Board of Directors or any individual director may be removed
from office at any time with or without cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation entitled to vote at an election of directors.
Under the CGCL, the holders of at least 10% of the number of outstanding shares
of any class of stock may initiate a court action to remove any director for
cause, which is defined as fraudulent or dishonest acts or gross abuse of
authority or discretion. In addition, any or all of the directors of a
California corporation may be removed with or without cause by the affirmative
vote of a majority of the outstanding shares entitled to vote. However, no
director may be removed (unless the entire board is removed) when the votes
cast against removal would be sufficient to elect the director if voted
cumulatively at an election at which the same total number of votes were cast
and the entire number of the directors authorized at the time of the director's
most recent election were then being elected.
MatriDigm's bylaws state that a director may be removed from office by the
MatriDigm Board if declared of unsound mind by an order of court or convicted
of a felony.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
Both the DGCL and the CGCL permit a corporation to include a provision in its
charter or articles of incorporation eliminating or limiting the personal
liability of a director to the corporation or its stockholders or its
shareholders for damages for a breach of the director's fiduciary duty, subject
to certain limitations.
Section 102(b)(7) of the DGCL provides that a corporation may include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, which concerns unlawful payments of dividends, stock purchases or
redemptions or (iv) for any transaction from which the director derived an
improper personal benefit.
Holdco's Certificate of Incorporation includes a provision similar to that of
the DGCL and eliminates director and officer liability to the maximum extent
permitted by the DGCL. Holdco's Articles of Incorporation further state that
any repeal or modification of the charter provision that exempts directors of
Holdco from personal liability to Holdco shall only be prospective and shall
not effect the limitation of liability granted to directors in effect at the
time of the alleged occurrence of any action or omission giving rise to
liability.
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The CGCL does not permit the elimination of monetary liability of a director
where such liability is based on: (i) intentional misconduct or knowing and
culpable violation of law; (ii) acts or omissions that a director believes to
be contrary to the best interests of the corporation or its shareholders, or
that involve the absence of good faith on the part of the director; (iii)
receipt of any improper personal benefit; (iv) acts or omissions that show
reckless disregard for the director's duty to the corporation or its
shareholders, where the director in the ordinary course of performing a
director's duties should have been aware of a risk of serious injury to the
corporation or its shareholders; (v) acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the
director's duty to the corporation and its shareholders; (vi) interested
transactions between the corporation and a director, in which a director has a
material financial interest; or (vii) improper distributions, loans or
guarantees. MatriDigm's Amended and Restated Articles of Incorporation provide
for the elimination of directors' liability for monetary damages to the fullest
extent permissible under California law.
Similar to Holdco, MatriDigm's Amended and Restated Articles of Incorporation
also state that any repeal or modification of the charter provision that
exempts directors of Holdco from personal liability to Holdco shall only be
prospective and shall not effect the limitation of liability granted to
directors in effect at the time of the alleged occurrence of any action or
omission giving rise to liability.
AMENDMENT OF CHARTER DOCUMENTS
The DGCL generally provides that the approval of a majority of the outstanding
shares of a class entitled as a class to vote thereon is required to amend a
certificate of incorporation. Holdco's Certificate of Incorporation provides
that any provision thereof may be amended in the manner presently or thereafter
prescribed by statute, except as provided in paragraph B of Article VII of
Holdco's Certificate of Incorporation, which operates to ensure that the laws
permitting limitations on directors' liability are applied as they existed at
the time of any cause of action in the event that an amendment or repeal of the
applicable DGCL provisions would have the effect of limiting or eliminating the
directors' protection from liability. Any amendment or repeal of Articles VI
and VII of Holdco's Certificate of Incorporation, which set forth powers
related to the amendment and repeal of the provisions of the Certificate of
Incorporation, requires the affirmative vote of 66 2/3% of the voting power of
all of the then-outstanding shares of voting stock, voting as a single class.
Under the CGCL, a corporation's articles of incorporation generally may be
amended by the approval of a majority of the outstanding shares of each class.
MatriDigm's Amended and Restated Articles of Incorporation make no provision to
the contrary.
AMENDMENT OF BYLAWS
Under the DGCL, bylaws may be amended by stockholders; however, a corporation
may confer, in its certificate of incorporation, the power to amend bylaws upon
the directors. The fact that such power has been so conferred upon the
directors does not divest the stockholders of their power to amend the bylaws.
Holdco's Certificate of Incorporation expressly provides that Holdco's Board of
Directors may make, alter or repeal Holdco's Bylaws, and the Holdco Bylaws
state that they may be amended by the affirmative vote of at least 66 2/3% of
the voting power of all of the then-outstanding shares of stock entitled to
vote thereon.
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Under the CGCL, bylaws may be adopted, amended or repealed either by the vote
of a majority of the outstanding shares entitled to vote thereon or (subject to
any restrictions in the articles of incorporation or bylaws) by the approval of
the board of directors, except that amendments to the bylaws specifying or
changing a fixed number of directors or the maximum or minimum number or
changing from a fixed to a variable board or vice versa may only be adopted by
approval of the affirmative vote of a majority of the outstanding shares
entitled to vote. MatriDigm's Bylaws contain language that reflects the bylaw
amendment provisions of the CGCL, including the requirement that any amendment
reducing the number of directors on a fixed board of directors or the minimum
number of directors on a variable number board of directors to a number less
than five cannot be adopted if the vote cast against its adoption at a meeting
or the shares not consenting, in the case of action by written consent, are
equal to more than 16 2/3% of the outstanding shares entitled to vote.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The DGCL permits a corporation to indemnify officers, directors, employees and
agents for actions taken in good faith and in a manner they reasonably believe
to be in, or not opposed to, the best interests of the corporation, and with
respect to any criminal action, which they had no reasonable cause to believe
was unlawful, as determined by a majority vote of the disinterested directors,
by a committee of such directors designated by majority vote of the
disinterested directors, by independent legal counsel in a written opinion (if
there are no independent directors or such independent directors so direct) or
by the stockholders. The DGCL provides that a corporation may advance expenses
of defense (upon receipt of a written undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful
defendant for expenses, and permits a corporation to purchase and maintain
liability insurance for its directors and officers. Under the DGCL,
indemnification may not be made for any claim, issue or matter as to which a
person has been adjudged to be liable to the corporation, unless and only to
the extent a court determines that the person is entitled to indemnity for such
expenses as the court deems proper.
Holdco's Bylaws state that Holdco will indemnify its directors and officers to
the fullest extent not prohibited by the DGCL as the same exists or may
thereafter be amended or interpreted, but, in the case of alleged occurrences
of actions or omissions preceding any such amendment or interpretation, only to
the extent that such amendment permits Holdco to provide broader
indemnification rights than permitted prior to such amendment; provided,
however, that Holdco may modify the extent of such indemnification by
individual contracts with its directors and officers; and, provided, further,
that Holdco will not be required to indemnify any director or officer in
connection with any proceeding (or part thereof) initiated by such person
unless (i) such indemnification is expressly required to be made by law, (ii)
the proceeding was authorized by Holdco's Board of Directors, (iii) such
indemnification is provided by Holdco, in its sole discretion, pursuant to the
powers vested in Holdco under the DGCL or (iv) such indemnification is required
to be made pursuant to the contractual right of indemnification expressly
creased under Holdco's Bylaws.
The indemnification and advancement rights conferred by Holdco's Bylaws are not
exclusive of any other right to which persons seeking indemnification may be
entitled under any statute, provision of Holdco's Certificate of Incorporation
or Bylaws, agreement, or vote of the stockholders or disinterested directors.
Finally, Holdco's Bylaws authorize Holdco, upon approval of Holdco's Board
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of Directors, to purchase insurance on behalf of any person required or
permitted to be indemnified pursuant to such bylaws.
Holdco's Certificate of Incorporation contains no provision with respect to the
indemnification of any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he or she is or was a director or officer, of Holdco, or is or was serving
at the request of Holdco as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all
expenses incurred by any director or officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under Holdco's Bylaws or otherwise. Notwithstanding the
foregoing, no advance shall be made by Holdco to an officer of Holdco (except
by reason of the fact that such officer is or was a director of Holdco in which
event this paragraph shall not apply) in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, if a determination is
reasonably and promptly made (i) by the Board of Directors by a majority vote
of a quorum consisting of directors who were not parties to the proceeding, or
(ii) if such quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, that the facts known to the decision-making party at the time such
determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of Holdco.
The CGCL permits indemnification of expenses in a derivative or third party
action, except that with respect to derivative actions (i) no indemnification
may be made when a person is adjudged liable to the corporation in the
performance of that person's duty to the corporation and its shareholders,
unless and only to the extent that a court determines that the person is fairly
and reasonably entitled to indemnity for expenses, and (ii) no indemnification
may be made in respect of amounts paid or expenses incurred in settling or
otherwise disposing of a threatened or pending action without court approval or
expenses incurred in an action settled or disposed of without court approval.
Indemnification is permitted by the CGCL only for acts taken in good faith and
reasonably believed to be in the best interests of the corporation and its
shareholders, as determined by a majority vote of a disinterested quorum of the
directors, independent legal counsel (if a quorum of independent directors is
not obtainable), a majority vote of a quorum of the shareholders (excluding
shares owned by the indemnified party), or the court handling the action and,
in the case of a criminal proceeding, indemnification is permitted if the
indemnified party had no reasonable cause to believe his or her conduct was
unlawful. The CGCL requires indemnification when the individual being
indemnified has successfully defended the action on the merits and provides
that a corporation may advance expenses of defense upon receipt of a written
undertaking to reimburse the corporation if indemnification is not appropriate.
MatriDigm's Amended and Restated Articles of Incorporation authorize MatriDigm
to indemnify agents through Bylaw provisions, agreements with agents, vote of
shareholder or disinterested directors or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the CGCL, subject only to
the applicable limits set forth in Section 204 of the CGCL with respect to
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actions arising from a breach of duty to MatriDigm and its shareholders.
MatriDigm's Bylaws additionally provide that MatriDigm will indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of MatriDigm to procure a
judgment in its favor) by reason of the fact that such person is or was an
agent of MatriDigm, against expenses actually and reasonably incurred in
connection with such proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in the best interests of MatriDigm
and, in the case of a criminal proceeding, had no reasonable cause to believe
the conduct of such person was unlawful. MatriDigm's Bylaws further provide
that MatriDigm will indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action by or in the
right of MatriDigm to procure a judgment in its favor by reason of the fact
that such person is or was an agent of MatriDigm; provided, however, that no
indemnification will be made (i) in respect of any claim, issue or matter as to
which such person was adjudged to be liable to MatriDigm in the performance of
such person's duty to MatriDigm and its shareholders, unless and only to the
extent that the court in which such proceeding is or was pending shall
determine upon application that such person is fairly and reasonably entitled
to indemnity for the expenses which such court shall determine; (ii) of amounts
paid in settling or otherwise disposing of a pending action without court
approval; or (iii) of expenses incurred in defending a pending action which is
settled or otherwise disposed of without court approval. Any indemnification of
MatriDigm's agents shall be made by MatriDigm only if authorized in the
specific case in accordance with certain procedures set forth in the relevant
Bylaw provisions, upon a determination that indemnification of the agent is
proper in the circumstances because the agent has met the applicable standard
of conduct set forth in the Bylaws. Expenses, costs and charges incurred in
defending any proceeding will be advanced prior to the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of the agent to
repay such amount if it is determined ultimately that the agent is not entitled
to be indemnified.
The indemnification provided under MatriDigm's Bylaws shall not be deemed
exclusive of, and shall not affect, any other rights to which an agent seeking
indemnification may be entitled under any law, other provision of MatriDigm's
Bylaws, MatriDigm's Amended and Restated Articles of Incorporation, agreement,
vote of shareholders or disinterested directors or otherwise.
DIVIDENDS
Under the DGCL, a corporation may pay dividends out of surplus or out of its
net profits for the fiscal year in which the dividend is declared or its net
profits for the preceding fiscal year, subject to certain limitations for the
benefit of certain preference shares. Holdco's Certificate of Incorporation and
Bylaws place no restrictions on Holdco's ability to pay dividends. Holdco's
Bylaws, however, provide that before payment of any dividend, there may be set
aside out of any funds of the corporation available for dividends such sum or
sums as Holdco's Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for any such other purpose conducive to Holdco's interest.
Generally, under the CGCL a California corporation may pay dividends out of
retained earnings or if, after giving effect thereto, (i) the assets (excluding
goodwill and certain other assets) of the corporation are at least equal to
1.25 times its liabilities (excluding certain deferred credits), and (ii)
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the current assets of such corporation are at least equal to (a) its current
liabilities or (b) if the average of the earnings of such corporation before
taxes and interest expense for the two preceding fiscal years was less than the
average of the interest expense of such corporation for such fiscal years, 1.25
times its current liabilities. In addition, the ability of a California
corporation to pay dividends is restricted by certain limitations for the
benefit of certain preference shares. MatriDigm's Amended and Restated Articles
of Incorporation and Bylaws contain no provision with regard to dividends.
STOCKHOLDERS MEETINGS
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or such other persons as may be authorized by the
certificate of incorporation or bylaws. Holdco's Bylaws provide that a special
meeting may be called by the chairman of the Board of Directors or a majority
of the Board of Directors. Holdco's Bylaws further provide that special
meetings of Holdco stockholders may be called for any purpose or purposes, by
(i) the chairman of the Board of Directors, (ii) the chief executive officer,
or (iii) the Board of Directors pursuant to a resolution adopted by a majority
of the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any such
resolution is presented to the board of directors for adoption.
Pursuant to Holdco's Bylaws, if a special meeting is called by any person or
persons other than the Board of Directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted. No
business may be transacted at such special meeting otherwise than specified in
such notice. The Board of Directors shall determine the time and place of such
special meeting, which shall be held not less than 35 nor more than 120 days
after the date of the receipt of the request. If notice of the special meeting
is not given to stockholders entitled to vote within 60 days after the receipt
of the request, the person or persons requesting the meeting may set the time
and place of the meeting and give the notice.
Holdco's Bylaws provide a procedure for nominating persons to be elected to
Holdco's Board of Directors including, among other things, the requirement of
not less than 10 nor more than 60 days' notice prior to the scheduled meeting
and the provision of certain information about the nominee and the stockholder.
Under the CGCL and MatriDigm's Bylaws, special meetings of MatriDigm
shareholders may be called by the chairman of the board, the MatriDigm Board or
the president, or by one or more shareholders holding not less than 10% of the
shares entitled to vote at the meeting. MatriDigm's Bylaws do not provide a
procedure for nominating directors.
ACTION BY WRITTEN CONSENT
The DGCL provides that, unless otherwise provided in the certificate of
incorporation, stockholders of a Delaware corporation may take any action
without a meeting by written consent signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. Prompt notice of the taking of any action by
less than unanimous consent must be given to stockholders who did not consent
to such action. Holdco's Certificate of Incorporation and Bylaws provide that
any action required by the provisions of the DGCL to be
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taken by the stockholders of Holdco must be taken either at a stockholders
meeting or by unanimous written consent.
Under the CGCL (unless otherwise provided in a corporation's articles of
incorporation), any action which may be taken at an annual or special meeting
of shareholders may also be taken by the written consent of the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. MatriDigm's Amended and
Restated Articles of Incorporation contain a similar provision, except that, in
the case of election of directors, such consent shall be effective only if
signed by the holders of all outstanding shares entitled to vote for the
election of directors; provided, however, that only the consent of a majority
of the outstanding shares entitled to vote is required to fill a vacancy on the
board of directors other than a vacancy created by removal.
DISSENTERS' RIGHTS
Under the DGCL, appraisal rights are generally available for the shares of any
class or series of stock of a corporation in a merger or consolidation,
provided, however, that no appraisal rights are available for the shares of any
class or series of stock which, at the record date for the meeting held to
approve such transaction, were either (i) listed on a national securities
exchange or NASDAQ, or (ii) held of record by more than 2,000 holders, and
further provided that no appraisal rights are available to stockholders of the
surviving corporation if the merger did not require their approval. Appraisal
rights are, however, available for such class or series if the holders thereof
receive in the merger or consolidation anything except: (i) shares of stock of
the corporation surviving or resulting from such merger or consolidation or
depository receipts in respect thereof; (ii) shares of stock of any other
corporation or depository receipts in respect thereof which at the effective
date of the merger or consolidation is either listed on a national securities
exchange or NASDAQ or held of record by more than 2,000 stockholders; (iii)
cash in lieu of fractional shares or fractional depository receipts; or (iv)
any combination of the foregoing.
Under the CGCL, in connection with the merger of a corporation for which the
approval of outstanding shares is required, dissenting shareholders of such
corporation who follow prescribed statutory procedures are entitled to receive
payment of the fair market value of their shares. No such rights are available,
however, if the shares are listed on a national securities exchange certified
by the California Commissioner of Corporations or appear on the Federal Reserve
Board list of over-the-counter margin stocks unless (i) such shares are subject
to certain restrictions on transfer, or (ii) the holders of at least five
percent of such shares elect dissenter's rights. In connection with the
MatriDigm Merger, holders of MatriDigm Common Stock may, by complying with
required procedures, be entitled to dissenters' rights under Chapter 13 of the
CGCL. See "Dissenters' Rights of MatriDigm Shareholders."
INSPECTION OF STOCKHOLDER LIST
Under the DGCL, upon written demand under oath stating the purpose thereof, any
stockholder of record may inspect the stock ledger, a list of the stockholders
and other books and records of a corporation so long as such inspection is for
a purpose reasonably related to such person's interest as a stockholder.
Holdco's Bylaws provide that Holdco's secretary shall prepare and make, at
least ten days
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before every meeting of stockholders, a complete list of the stockholders
entitled to vote at said meeting, that includes among other things the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held.
Unlike the DGCL, the CGCL provides for an absolute right of inspection of the
shareholder list for persons holding five percent or more of a corporation's
voting shares or persons holding one percent or more of such shares who have
filed a Schedule 14A with the Securities and Exchange Commission relating to
the election of directors. Both the CGCL and the DGCL allow any stockholder or
shareholder to inspect the stockholder list for a purpose reasonably related to
such person's interest as a stockholder or shareholder. MatriDigm's Bylaws
provide that five percent shareholders shall have a right to copy or to receive
a copy (with reimbursement for such copy to be remitted to MatriDigm) the
record of shareholders' names, addresses and shareholdings upon five business
days' prior written demand upon MatriDigm. MatriDigm's Bylaws also provide that
every director has the absolute right at any reasonable time to inspect and
copy all books, records and documents of every kind and to inspect the physical
properties of MatriDigm.
LOANS TO OFFICERS AND EMPLOYEES
Under the DGCL, a corporation may make loans to or guarantee the obligations of
its officers or other employees and those of its subsidiaries when such action,
in the judgment of the directors, may reasonably be expected to benefit the
corporation.
Holdco's Bylaws specifically provide that Holdco may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of Holdco or of Holdco's subsidiaries, including any officer or employee who is
a director of Holdco or its subsidiaries, whenever, in the judgment of Holdco's
Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the board of directors shall approve, including, without limitation, a
pledge of shares of stock of the corporation.
Under the CGCL, such loans or guaranties, including pursuant to employee
benefit plans, may be made only with shareholder approval, provided, however,
that, if the company has 100 or more shareholders and a bylaw approved by
shareholders permitting such loans or guarantees to be approved by the board of
directors, the board of directors alone may approve such loans to or guarantees
on behalf of an officer (whether or not such officer is a director) or adopt an
employee benefit plan authorizing such loans or guaranties by a vote
sufficient, without counting the vote of any interested director or directors,
if the board of directors determines that any such loans, guarantees or plans
may reasonably be expected to benefit the corporation. Neither MatriDigm's
Amended and Restated Articles of Incorporation nor its Bylaws contain a
provision regarding loans to officers and employees.
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INTERESTED DIRECTOR TRANSACTIONS
Under the laws of both California and Delaware, contracts or transactions
between a corporation and one or more of its directors, or between a
corporation and any other entity in which one or more of its directors are
directors or have a financial interest, are not void or voidable because of
such interest or because such director is present at a meeting of the board
which authorizes or approves the contract or transaction, provided that certain
conditions, such as obtaining the required approval and fulfilling the
requirements of good faith and full disclosure, are met. With certain
exceptions, the conditions are similar under the CGCL and the DGCL. Under the
CGCL and the DGCL, either (i) the stockholders or shareholders of the Board of
Directors must approve any such contract or transaction in good faith after
full disclosure of the material facts (and, in the case of board approval other
than for a common directorship, the CGCL requires that the contract or
transaction must also be "just and reasonable" to the corporation), or (ii) the
contract or transaction must have been "fair" (in Delaware) or, in the case of
a common directorship (in California), "just and reasonable" as to the
corporation at the time it was approved. The CGCL explicitly places the burden
of proof of the just and reasonable nature of the contract or transaction on
the interested director.
Under the DGCL, if approval of the board of directors is sought, the contract
or transaction must be approved by a majority of the disinterested directors
(even though less than a majority of a quorum). Under the CGCL, if shareholder
approval is sought, the interested director is not entitled to vote his or her
shares at a shareholder meeting with respect to any action regarding such
contract or transaction. If board approval is sought, the contract or
transaction must be approved by a majority vote of a quorum of the directors,
without counting the vote of any interested directors (except that interested
directors may be counted for purposes of establishing a quorum).
Neither Holdco's Certificate of Incorporation and Bylaws nor MatriDigm's
Amended and Restated Articles of Incorporation and Bylaws contain provisions
relating to interested director transactions.
STOCKHOLDER DERIVATIVE SUIT
Under the DGCL, a person may only bring a derivative action on behalf of the
corporation if the person was a stockholder of the corporation at the time of
the transaction in question or his or her stock thereafter devolved upon him or
her by operation of law. The CGCL provides that a shareholder bringing a
derivative action on behalf of a corporation need not have been a shareholder
at the time of the transaction in question, provided that certain criteria are
met. The CGCL also provides that the corporation or the defendant in a
derivative suit may, under certain circumstances, make a motion to the court
for an order requiring the plaintiff shareholder to furnish a security bond.
The DGCL does not have a similar bonding requirement. Holdco's Certificate of
Incorporation and Bylaws contain no provisions that address stockholder
derivative suits. MatriDigm's Amended and Restated Articles of Incorporation
and Bylaws also contain no such provision.
DISSOLUTION
Under the DGCL, if the dissolution is initiated by the board of directors, it
may be approved by the holders of a majority of the corporation's stock. If the
board of directors does not approve the proposal to dissolve, it must be
consented to in writing by all stockholders entitled to vote thereon.
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Under the CGCL, shareholders holding 50% or more of the total voting power may
authorize a corporation's dissolution and this right may not be modified by the
articles of incorporation.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF HOLDCO
AND SHAREHOLDERS OF ZITEL
Holdco is incorporated under the laws of the State of Delaware and Zitel is
incorporated under the laws of the State of California. As a result of the
Zitel Merger, holders of Zitel Common Stock will become stockholders of Holdco
and the rights of all such former Zitel shareholders will be governed by the
applicable provisions of Delaware law, Holdco's Certificate of Incorporation
and Holdco's Bylaws. The rights of the holders of Zitel Common Stock are
currently governed by the applicable provisions of California law, Zitel's
Restated Articles of Incorporation, and Zitel's Bylaws.
Zitel shareholders should carefully review the following summary that sets
forth the material differences between the rights of Zitel shareholders and
Holdco stockholders in order to understand how certain of their rights as
shareholders will be affected upon completion of the Zitel Merger. This summary
does not purport to be a complete statement of the rights of Zitel shareholders
under the applicable California laws, Zitel's Restated Articles of
Incorporation and Zitel's Bylaws, as compared with the rights of Holdco
stockholders under the applicable Delaware laws, Holdco's Certificate of
Incorporation and Holdco's Bylaws, or a complete description of the specific
provisions thereof as referred to herein. The identification of specific
differences is not meant to indicate that other equally or more significant
differences do not exist. This summary is qualified in its entirety by
reference to the CGCL and the DGCL and the governing corporate instruments of
Zitel and Holdco to which such Zitel shareholders are referred.
CHANGES IN CONTROL AND BUSINESS COMBINATIONS
Certain provisions of Zitel's Restated Articles of Incorporation and Bylaws,
and Holdco's Articles of Incorporation and Bylaws, as well as certain
provisions of the CGCL and DGCL, may have the effect of discouraging certain
transactions that involve an actual or threatened change of control of Zitel or
Holdco.
State Antitakeover Statutes
Section 203 of the DGCL provides that, subject to certain exceptions, a
corporation may not engage in any business combination with any "interested
stockholder" for a three year period following the date that such stockholder
becomes an interested stockholder, unless (i) prior to such time, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding shares held by directors who are also
officers and employee stock purchase plans in which employee participants do
not have the right to determine confidentially whether plan shares will be
tendered in a tender or exchange offer) or (iii) at or subsequent to such time,
the business combination is approved by the Board of Directors of the
corporation and by the affirmative vote at an annual or special meeting, and
not by written consent, of at least 66 2/3% of the
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outstanding voting stock that is not owned by the interested stockholder.
Except as specified in Section 203 of the DGCL, an interested stockholder is
defined to include (i) any person that is the owner of 15% or more of the
outstanding voting stock of the corporation or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately prior to
the relevant date, and (ii) the affiliates and associates of any such person.
Under certain circumstances, Section 203 of the DGCL may make it more difficult
for a person who would be an "interested stockholder" to effect various
business combinations with a corporation for a three year period. It is
anticipated that the provisions of Section 203 of the DGCL may encourage
companies interested in acquiring Holdco to negotiate in advance with Holdco's
Board of Directors, since the stockholder approval requirement would be avoided
if a majority of the directors then in office approve either the business
combination or the transaction which results in the stockholder becoming an
interested stockholder.
A Delaware corporation will be subject to the provisions of Section 203 of the
DGCL unless it expressly elects to opt out of Section 203 of the DGCL. Holdco
has not made such an election and, accordingly, is subject to the terms thereof
unless and until Holdco's stockholders approve an amendment to Holdco's
Certificate of Incorporation or Bylaws expressly electing not to be governed by
Section 203 of the DGCL by the affirmative vote of a majority of shares
entitled to vote.
There is no provision in the CGCL equivalent to Section 203 of the DGCL.
However, under the CGCL, if a party that makes a tender offer or proposes to
acquire a corporation by a reorganization or certain sales of assets is
controlled by such corporation or is controlled by an officer or director of
such corporation, or if a director or executive officer of such corporation has
a material financial interest in such party (each an "Interested Party
Proposal"), (i) an affirmative opinion in writing as to the fairness of the
consideration to the shareholders of such corporation must be delivered to
shareholders of such corporation, and (ii) such shareholders must be (a)
informed of certain later tender offers or written proposals for a
reorganization or sale of assets made by other persons, and (b) afforded a
reasonable opportunity to withdraw any vote, consent or proxy previously given
or shares previously tendered in connection with the Interested Party Proposal.
The CGCL also provides generally that if a corporation that is party to a
merger, or its parent, owns more than 50% but less than 90% of the voting power
of the other corporation that is party to such merger, the nonredeemable shares
of common stock of the controlled corporation may be converted only into
nonredeemable shares of the surviving corporation or a parent unless all of the
shareholders of each class consents.
Certain Voting Rights
Under the DGCL, any merger, consolidation or sale of all or substantially all
of the assets of a corporation requires the approval of the holders of a
majority (unless the certificate of incorporation requires a higher percentage)
of the outstanding shares of such corporation entitled to vote thereon.
Holdco's Certificate of Incorporation does not require a higher percentage.
Under Delaware law, the stockholders of the surviving corporation are not
required to approve a merger if certain conditions are satisfied. Unless
required by a company's certificate of incorporation,
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a merger need not be approved by such stockholders where (i) the agreement of
merger does not amend the Certificate of Incorporation of the surviving
corporation, (ii) each share of stock of the surviving corporation immediately
prior to the merger is identical to each share of stock of the surviving
corporation after the merger, and (iii) either no new shares of common stock of
the surviving corporation or securities convertible into such stock are to be
issued under the plan of merger or any such shares to be issued in the merger
plus the shares initially issuable upon conversion of any such convertible
securities issued in the merger will not exceed 20% of the number of shares
outstanding immediately prior to the merger. The DGCL further provides that no
stockholder approval is required in a merger of a corporation with or into a
single direct or indirect wholly-owned subsidiary of such corporation for the
purpose of effecting a holding company reorganization, if certain conditions
are met, including (i) as a result of the merger, the corporation or its
successor becomes a direct or indirect wholly-owned subsidiary of the new
holding company, (ii) stockholders of the corporation receive in the merger the
same number of shares of the new holding company as they owned in the
corporation prior to the merger, which stock has the same designations, rights,
powers and preferences, and the qualifications, limitations and restrictions
thereof, with respect to the holding company as such stock had with respect to
the corporation prior to the merger, (iii) the certificate of incorporation and
by-laws of the new holding company contain provisions identical to the
certificate of incorporation and by-laws of the corporation immediately prior
to the effective time of the merger (except for provisions that could have been
amended or deleted without stockholder approval), (iv) the directors of the new
holding company will be the same as the directors of the corporation
immediately prior to the merger, (v) the certificate of incorporation of the
corporation or its successor immediately following the merger is identical in
all substantive respects to the certificate of incorporation of the corporation
immediately prior to the merger, provided that the certificate of incorporation
of the corporation or its successor shall be amended in the merger to contain a
provision requiring that any act or transaction by or involving such
corporation that requires for its adoption under the DGCL or its certificate of
incorporation the approval of the stockholders of such corporation shall
require, in addition, the approval of the stockholders of the new holding
company or any successor thereto by merger and (vi) the merger is tax-free for
Federal income tax purposes to the stockholders of the corporation. Holdco's
Certificate of Incorporation does not require stockholder authorization for
mergers of the type described in this paragraph.
Similarly, Delaware law permits a merger of a 90% owned subsidiary corporation
into its parent without stockholder approval so long as the resolution of the
board of directors of the parent providing for the merger states the terms and
conditions of the merger, including the consideration to be given by the parent
in exchange for the subsidiary shares not owned by the parent, if any.
The CGCL generally requires approval of any reorganization (which includes a
merger, certain exchange reorganizations and certain sale-of-asset
reorganizations) or sale of all or substantially all of the assets of a
corporation by the affirmative vote of the holders of a majority (unless the
articles of incorporation require a higher percentage) of the outstanding
shares of each class of capital stock of the corporation entitled to vote
thereon. Zitel's Restated Articles of Incorporation do not require a higher
percentage.
Subject to certain conditions, under the CGCL, no approval of a reorganization
is required by the holders of the outstanding shares of any corporation if such
corporation, or its shareholders
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immediately before such reorganization, or both, own, immediately after such
reorganization, equity securities (other than warrants or rights) of the
surviving or acquiring corporation, or the parent of either of the constituent
corporations, possessing more than five-sixths of the voting power of such
surviving or acquiring corporation or such parent. Zitel's Restated Articles of
Incorporation do not require a higher percentage.
Like Delaware law, under the CGCL, a parent corporation may, without
shareholder approval, merge into itself a subsidiary of which it owns at least
90% of the outstanding shares of each class of stock.
Rights Agreements; Preferred Stock
Pursuant to Holdco's Certificate of Incorporation, Holdco's Board of Directors
is authorized, subject to the limitations prescribed by law and Holdco's
Certificate of Incorporation, to provide for the issuance of shares of Holdco
Preferred Stock in one or more series, and to fix for each such series voting
powers, preferences and relative, participating, optional or other special
rights and such qualifications, limitations or restrictions thereof as are
permitted by the DGCL. Similarly, Zitel's Restated Articles of Incorporation
provide that the Zitel Board is authorized, subject to the limitations
prescribed by Zitel's Restated Articles of Incorporation and the CGCL, to
provide for the issuance of shares of Zitel Preferred Stock in one or more
series, including several pre-defined series. The authorized shares of Holdco
Preferred Stock are available for issuance without further action by Holdco
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which Holdco securities may
be listed or traded.
Although Holdco's Board of Directors has no intention at the present time of
doing so, it could issue a series of Holdco Preferred Stock that could,
depending on the terms of such series, delay or prevent the completion of a
merger, tender offer or other takeover attempt. Holdco's Board of Directors
will make any determination to issue such shares based on its judgment as to
the best interests of Holdco and its stockholders. Holdco's Board of Directors,
in so acting, could issue Holdco Preferred Stock having terms that discourage
an acquisition attempt through which an acquirer may be able to change the
composition of Holdco's Board of Directors, including a tender offer or other
transaction that some, or a majority, of Holdco's stockholders might believe to
be in their best interests or in which stockholders might receive a premium for
their stock over the then current market price of such stock. Holdco currently
has no stockholder rights plan.
ELECTION AND NUMBER OF DIRECTORS; FILLING VACANCIES; REMOVAL OF DIRECTORS
Number of Directors
Holdco's Bylaws state that the number of directors is to be fixed in accordance
with Holdco's Certificate of Incorporation, which states that the number of
directors shall be fixed by resolution of the Board of Directors. The Agreement
of Reorganization requires an initial board of seven directors, with each of
MatriDigm and Zitel to appoint three directors, and the appointment of the
seventh director to be agreed upon by the parties to serve as an independent
director.
Zitel's Bylaws authorize a number of directors that shall be not less than five
nor more than nine. The exact number of directors may be set from time to time
by (i) the approval of Zitel's Board of Directors, or (ii) by the affirmative
vote of a majority of shares represented and voting at a duly held
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meeting at which a quorum is present. Zitel's Bylaws further provide that any
amendment of the Bylaws that would have the effect of changing the maximum or
minimum number of directors may be adopted only by the affirmative vote of a
majority of the outstanding shares entitled to vote; provided, that an
amendment reducing the minimum number of directors to less than five cannot be
adopted if votes cast against its adoption are equal to more than 16 2/3%.
Cumulative Voting
Under the DGCL, cumulative voting in the election of directors is not available
unless specifically provided for in a company's certificate of incorporation.
Holdco's Certificate of Incorporation and Bylaws do not provide for cumulative
voting rights in elections of directors.
Under the CGCL (unless a listed corporation's articles of incorporation or
bylaws provide otherwise), any shareholder of a corporation is entitled to
cumulate his or her votes for the election of directors provided that at least
one shareholder has given notice at the meeting prior to the voting of such
shareholder's intention to cumulate his or her votes. Cumulative votes may only
be cast for candidates who have been nominated before the voting. Zitel's
Restated Articles of Incorporation do not restrict cumulative voting as
provided under the CGCL.
Classified Board of Directors
Under the DGCL, a corporation may have a classified board of directors, divided
into as many as three classes. Subject to the rights of the holders of any
series of Preferred Stock to elect additional directors under specified
circumstances, Holdco's Certificate of Incorporation and Bylaws do not provide
for the division of Holdco's directors into classes.
The CGCL generally requires that directors be elected annually but does permit
a "classified" board of directors if the corporation is "listed." A listed
corporation is defined under the CGCL as one which (i) is listed on the New
York Stock Exchange or American Stock Exchange or (ii) with a class of
securities designated as a national market systems security on NASDAQ (or any
successor national market system) if the corporation has at least 800 holders
of its equity securities. If eligible for the classes, the CGCL permits
corporations to provide for a Board of Directors divided into as many as three
classes by adopting an amendment to their Articles of Incorporation or Bylaws,
which amendment must be approved by the stockholders. Because Zitel's
securities are publicly traded on the NASDAQ National Market, Zitel is a
"listed" company as defined by Section 301.5(d) of the CGCL. Zitel's Restated
Articles of Incorporation and Bylaws do not provide for a classified board of
directors.
Removal of Directors
Under the DGCL, unless otherwise provided in a corporation's certificate of
incorporation, any director or the entire board of directors may be removed,
with or without cause, by the holders of a majority of the voting shares;
provided, however, that directors of a corporation with a classified board may
be removed only for cause and, provided, further, that in the case of a
corporation having cumulative voting, if less than the entire board is removed,
a director is to be removed only for cause if the votes cast against his or her
removal would be sufficient to elect him or her if them cumulatively voted at
an election of the entire board of directors.
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Subject to the rights of the holders of any series of Holdco Preferred Stock to
elect additional directors under specified circumstances, Holdco's Certificate
of Incorporation and Bylaws do not provide for the division of Holdco's Board
of Directors into classes and, accordingly, directors of Holdco are permitted
to be removed without cause. Holdco's Certificate of Incorporation provides
that subject to the rights of the holders of any series of Preferred Stock,
Holdco's Board of Directors or any individual director may be removed from
office at any time with or without cause by the affirmative vote of the holders
of a majority of the voting power of all the then-outstanding shares of voting
stock of the corporation entitled to vote at an election of directors.
Under the CGCL, the holders of at least 10% of the number of outstanding shares
of any class of stock may initiate a court action to remove any director for
cause, which is defined as fraudulent or dishonest acts or gross abuse of
authority or discretion. In addition, any or all of the directors of a
California corporation may be removed with or without cause by the affirmative
vote of a majority of the outstanding shares entitled to vote. However, no
director may be removed (unless the entire board is removed) when the votes
cast against removal would be sufficient to elect the director if voted
cumulatively at an election at which the same total number of votes were case
and the entire number of the directors authorized at the time of the director's
most recent election were then being elected.
Zitel's Bylaws provide that the Zital Board or any individual director may be
removed from office at any time with or without cause by the affirmative vote
of the holders of a majority of the voting power of all the then-outstanding
shares of Zitel's voting stock entitled to vote at an election of directors.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
Both the DGCL and the CGCL permit a corporation to include a provision in its
charter or articles of incorporation eliminating or limiting the personal
liability of a director to the corporation or its stockholders or its
shareholders for damages for a breach of the director's fiduciary duty, subject
to certain limitations.
Section 102(b)(7) of the DGCL provides that a corporation may include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, which concerns unlawful payments of dividends, stock purchases or
redemptions or (iv) for any transaction from which the director derived an
improper personal benefit.
Holdco's Certificate of Incorporation includes such a provision, eliminating
director and officer liability to the maximum extent permitted by the DGCL.
Holdco's Articles of Incorporation further state that any repeal or
modification of the charter provision that exempts directors of Holdco from
personal liability to Holdco shall only be prospective and shall not effect the
limitation of liability granted to directors in effect at the time of the
alleged occurrence of any action or omission giving rise to liability.
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The CGCL does not permit the elimination of monetary liability of a director
where such liability is based on: (i) intentional misconduct or knowing and
culpable violation of law; (ii) acts or omissions that a director believes to
be contrary to the best interests of the corporation or its shareholders, or
that involve the absence of good faith on the part of the director; (iii)
receipt of any improper personal benefit; (iv) acts or omissions that show
reckless disregard for the director's duty to the corporation or its
shareholders, where the director in the ordinary course of performing a
director's duties should have been aware of a risk of serious injury to the
corporation or its shareholders; (v) acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the
director's duty to the corporation and its shareholders; (vi) interested
transactions between the corporation and a director, in which a director has a
material financial interest; or (vii) improper distributions, loans or
guarantees. Zitel's Restated Articles of Incorporation provide for the
elimination of directors' liability for monetary damages to the fullest extent
permissible under California law.
AMENDMENT OF ARTICLES OR CERTIFICATE OF INCORPORATION AND BYLAWS
The DGCL generally provides that the approval of a majority of the outstanding
shares of a class entitled as a class to vote thereon is required to amend a
Certificate of Incorporation. Holdco's Certificate of Incorporation provides
that any provision thereof may be amended in the manner presently or thereafter
prescribed by statute, except as provided in paragraph B of Article VII of
Holdco's Certificate of Incorporation, which operates to ensure that the laws
permitting limitations on directors' liability are applied as they existed at
the time of any cause of action in the event that an amendment or repeal of the
applicable DGCL provisions would have the effect of limiting or eliminating the
directors' protection from liability. Any amendment or repeal of Articles VI
and VII of Holdco's Certificate of Incorporation, which set forth powers
related to the amendment and repeal of the provisions of the Certificate of
Incorporation, requires the affirmative vote of 66 2/3% of the voting power of
all of the then-outstanding shares of voting stock, voting as a single class.
Under the CGCL, a corporation's Articles of Incorporation generally may be
amended by the approval of a majority of the outstanding shares of each class.
Zitel's Restated Articles of Incorporation provide nothing to the contrary.
AMENDMENT OF BYLAWS
Under the DGCL, bylaws may be amended by stockholders; however, a corporation
may confer, in its certificate of incorporation, the power to amend bylaws upon
the directors. The fact that such power has been so conferred upon the
directors does not divest the stockholders of their power to amend the bylaws.
Holdco's Certificate of Incorporation expressly provides that Holdco's Board of
Directors may make, alter or repeal Holdco's Bylaws, and the Holdco Bylaws
state that they may be amended by the affirmative vote of at least 66 2/3% of
the voting power of all of the stock then-outstanding shares of stock entitled
to vote thereon.
Under the CGCL, bylaws may be adopted, amended or repealed either by the vote
of a majority of the outstanding shares entitled to vote thereon or (subject to
any restrictions in the articles of incorporation or bylaws) by the approval of
the board of directors, except that amendments to the bylaws specifying or
changing a fixed number of directors or the maximum or minimum number or
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changing from a fixed to a variable board or vice versa may only be adopted by
approval of the affirmative vote of a majority of the outstanding shares
entitled to vote.
Reflecting the CGCL, Zitel's Bylaws provide for amendment by a majority of the
outstanding shares entitled to vote. Subject to the rights of Zitel's
shareholders, Zitel's directors may adopt, amend or repeal Zitel's Bylaws.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The DGCL permits a corporation to indemnify officers, directors, employees and
agents for actions taken in good faith and in a manner they reasonably believe
to be in, or not opposed to, the best interests of the corporation, and with
respect to any criminal action, which they had no reasonable cause to believe
was unlawful, as determined by a majority vote of the disinterested directors,
by a committee of such directors designated by majority vote of the
disinterested directors, by independent legal counsel in a written opinion (if
there are no independent directors or such independent directors so direct) or
by the stockholders. The DGCL provides that a corporation may advance expenses
of defense (upon receipt of a written undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful
defendant for expenses, and permits a corporation to purchase and maintain
liability insurance for its directors and officers. Under the DGCL,
indemnification may not be made for any claim, issue or matter as to which a
person has been adjudged to be liable to the corporation, unless and only to
the extent a court determines that the person is entitled to indemnity for such
expenses as the court deems proper.
Holdco's Bylaws state that Holdco will indemnify its directors and officers to
the fullest extent not prohibited by the DGCL as the same exists or may
thereafter be amended or interpreted, but, in the case of alleged occurrences
of actions or omissions preceding any such amendment or interpretation, only to
the extent that such amendment permits Holdco to provide broader
indemnification rights than permitted prior to such amendment; provided,
however, that Holdco may modify the extent of such indemnification by
individual contracts with its directors and officers; and, provided, further,
that Holdco will not be required to indemnify any director or officer in
connection with any proceeding (or part thereof) initiated by such person
unless (i) such indemnification is expressly required to be made by law, (ii)
the proceeding was authorized by Holdco's Board of Directors, (iii) such
indemnification is provided by Holdco, in its sole discretion, pursuant to the
powers vested in Holdco under the DGCL or (iv) such indemnification is required
to be made pursuant to the contractual right of indemnification expressly
creased under Holdco's Bylaws.
The indemnification and advancement rights conferred by Holdco's Bylaws are not
exclusive of any other right to which persons seeking indemnification may be
entitled under any statute, provision of Holdco's Certificate of Incorporation
or Bylaws, agreement, or vote of the stockholders or disinterested directors.
Finally, Holdco's Bylaws authorize Holdco, upon approval of Holdco's Board of
Directors, to purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to such Bylaws.
Holdco's Certificate of Incorporation contains no provision with respect to the
indemnification of any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by
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reason of the fact that he or she is or was a director or officer, of Holdco,
or is or was serving at the request of Holdco as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise,
prior to the final disposition of the proceeding, promptly following request
therefor, all expenses incurred by any director or officer in connection with
such proceeding upon receipt of an undertaking by or on behalf of such person
to repay said amounts if it should be determined ultimately that such person is
not entitled to be indemnified under Holdco's Bylaws or otherwise.
Notwithstanding the foregoing, no advance shall be made by Holdco to an officer
of Holdco (except by reason of the fact that such officer is or was a director
of Holdco in which event this paragraph shall not apply) in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, if a
determination is reasonably and promptly made (i) by the board of directors by
a majority vote of a quorum consisting of directors who were not parties to the
proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, that the facts known to the decision-making party at the time
such determination is made demonstrate clearly and convincingly that such
person acted in bad faith or in a manner that such person did not believe to be
in or not opposed to the best interests of Holdco.
The CGCL permits indemnification of expenses in a derivative or third party
action, except that with respect to derivative actions (i) no indemnification
may be made when a person is adjudged liable to the corporation in the
performance of that person's duty to the corporation and its shareholders,
unless and only to the extent that a court determines that the person is fairly
and reasonably entitled to indemnity for expenses, and (ii) no indemnification
may be made in respect of amounts paid or expenses incurred in settling or
otherwise disposing of a threatened or pending action without court approval or
expenses incurred in an action settled or disposed of without court approval.
Indemnification is permitted by the CGCL only for acts taken in good faith and
reasonably believed to be in the best interests of the corporation and its
shareholders, as determined by a majority vote of a disinterested quorum of the
directors, independent legal counsel (if a quorum of independent directors is
not obtainable), a majority vote of a quorum of the shareholders (excluding
shares owned by the indemnified party), or the court handling the action and,
in the case of a criminal proceeding, indemnification is permitted if the
indemnified party had no reasonable cause to believe his or her conduct was
unlawful. The CGCL requires indemnification when the individual being
indemnified has successfully defended the action on the merits and provides
that a corporation may advance expenses of defense upon receipt of a written
undertaking to reimburse the corporation if indemnification is not appropriate.
Zitel's Restated Articles of Incorporation authorize Zitel to indemnify its
directors and executive officers to the fullest extent not prohibited by the
DGCL; provided, however, that Zitel may modify the extent of such
indemnification by individual contracts with its directors and officers; and,
provided, further, that Zitel is not required to indemnify any director or
officer in connection with any proceeding (or part thereof) initiated by such
person unless (i) such indemnification is expressly required to be made by law,
(ii) the proceeding was authorized by the Zitel Board, or (iii) such
indemnification is provided by Zitel, in its sole discretion, pursuant to the
powers it has been vested under the CGCL. Zitel's Bylaws also grant Zitel the
power to indemnify its other officers, employees and other agents as set forth
in the CGCL. Any amendment or repeal of the indemnification provisions
contained in Zitel's Bylaws shall only be prospective and will not affect the
rights under
123
such Bylaw provision in effect at the time of the alleged occurrence of any
action or omission to act that is the cause of any proceeding against any agent
of Zitel.
DIVIDENDS
Under the DGCL, a corporation may pay dividends out of surplus or out of its
net profits for the fiscal year in which the dividend is declared or its net
profits for the preceding fiscal year, subject to certain limitations for the
benefit of certain preference shares. Holdco's Certificate of Incorporation and
Bylaws place no restrictions on Holdco's ability to pay dividends. Holdco's
Bylaws, however, provide that before payment of any dividend, there may be set
aside out of any funds of the corporation available for dividends such sum or
sums as Holdco's Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for any such other purpose conducive to Holdco's interest.
Generally, under the CGCL a California corporation may pay dividends out of
retained earnings or if, after giving effect thereto, (i) the assets (excluding
goodwill and certain other assets) of the corporation are at least equal to
1.25 times its liabilities (excluding certain deferred credits), and (ii) the
current assets of such corporation are at least equal to (a) its current
liabilities or (b) if the average of the earnings of such corporation before
taxes and interest expense for the two preceding fiscal years was less than the
average of the interest expense of such corporation for such fiscal years, 1.25
times its current liabilities. In addition, the ability of a California
corporation to pay dividends is restricted by certain limitations for the
benefit of certain preference shares.
Zitel's Restated Articles of Incorporation and Bylaws contain no provisions
with respect to the payment of dividends.
STOCKHOLDERS MEETINGS
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or such other persons as may be authorized by the
certificate of incorporation or bylaws. Holdco's Bylaws provide that a special
meeting may be called by the chairman of the Board of Directors or a majority
of the Board of Directors. Holdco's Bylaws further provide that special
meetings of Holdco stockholders may be called for any purpose or purposes, by
(i) the chairman of the Board of Directors, (ii) the chief executive officer,
or (iii) the Board of Directors pursuant to a resolution adopted by a majority
of the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any such
resolution is presented to the board of directors for adoption.
Pursuant to Holdco's Bylaws, if a special meeting is called by any person or
persons other than the Board of Directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted. No
business may be transacted at such special meeting otherwise than specified in
such notice. The Board of Directors shall determine the time and place of such
special meeting, which shall be held not less than 35 nor more than 120 days
after the date of the receipt of the request. If notice of the special meeting
is not given to stockholders entitled to vote within 60 days after the receipt
of the request, the person or persons requesting the meeting may set the time
and place of the meeting and give the notice.
124
Holdco's Bylaws provide a procedure for nominating persons to be elected to
Holdco's Board of Directors including, among other things, the requirement of
not less than 10 nor more than 60 days' notice prior to the scheduled meeting
and the provision of certain information about the nominee and the stockholder.
Under the CGCL and pursuant to Zitel's Bylaws, special meetings may be called
by the chairman of the board, the chief executive officer, the Zitel Board or
the president, or by one or more shareholders holding not less than 10% of the
shares entitled to vote at the meeting. Zitel's Bylaws provide further that if
a special meeting of the stockholders is called by any person or persons other
than the Zitel Board, the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted.
The appropriate officer of Zitel will then cause notice to be given to the
shareholders entitled to vote that a meeting will be held at the time requested
by the person or persons calling the meeting, not less than 35 nor more than
120 days after the date of the receipt of the request. If notice to
shareholders is not given within 20 days after the receipt of the request, the
person or persons requesting the meeting may set the time and place of the
meeting and give the notice. Zitel's Bylaws do not provide that the notice of
any meeting at which directors are elected shall include the name of any
nominee or nominees whom, at the time of the notice, management intends to
present for election.
ACTION BY WRITTEN CONSENT
The DGCL provides that, unless otherwise provided in the certificate of
incorporation, stockholders of a Delaware corporation may take any action
without a meeting by written consent signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. Prompt notice of the taking of any action by
less than unanimous consent must be given to stockholders who did not consent
to such action. Holdco's Certificate of Incorporation and Bylaws provide that
any action required by the provisions of the DGCL to be taken by the
stockholders of Holdco must be taken either at a stockholders meeting or by
unanimous written consent.
Under the CGCL (unless otherwise provided in a corporation's articles of
incorporation), any action which may be taken at an annual or special meeting
of shareholders may also be taken by the written consent of the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Zitel's Bylaws generally
reflect the provisions of the CGCL with respect to shareholder action by
written consent with the exception that, in the case of the election of
directors, such written consent must be signed by the holders of all
outstanding shares entitled to vote for the election of directors.
DISSENTERS' RIGHTS
Under the DGCL, appraisal rights are generally available for the shares of any
class or series of stock of a corporation in a merger or consolidation,
provided, however, that no appraisal rights are available for the shares of any
class or series of stock which, at the record date for the meeting held to
approve such transaction, were either (i) listed on a national securities
exchange or the NASDAQ,
125
or (ii) held of record by more than 2,000 holders, and further provided that no
appraisal rights are available to stockholders of the surviving corporation if
the merger did not require their approval. Appraisal rights are, however,
available for such class or series if the holders thereof receive in the merger
or consolidation anything except: (i) shares of stock of the corporation
surviving or resulting from such merger or consolidation or depository receipts
in respect thereof; (ii) shares of stock of any other corporation or depository
receipts in respect thereof which at the effective date of the merger or
consolidation is either listed on a national securities exchange or the NASDAQ
or held of record by more than 2,000 stockholders; (iii) cash in lieu of
fractional shares or fractional depository receipts; or (iv) any combination of
the foregoing.
Under the CGCL, in connection with the merger of a corporation for which the
approval of outstanding shares is required, dissenting shareholders of such
corporation who follow prescribed statutory procedures are entitled to receive
payment of the fair market value of their shares. No such rights are available,
however, if the shares are listed on a national securities exchange certified
by the California Commissioner of Corporations or appear on the Federal Reserve
Board list of over-the-counter margin stocks unless (i) such shares are subject
to certain restrictions on transfer, or (ii) the holders of at least five
percent of such shares elect dissenter's rights. In connection with the
MatriDigm Merger, holders of Zitel Common Stock may, by complying with required
procedures, be entitled to dissenters' rights under Chapter 13 of the CGCL. See
"Dissenters' Rights of Zitel Shareholders."
INSPECTION OF STOCKHOLDER LIST
Under the DGCL, upon written demand under oath stating the purpose thereof, any
stockholder of record may inspect the stock ledger, a list of the stockholders
and other books and records of a corporation so long as such inspection is for
a purpose reasonably related to such person's interest as a stockholder.
Holdco's Bylaws provide that Holdco's secretary shall prepare and make, at
least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at said meeting, that includes among other things
the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting, or, if
not specified, at the place where the meeting is to be held.
Unlike the DGCL, the CGCL provides for an absolute right of inspection of the
shareholder list for persons holding five percent or more of a corporation's
voting shares or persons holding one percent or more of such shares who have
filed a Schedule 14A with the Securities and Exchange Commission relating to
the election of directors. Both the CGCL and the DGCL allow any stockholder or
shareholder to inspect the stockholder list for a purpose reasonably related to
such person's interest as a stockholder or shareholder. Zitel's bylaws provide
that five percent shareholders shall have a right to copy or to receive a copy
(with reimbursement for such copy to be remitted to Zitel) of the record of
shareholders' names, addresses and shareholdings upon five business days' prior
written demand upon Zitel. Zitel's Bylaws further provide that the record of
shareholders shall also be open to inspection on the written demand of any
shareholder at any time during usual business hours, for a purpose reasonably
related to the holder's interest as a shareholder.
126
LOANS TO OFFICERS AND EMPLOYEES
Under the DGCL, a corporation may make loans to or guarantee the obligations of
its officers or other employees and those of its subsidiaries when such action,
in the judgment of the directors, may reasonably be expected to benefit the
corporation.
Holdco's Bylaws specifically provide that Holdco may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of Holdco or of Holdco's subsidiaries, including any officer or employee who is
a director of Holdco or its subsidiaries, whenever, in the judgment of Holdco's
Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a
pledge of shares of stock of the corporation.
Under the CGCL, such loans or guaranties, including pursuant to employee
benefit plans, may be made only with shareholder approval, provided, however,
that, if the company has 100 or more shareholders and a Bylaw approved by
shareholders permitting such loans or guarantees to be approved by the board of
directors, the board of directors alone may approve such loans to or guarantees
on behalf of an officer (whether or not such officer is a director) or adopt an
employee benefit plan authorizing such loans or guaranties by a vote
sufficient, without counting the vote of any interested director or directors,
if the board of directors determines that any such loans, guarantees or plans
may reasonably be expected to benefit the corporation. Neither Zitel's Restated
Articles of Incorporation nor its Bylaws contain a provision regarding loans to
officers and employees.
INTERESTED DIRECTOR TRANSACTIONS
Under the laws of both California and Delaware, contracts or transactions
between a corporation and one or more of its directors, or between a
corporation and any other entity in which one or more of its directors are
directors or have a financial interest, are not void or voidable because of
such interest or because such director is present at a meeting of the board
which authorizes or approves the contract or transaction, provided that certain
conditions, such as obtaining the required approval and fulfilling the
requirements of good faith and full disclosure, are met. With certain
exceptions, the conditions are similar under the CGCL and the DGCL. Under the
CGCL and the DGCL, either (i) the stockholders or shareholders of the board of
directors must approve any such contract or transaction in good faith after
full disclosure of the material facts (and, in the case of board approval other
than for a common directorship, the CGCL requires that the contract or
transaction must also be "just and reasonable" to the corporation), or (ii) the
contract or transaction must have been "fair" (in Delaware) or, in the case of
a common directorship (in California), "just and reasonable" as to the
corporation at the time it was approved. The CGCL explicitly places the burden
of proof of the just and reasonable nature of the contract or transaction on
the interested director.
Under the DGCL, if approval of the board of directors is sought, the contract
or transaction must be approved by a majority of the disinterested directors
(even though less than a majority of a quorum). Under the CGCL, if shareholder
approval is sought, the interested director is not entitled to vote his or her
shares at a shareholder meeting with respect to any action regarding such
contract or transaction. If board approval is sought, the contract or
transaction must be approved by a majority
127
vote of a quorum of the directors, without counting the vote of any interested
directors (except that interested directors may be counted for purposes of
establishing a quorum).
Neither Holdco's Certificate of Incorporation and Bylaws nor Zitel's Restated
Articles of Incorporation and Bylaws contain provisions relating to interested
director transactions.
STOCKHOLDER DERIVATIVE SUIT
Under the DGCL, a person may only bring a derivative action on behalf of the
corporation if the person was a stockholder of the corporation at the time of
the transaction in question or his or her stock thereafter devolved upon him or
her by operation of law. The CGCL provides that a shareholder bringing a
derivative action on behalf of a corporation need not have been a shareholder
at the time of the transaction in question, provided that certain criteria are
met. The CGCL also provides that the corporation or the defendant in a
derivative suit may, under certain circumstances, make a motion to the court
for an order requiring the plaintiff shareholder to furnish a security bond.
The DGCL does not have a similar bonding requirement. Holdco's Certificate of
Incorporation and Bylaws contain no provisions that address stockholder
derivative suits. Zitel's Restated Articles of Incorporation and Bylaws also
contain no such provision.
DISSOLUTION
Under the DGCL, if dissolution is initiated by the board of directors, it may
be approved by the holders of a majority of the corporation's stock. If the
board of directors does not approve the proposal to dissolve, it must be
consented to in writing by all stockholders entitled to vote thereon. Under the
CGCL, shareholders holding 50% or more of the total voting power may authorize
a corporation's dissolution and this right may not be modified by the articles
of incorporation.
128
ZITEL CORPORATION AND MATRIDIGM CORPORATION UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements give
effect to the proposed Merger of Zitel and MatriDigm. The Mergers are subject
to stockholder and regulatory approval and other conditions. The unaudited pro
forma condensed combined balance sheet has been prepared as if the acquisition,
which will be accounted for as a purchase of MatriDigm by Zitel, was
consummated as of June 30, 1998. Such pro forma balance sheet combines Zitel's
and MatriDigm's balance sheets as of that date.
The aggregate net purchase price of $64.0 million has been calculated based on
the assumption that Zitel's stock price is $3.0625 (closing price as of October
5, 1998) and together with the fair value of the liabilities assumed has been
allocated to the MatriDigm assets acquired. Included in the pro forma purchase
price are the fair value of the approximately 18.0 million shares of Zitel to
be issued in exchange for all of the outstanding Preferred Stock and Common
Stock of MatriDigm, the fair value, based on the Black Scholes method, of the
assumed options to acquire MatriDigm Common Stock of $6.0 million and the
estimated direct transaction costs of $4.1 million. The MatriDigm common stock
options were valued using a Zitel stock price of $3.0625 per share. The
allocation of the purchase price was based upon a preliminary independent
appraisal of the fair value of the assets acquired and liabilities assumed.
The unaudited pro forma condensed combined statements of operations for the
year ended September 30, 1997 and for the nine months ended June 30, 1998 give
effect to the proposed merger as if the acquisition was completed at the
beginning of the year and nine month period, respectively, and combines Zitel's
and MatriDigm's statements of operations for each of those periods. Such
statements do not include the effect of the $18.6 million nonrecurring charge
for in-process research and development that has not reached technological
feasibility and does not have alternative future uses. However such statements
do reflect adjustments for the elimination of transactions between Zitel and
MatriDigm, amortization of assembled workforce, existing technology, tradename,
goodwill and related income tax effects.
This method of combining historical financial statements for the preparation of
the pro forma condensed combined statements is for presentation only. Actual
statements of operations of the companies will be combined from the closing
date of the acquisition with no retroactive restatements. The unaudited pro
forma condensed combined financial statements are provided for illustrative
purposes only and are not necessarily indicative of the combined financial
position or combined results of operations that would have been reported had
the Mergers occurred on the dates indicated, nor do they represent a forecast
of the combined financial position or results of operations for any future
period. The unaudited pro forma condensed combined financial statements should
be read in conjunction with the historical financial statements and
accompanying notes for Zitel and MatriDigm.
129
ZITEL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
JUNE 30, 1998
PRO FORMA PRO FORMA
ZITEL MATRIDIGM ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
ASSETS
Current Assets:
Cash and cash equivalents........ $ 11,751 $ 654 $ 12,405
Restricted cash.................. -- 89 89
Accounts receivable.............. 3,762 925 $ (116)h 4,571
Inventories...................... 207 102 309
Deferred and refundable taxes.... 208 208
Other current assets............. 1,935 88 2,023
-------- -------- -------- --------
Total current assets........... 17,863 1,858 (116) 19,605
Fixed assets, net................ 1,442 2,991 4,433
Other assets..................... 9,396 604 (6,981)b 3,019
Deferred taxes................... 10,490 i 10,490
Goodwill and other intangibles,
net............................. 4,581 48,745 c 53,326
-------- -------- -------- --------
Total assets................... $ 33,282 $ 5,453 $ 52,138 $ 90,873
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable................. $ 4,200 $ 335 $ (116)h $ 4,419
Accrued liabilities.............. 4,523 1,135 2,888 f 8,546
Current portion of long-term
debt............................ 3,624 3,624
-------- -------- -------- --------
Total current liabilities...... 8,723 5,094 2,772 16,589
Deferred taxes................... 10,490 i 10,490
Long term debt................... 248 248
Convertible subordinated
debentures to shareholder....... 15,372 5,000 20,372
-------- -------- -------- --------
Total liabilities.............. 24,095 10,342 13,262 47,699
Stockholders' equity (deficit):
Preferred stock.................. 9,067 (9,067)b --
Common stock..................... 48,835 209 60,948 a,b 109,992
Additional paid-in capital....... 13,154 (13,154)b --
Note receivable from
shareholder .................... (32) (32)
Accumulated deficit.............. (39,648) (27,287) 149 b,d (66,786)
-------- -------- -------- --------
Total stockholders' equity
(deficit)..................... 9,187 (4,889) 38,876 43,174
-------- -------- -------- --------
Total liabilities and
stockholders' equity
(deficit)..................... $ 33,282 $ 5,453 $ 52,138 $ 90,873
======== ======== ======== ========
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
130
ZITEL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
PRO FORMA PRO FORMA
ZITEL MATRIDIGM ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
Net sales........................ $ 16,137 $ 3,825 $ (116)h $ 19,846
Royalty revenue.................. 1,541 1,541
-------- -------- ------- --------
Total revenue.................... 17,678 3,825 (116) 21,387
Cost of goods sold............... 10,240 2,497 4,300 e,h 17,037
Research & development expenses.. 5,567 5,366 135 e 11,068
Selling, general & administrative
expenses........................ 19,474 6,533 276 e 26,283
Loss on impairment of assets..... 1,956 1,956
Amortization of goodwill......... 3,378 e 3,378
-------- -------- ------- --------
Operating loss................... (19,559) (10,571) (8,205) (38,335)
Interest expense................. 2,409 345 2,754
Interest & other income.......... (2) (81) (83)
-------- -------- ------- --------
Loss before income taxes......... (21,966) (10,835) (8,205) (41,006)
Provision for income taxes....... 6,547 (6,547)i --
-------- -------- ------- --------
Net loss......................... $(28,513) $(10,835) $(1,658) $(41,006)
======== ======== ======= ========
Basic and diluted net loss per
share........................... $ (1.73) $ (0.53) $ (1.19)
======== ======== ========
Number of shares used in basic
and diluted loss per share
calculation..................... 16,528 20,522 17,992 g 34,520
======== ======== ======= ========
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
131
ZITEL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
PRO FORMA PRO FORMA
ZITEL MATRIDIGM ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
Net sales......................... $ 12,626 $ 123 $ 12,749
Royalty revenue................... 5,340 5,340
-------- -------- --------
Total revenue..................... 17,966 123 18,089
Cost of goods sold................ 9,301 85 $ 5,833 e 15,219
Research & development expenses... 7,504 7,003 180 e 14,687
Selling, general & administrative
expenses......................... 14,468 7,674 368 e 22,510
Acquisition of in process research
and development.................. 6,600 6,600
Amortization of goodwill.......... 4,504 e 4,504
-------- -------- -------- --------
Operating loss.................... (19,907) (14,639) (10,885) (45,431)
Interest expense.................. 3,532 120 3,652
Interest & other income........... (1,435) (180) (1,615)
-------- -------- -------- --------
Loss before income taxes.......... (22,004) (14,579) (10,885) (47,468)
Benefit for income taxes.......... (4,503) (1,627)i (6,130)
-------- -------- -------- --------
Net loss.......................... $(17,501) $(14,579) $ (9,258) $(41,338)
======== ======== ======== ========
Basic and diluted net loss per
share............................ $ (1.15) $ (0.76) $ (1.24)
======== ======== ========
Number of shares used in basic and
diluted loss per share
calculation...................... 15,222 19,115 17,992 g 33,214
======== ======== ======== ========
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
132
ZITEL AND MATRIDIGM NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
NOTE 1 -- PURCHASE PRICE
The purchase price of the acquisition of MatriDigm is currently estimated as
follows:
Fair value of Zitel common stock to be issued.......................... $53,850
Fair value of Zitel employee stock options to be issued................ $ 5,996
Direct transaction costs............................................... $ 4,138
-------
TOTAL.................................................................. $63,984
=======
The purchase price is expected to be allocated as follows:
Current assets......................................................... $ 1,276
Liabilities assumed.................................................... $(7,104)
Equipment and other.................................................... $ 2,470
In-process technology.................................................. $18,597
Assembled workforce.................................................... $ 900
Existing technology.................................................... $23,485
Tradename.............................................................. $ 1,840
Goodwill............................................................... $22,520
-------
TOTAL.................................................................. $63,984
=======
The allocation of the purchase price among net assets acquired was based on a
preliminary independent appraisal of the fair value. Such appraisal allocated
$18.6 million to purchased in-process research and development. The unaudited
pro forma condensed combined statements of operations do not include this one-
time charge for purchased in-process technology as it represents a material
nonrecurring charge in accordance with the rules for the preparation of pro
forma financial statements.
NOTE 2 -- PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the unaudited pro forma
condensed combined financial statements:
(a) Reflects the value of Zitel stock issued to effect the transaction and
the fair value of MatriDigm options assumed by Zitel.
(b) Reflects elimination of MatriDigm Common Stock, Preferred Stock,
accumulated deficit, additional paid-in capital and the Zitel investment in
MatriDigm.
(c) Reflects allocation of purchase price to existing technology, assembled
workforce, tradename and goodwill.
(d) Reflects one-time charge for purchased in-process technology.
(e) Reflects amortization on a straight-line basis of purchased existing
technology, assembed workforce, tradename and goodwill over three to five
years.
(f) Reflects accrual of direct transaction costs of which $2,888 are to be
paid in cash and $1,250 are to be settled in common stock.
133
(g) Reflects the issuance of shares of Zitel Common Stock to effect the
transaction and the dilutive effects of options to acquire 2,376,087 shares
of Zitel Common Stock issued for the MatriDigm options.
(h) Reflects the elimination of intercompany payables and receivables and
intercompany sales.
(i) Reflects the effect of the above adjustments on income tax expense.
LEGAL MATTERS
The validity of the shares of Holdco Common Stock to be issued in connection
with the Mergers and offered hereby, the federal income tax consequences of the
Mergers and certain other matters relating to the Mergers and the transactions
contemplated thereby will be passed upon for Zitel and Holdco by Skadden, Arps,
San Francisco, California. Certain legal matters with respect to the Agreement
of Reorganization, the federal income tax consequences of the Mergers and
certain other legal matters relating to the Mergers and the transactions
contemplated thereby will be passed upon for MatriDigm by Arter & Hadden,
Dallas, Texas.
EXPERTS
The consolidated balance sheets of Zitel and its subsidiaries as of September
30, 1997 and 1996, and the consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1997, incorporated by reference in this Proxy Statement/Prospectus/Consent
Solicitation, which is referred to and made a part of the Registration
Statement, have been incorporated herein in reliance on the report, which
includes an explanatory paragraph, for an emphasis of a matter, regarding the
Company's operating activities and liquidity, of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The balance sheet of MatriDigm as of September 30, 1997 and 1996 and the
statements of operations, of changes in shareholders' equity (deficit) and of
cash flows for the period from August 9, 1995 ("date of inception") to
September 30, 1996 and for the year ended September 30, 1997, included in this
Proxy Statement/Prospectus/Consent Solicitation have been audited by
PricewaterhouseCoopers LLP, independent accountants, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of that firm as experts in accounting and
auditing.
134
MATRIDIGM CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants......................................... F-2
Balance Sheet as of September 30, 1996 and 1997, and June 30, 1998
(unaudited).............................................................. F-3
Statement of Operations for the period August 9, 1995 (date of inception)
to September 30, 1996, and for the year ended September 30, 1997, and for
the nine months ended June 30, 1997 (unaudited) and 1998 (unaudited)..... F-4
Statement of Changes in Shareholders' Equity (Deficit) as of September 30,
1996 and 1997, and as of June 30, 1998 (unaudited)....................... F-5
Statement of Cash Flows for the period August 9, 1995 (date of inception)
to September 30, 1996, and for the year ended September 30, 1997, and for
the nine months ended June 30, 1997 (unaudited) and 1998 (unaudited)..... F-6
Notes to Financial Statements............................................. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
the Shareholders of MatriDigm Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of MatriDigm
Corporation at September 30, 1996 and 1997, and the results of its operations
and its cash flows for the period from August 9, 1995 (date of inception) to
September 30, 1996, and for the year ended September 30, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Subsequent to September 30, 1997, the Company emerged from the development
stage. As discussed in Note 13, revenues since September 30, 1997 have not
generated sufficient funds to finance operations. Until sufficient revenues
are generated, the Company will be required to obtain additional financing to
meet cash and working capital requirements. There can be no assurance that
additional financing will be available.
PricewaterhouseCoopers LLP
Dallas, Texas
November 26, 1997, except as to
Notes 4 and 12 which are as of
December 17, 1997 and as to Note 13
which is as of October 19, 1998
F-2
MATRIDIGM CORPORATION
BALANCE SHEET
SEPTEMBER 30,
----------------------- JUNE 30,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.............. $2,590,826 $ 3,106,938 $ 654,220
Restricted cash........................ -- 608,606 88,600
Accounts receivable.................... -- 79,050 925,309
Inventory.............................. -- -- 102,238
Prepaid expenses and other current
assets................................ 20,864 21,898 88,167
---------- ----------- -----------
Total current assets................. 2,611,690 3,816,492 1,858,534
Property and equipment, net.............. 569,148 3,589,658 2,991,101
Technology rights, net................... 389,074 301,353 235,562
Deferred financing costs, net............ -- -- 300,000
Other assets............................. 51,203 117,144 67,713
---------- ----------- -----------
Total assets......................... $3,621,115 $ 7,824,647 $ 5,452,910
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable....................... $ 184,211 $ 231,729 $ 335,283
Accrued compensation and benefits...... 138,549 588,887 556,952
Accrued other liabilities.............. 1,239 261,265 264,440
Deferred revenue to shareholder........ -- -- 312,516
Current portion of long-term debt...... -- 452,094 3,624,181
---------- ----------- -----------
Total current liabilities............ 323,999 1,533,975 5,093,372
Long-term debt........................... -- 478,575 248,097
Subordinated convertible note payable to
shareholder............................. -- 5,000,000 5,000,000
---------- ----------- -----------
Total liabilities.................... 323,999 7,012,550 10,341,469
---------- ----------- -----------
Commitments (Note 7).....................
Shareholders' equity (deficit):
Convertible preferred stock, no par value
Authorized: 30,000,000 shares:
Series A; issued and outstanding:
9,600,000 shares; liquidation value:
$3,500,000............................ 3,562,995 3,566,471 3,566,471
Series B; issued and outstanding:
2,000,000 shares; liquidation value:
$1,500,000............................ 1,500,000 1,500,000 1,500,000
Series D; issued and outstanding:
2,000,000 shares at 1997 and at June
30, 1998, respectively; liquidation
value: $4,000,000..................... -- 4,000,000 4,000,000
Common stock, no par value, stated value
$.01 per share; authorized: 100,000,000
shares; issued and outstanding:
16,000,000, 20,372,010 and 20,894,603
shares (unaudited) respectively......... 160,000 203,720 208,946
Additional paid-in capital............... -- 8,036,323 13,154,430
Note receivable from shareholder......... (53,000) (42,400) (31,800)
Accumulated deficit...................... (1,872,879) (16,452,017) (27,286,606)
---------- ----------- -----------
Total shareholders' equity
(deficit)........................... 3,297,116 812,097 (4,888,559)
---------- ----------- -----------
Total liabilities and shareholders'
equity (deficit).................... $3,621,115 $ 7,824,647 $ 5,452,910
========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
MATRIDIGM CORPORATION
STATEMENT OF OPERATIONS
FOR THE PERIOD FOR THE
AUGUST 9, 1995 FOR THE NINE MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED JUNE 30,
TO SEPTEMBER 30, SEPTEMBER 30, --------------------------
1996 1997 1997 1998
------------------- ------------- ------------ ------------
(UNAUDITED)
Sales................... $ -- $ 123,162 $ 42,000 $ 3,825,000
Cost of sales........... -- 85,486 29,150 2,496,600
----------- ------------ ------------ ------------
Gross margin.......... -- 37,676 12,850 1,328,400
----------- ------------ ------------ ------------
Operating expenses:
General and
administrative....... 561,976 5,883,235 3,925,600 5,033,400
Research and
development.......... 1,237,515 7,003,032 4,919,650 5,365,800
Sales and marketing... 205,585 1,790,442 1,420,300 1,499,900
----------- ------------ ------------ ------------
Total operating
expenses........... 2,005,076 14,676,709 10,265,550 11,899,100
----------- ------------ ------------ ------------
Loss from
operations......... (2,005,076) (14,639,033) (10,252,700) (10,570,700)
Interest income and
other.................. 132,197 179,889 100,300 80,911
Interest expense........ -- (119,994) (26,100) (344,800)
----------- ------------ ------------ ------------
Net loss.............. $(1,872,879) $(14,579,138) $(10,178,500) $(10,834,589)
=========== ============ ============ ============
Weighted average common
shares outstanding..... 14,038,462 19,115,068 18,736,860 20,522,036
=========== ============ ============ ============
Basic and diluted net
loss per common share.. $ (0.13) $ (0.76) $ (0.54) $ (0.53)
=========== ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
MATRIDIGM CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- ------------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDER DEFICIT TOTAL
---------- ---------- ---------- -------- ----------- ----------- ------------ ------------
Common stock issuances.. -- -- 16,000,000 $160,000 -- $(53,000) -- $ 107,000
Series A preferred stock
issuances, net......... 9,600,000 $3,562,995 -- -- -- -- -- 3,562,995
Series B preferred stock
and warrant issuances,
net.................... 2,000,000 1,500,000 -- -- -- -- -- 1,500,000
Net loss................ -- -- -- -- -- -- $ (1,872,879) (1,872,879)
---------- ---------- ---------- -------- ----------- -------- ------------ ------------
Balance, September 30,
1996................... 11,600,000 5,062,995 16,000,000 160,000 -- (53,000) (1,872,879) 3,297,116
Common stock issuances,
net.................... -- -- 3,912,019 39,120 7,589,965 -- -- 7,629,085
Stock option exercises.. -- -- 459,991 4,600 166,358 -- -- 170,958
Series D preferred stock
issuances, net......... 2,000,000 4,000,000 -- -- -- -- -- 4,000,000
Other................... -- 3,476 -- -- 280,000 10,600 -- 294,076
Net loss................ -- -- -- -- -- -- (14,579,138) (14,579,138)
---------- ---------- ---------- -------- ----------- -------- ------------ ------------
Balance, September 30,
1997................... 13,600,000 9,066,471 20,372,010 203,720 8,036,323 (42,400) (16,452,017) 812,097
(Unaudited)
Common stock
subscriptions, net..... -- -- -- -- 570,666 -- -- 570,666
Stock option exercises.. -- -- 121,540 1,215 85,926 -- -- 87,141
Conversion of notes
payable................ -- -- 401,053 4,011 4,006,515 -- -- 4,010,526
Warrant issuances....... -- -- -- -- 455,000 -- -- 455,000
Other................... -- -- -- -- -- 10,600 -- 10,600
Net loss................ -- -- -- -- -- -- (10,834,589) (10,834,589)
---------- ---------- ---------- -------- ----------- -------- ------------ ------------
Balance, June 30, 1998.. 13,600,000 $9,066,471 20,894,603 $208,946 $13,154,430 $(31,800) $(27,286,606) $ (4,888,559)
========== ========== ========== ======== =========== ======== ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
MATRIDIGM CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD
AUGUST 9, 1995 FOR THE FOR THE NINE MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED JUNE 30,
TO SEPTEMBER 30, SEPTEMBER 30, --------------------------
1996 1997 1997 1998
------------------- ------------- ------------ ------------
(UNAUDITED)
Cash flows from operating
activities:
Net loss............... $(1,872,879) $(14,579,138) $(10,178,500) $(10,834,589)
Adjustment to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........ 134,780 987,604 751,600 1,559,600
Noncash expenses
incurred............ 7,000 14,076 10,600 10,600
(Gain) loss on
disposal of property
and equipment....... -- (2,102) 900 11,200
Changes in current
assets and
liabilities:
Accounts receivable.. -- (79,050) (10,500) (846,259)
Inventory............ -- -- -- (102,238)
Prepaid expenses and
other current
assets.............. (20,864) (1,034) (28,900) (33,081)
Accounts payable..... 184,211 47,518 82,400 103,554
Accrued liabilities.. 139,788 710,364 210,000 283,756
----------- ------------ ------------ ------------
Net cash used in
operating
activities.......... (1,427,964) (12,901,762) (9,162,400) (9,847,457)
----------- ------------ ------------ ------------
Cash flows from investing
activities:
Acquisition of property
and equipment......... (552,357) (3,066,852) (2,764,100) (397,500)
Purchase of technology
rights................ (362,174) -- -- --
Proceeds from the sale
of property and
equipment............. -- 253,752 -- 2,900
(Increase) decrease in
other assets.......... (63,203) (80,341) (24,300) 8,000
----------- ------------ ------------ ------------
Net cash used in
investing
activities.......... (977,734) (2,893,441) (2,788,400) (386,600)
----------- ------------ ------------ ------------
Cash flows from financing
activities:
Payments on capital
leases................ -- (160,122) (55,400) (462,000)
Proceeds from
subordinated
convertible note
payable............... -- 5,000,000 5,000,000 4,010,526
Proceeds from issuance
of convertible
preferred stock....... 4,996,524 4,000,000 4,000,000 --
Proceeds from issuance
of and subscriptions
to common stock....... -- 7,800,043 7,067,100 657,807
Proceeds from note
payable............... -- -- -- 3,000,000
Other proceeds......... -- 280,000 -- --
Proceeds from issuance
of stock warrants..... -- -- -- 55,000
Cash deposits for
leases................ -- (608,606) (608,606) 520,006
----------- ------------ ------------ ------------
Net cash provided by
financing
activities.......... 4,996,524 16,311,315 15,403,094 7,781,339
----------- ------------ ------------ ------------
Net increase
(decrease) in cash
and cash
equivalents....... 2,590,826 516,112 3,452,294 (2,452,718)
Cash and cash equivalents
Beginning of the
period................ -- 2,590,826 2,590,826 3,106,938
----------- ------------ ------------ ------------
End of the period...... $ 2,590,826 $ 3,106,938 $ 6,043,120 $ 654,220
=========== ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY
MatriDigm Corporation ("the Company" or "MatriDigm") was incorporated in the
state of California in August 1995 to specialize in COBOL maintenance and
reengineering. For the periods ended September 30, 1996 and 1997, the Company
was in the development stage and devoted substantially all of its efforts to
develop its process, raise capital and recruit personnel. During the year ended
September 30, 1997, the Company completed development of a process to renovate
COBOL language software code to operate in the Year 2000 and beyond. Revenue
for the period from August 9, 1995 (date of inception) to September 30, 1997
was insignificant. The Company emerged from the development stage during the
period ended June 30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles.
Cash and cash equivalents
Cash and cash equivalents consist primarily of demand deposits. Cash
equivalents are defined as highly liquid instruments with original maturities
of three months or less. The restricted cash balance represents time deposits
which are restricted under letters of credit. The letters of credit are
maintained to satisfy requirements under leases.
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts payable and other accrued liabilities
approximate fair value due to their short maturities. The fair value of the
subordinated convertible note payable to shareholder of $4,700,000 as of June
30, 1998 is estimated based on discounted cash flows using the Company's
incremental borrowing rate.
Property and equipment
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation is recorded on a straight-line basis over the
estimated useful lives. Leasehold improvements are capitalized and amortized
over the lesser of the life of the lease or the estimated useful life of the
asset. The estimated useful lives for such assets are as follows:
1996 1997
--------- -------
Furniture and fixtures........................................ 3 years 3 years
Purchased computer software and equipment..................... 3 years 3 years
Leasehold improvements........................................ 20 months 7 years
F-7
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Technology rights
Capitalized technology rights are amortized on a straight-line basis over an
estimated useful life of five years. Accumulated amortization was $73,000 and
$160,821 at September 30, 1996 and 1997, respectively.
Deferred financing costs
Financing costs are capitalized and amortized over the life of the financing
agreement. Accumulated amortization was $100,000 as of June 30, 1998.
Deferred revenue to shareholder
Deferred revenue represents the balance of prepayments made by a shareholder
for code renovation for which revenue has not yet been recognized.
Revenue recognition
The Company's current principal business is providing Year 2000 computer code
renovating (conversion) services, consisting of upgrading or supplementing
software code to enable computer programs to function in the Year 2000 and
beyond. The Company contracts with representatives ("Technology Associates") to
market and distribute code conversion services to its clients. These Technology
Associates act as independent contractors. Revenue is recognized upon shipment
of renovated code to a Technology Associate. Revenue from sales to Technology
Associates of the hardware and/or software used in the code preparation process
is recognized upon shipment of the hardware and/or software.
Research and development
Research and development expenses are charged to operations as incurred.
Income taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," which prescribes the
use of the liability method. Under the liability method, deferred tax assets
and liabilities are calculated at the balance sheet date using current tax laws
and rates in effect. Valuation allowances are recorded when it is more likely
than not that a tax benefit will not be realized prior to the expiration of the
related carryforward periods.
Net loss per share
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share." This statement established a new methodology for
reporting earnings per share for interim financial information and annual
financial statements issued with period ending after December 15, 1997. Net
loss per common share for each period is computed using the weighted
F-8
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
average number of common and common equivalent shares outstanding during the
respective periods. At September 30, 1996 and 1997 and June 30, 1997 and 1998,
there were 14,777,200, 17,774,430, 17,543,105 and 19,027,391 potentially
dilutive common shares which were not included in weighted average shares
outstanding because to do so would have been antidilutive.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentration of credit risk
Financial instruments that potentially subject MatriDigm to concentration of
credit risk consist primarily of trade accounts receivable. The Company does
not believe that it is subject to any unusual credit risk beyond the normal
credit risk attendant in its business.
New accounting pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. The Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. The
Statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company will adopt SFAS No. 130 in the
year ended September 30, 1998 and it is expected to have no impact on the
Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 established standards for
reporting information about operating segments in annual financial statements
and in interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. In general, such information must be reported for
externally in the same manner used for internal management purposes. SFAS No.
131 is effective for financial statements issued for periods beginning after
December 15, 1997. In the initial year of adoption, comparative information for
earlier years must be restated. Since SFAS No. 131 only requires disclosure of
certain information, its adoption will not affect the Company's financial
position or results of operations.
F-9
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
established a new model for accounting for derivatives and hedging activities
and supercedes and amends a number of existing standards. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999, but earlier adoption
is permitted. Upon initial application, all derivatives are required to be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. Recognition of changes in fair value
depends on whether the derivative is designated and qualifies as a hedge, and
the type of hedging relationship that exists. The Company does not currently,
nor does it expect to, hold any derivative instruments or participate in any
hedging activities.
Unaudited interim financial information
The interim financial information for the nine month periods ended June 30,
1997 and 1998 has been prepared from the unaudited financial records of
MatriDigm and in the opinion of management reflects all adjustments, consisting
only of normal recurring items, necessary for a fair presentation of the
financial position and results of operations and of cash flows for the interim
periods.
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of:
SEPTEMBER 30,
--------------------
1996 1997
-------- ----------
Furniture and fixtures.................................... $ 48,415 $ 903,551
Purchased computer software and equipment................. 527,986 2,787,767
Leasehold improvements.................................... 42,427 757,346
-------- ----------
618,828 4,448,664
Less: accumulated depreciation and amortization........... (49,680) (859,006)
-------- ----------
$569,148 $3,589,658
======== ==========
Purchased computer equipment includes assets which are subject to capital
leases with an aggregate cost of $1,090,791, and accumulated amortization and
amortization expenses of $81,940 at and for the year ended September 30, 1997.
F-10
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT
Long-term debt is comprised of:
SEPTEMBER 30,
----------------------
1996 1997
----------- ----------
Subordinated convertible note payable to shareholder;
interest rate of 6%; interest payable on September 30,
1997, then monthly from December 31, 1997; principal
payments scheduled for payment in six equal monthly
installments from January 31, 1998; principal payments
subordinated to all credit from financial institutions
and to capital leases; and principal convertible into
common stock at $12 per share on or before December
31, 1997. The capital lessor has not consented to the
payment of principal during the term of the leases.... $ -- $5,000,000
Capitalized lease obligations at various interest
rates................................................. -- 930,669
----------- ----------
-- 5,930,669
Less: current portion.................................. -- (452,094)
----------- ----------
$ -- $5,478,575
=========== ==========
In April 1998, the Company borrowed $3,000,000 from a bank. Interest accrues at
LIBOR plus 1.125% and is payable quarterly beginning June 30, 1998. Principal
is payable on April 1, 1999. Three shareholders were issued 825,000 warrants in
consideration for guaranteeing this debt.
Interest payments of $119,994 were made during the year ended September 30,
1997.
Restricted cash of $108,606 at September 30, 1997 is related to the capital
leases. Maturities of capital lease obligations at September 30, 1997 are:
1998................................................................ $452,094
1999................................................................ 412,031
2000................................................................ 66,544
--------
$930,669
========
Subsequent to September 30, 1997, terms of the $5,000,000 subordinated
convertible note payable were revised so that the interest rate was 2%;
principal is payable in six equal monthly installments commencing June 30,
1999; principal is convertible into common stock at $3 per share; and principal
payments are subordinated to only debtors of the Company as of April 1998.
In December 1997, the Company obtained $4 million of financing from related
parties as described in Note 12. This debt was converted into common stock at a
rate of $1.43 per share during April 1998. The conversion resulted in the
issuance of 401,053 shares of common stock and the reallocation of ownership of
founders' shares.
F-11
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
At September 30, 1996 and 1997, the components of deferred tax assets are as
follows:
1996 1997
--------- -----------
Net operating loss................................... $ 731,000 $ 2,742,500
Capitalized research and development costs........... -- 2,900,500
Credits for research activities...................... -- 499,200
Other, net........................................... (22,000) 110,600
--------- -----------
Net deferred tax asset............................... 709,000 6,252,800
Less: valuation allowance............................ (709,000) (6,252,800)
--------- -----------
$ -- $ --
========= ===========
The Company has established a valuation allowance to the extent of its deferred
tax assets since it is presently more likely than not that a tax benefit will
not be realized prior to the expiration of the related carryforward periods.
A reconciliation of the income tax provision to the amount computed by applying
the federal statutory benefit rate to the net loss follows:
FOR THE PERIOD FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
-------------- -------------
Federal statutory benefit rate................ (35)% (35)%
State income tax provision, net of federal tax
benefit...................................... (4)% -- %
Research and development credit............... -- % (3)%
Other, net.................................... (1)% -- %
Net operating loss not benefited.............. 40 % 38 %
---------- ----------
-- % -- %
========== ==========
The Company had federal and state net operating loss carryforwards of
approximately $1.8 million and $7.8 million at September 30, 1996 and 1997,
respectively. The Company's federal and state net operating loss carryforwards
will begin expiring in the year 2011, if not utilized. The Company also has
credits for research activities of $499,200 at September 30, 1997 to
carryforward which will begin to expire in 2011. For the year ended September
30, 1997, the Company has deducted $628,000 of compensation for tax purposes
only which is related to the exercise of stock options.
The Tax Reform Act of 1986 limits the use of net operating loss and tax credit
carryforwards in certain situations where changes occur in the stock ownership
of a company. In the event the Company has a change in ownership, as defined,
utilization of the carryforwards could be restricted.
F-12
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. NOTE RECEIVABLE FROM SHAREHOLDER
On October 1, 1995, the Company entered into a note receivable agreement with a
shareholder for the purchase of 5,300,000 shares of common stock at $.01 per
share. The shares are pledged as collateral in the case of default by the
shareholder. The note is payable in five annual installments beginning October
1, 1996, of $10,600 of principal plus interest, which accrues at 7% per annum.
7. COMMITMENTS
The Company leases its office facilities under a noncancelable operating lease
which expires in 2003. The Company is responsible for certain taxes,
maintenance costs and insurance under the lease. Restricted cash of $500,000 at
September 30, 1997 related to this lease was released in November 1997.
During fiscal year 1997, the Company leased software and equipment under
noncancelable operating leases which expire at various dates through March
2002.
Future minimum rental payments at September 30, 1997 are as follows:
1998.............................................................. $ 525,839
1999.............................................................. 536,252
2000.............................................................. 542,704
2001.............................................................. 550,482
2002.............................................................. 555,178
Thereafter........................................................ 603,989
----------
$3,314,444
==========
Rent expense was $34,830 for the period from August 9, 1995 (date of inception)
to September 30, 1996 and $654,809 for the year ended September 30, 1997.
8. SHAREHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock
Under the Company's Articles of Incorporation, the Company's preferred stock is
issuable in series and the Company's board of directors is authorized to
determine the rights, preferences and terms of each series.
During the period ended September 30, 1996, the Company amended its Articles of
Incorporation to authorize the issuance of 30,000,000 shares of preferred stock
of which 9,600,000, 2,000,000 and 1,500,000 were designated as Series A, Series
B and Series C preferred stock, respectively.
During the year ended September 30, 1997, the Company designated 5,000,000,
666,666 and 500,000 shares as Series D, Series E and Series F preferred stock,
respectively.
The Company's Series A, B, C, D, E and F preferred stock have voting rights
equal to the number of common shares into which each preferred share converts.
Each share of preferred stock is convertible
F-13
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
into common stock on a one-for-one basis, subject to certain adjustments as
described in the Preferred Stock Purchase Agreements. Conversion is automatic
upon the effective date of a public offering of common stock for which the
aggregate proceeds are not less than $15,000,000 and the offering price is not
less than $1.00 per share of common stock. At September 30, 1996 and 1997, the
Company had 13,100,000 and 15,100,000 shares, respectively, of common stock
reserved for conversion.
The Company is not required to declare a dividend in any year. However, in
preference to any common stock dividends, holders of preferred stock are
entitled to a dividend in the amount of 5% of the initial sales price of shares
of each respective series of preferred stock; that is, $.017 per share of
Series A, $.038 per share of Series B, $.05 per share of Series C, $.10 per
share of Series D, $.15 per share of Series E and $.20 per share of Series F.
Preferred dividends are noncumulative and are in preference to any common stock
dividends. No dividends have been declared. The holders of the Series A
preferred stock are also entitled to registration rights as described in the
preferred stock purchase agreement.
In the event of any liquidation, dissolution, or winding up of the Company,
either voluntary or involuntary, the holders of the then outstanding Series A,
B, C, D, E and F preferred stock are 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 the common stock, the amounts of $0.36, $0.75,
$1.00, $2.00, $3.00 and $4.00 per share for Series A, B, C, D, E and F
preferred stock, respectively, plus all declared but unpaid dividends for each
share of preferred stock. If, upon occurrence of such event, the assets and
funds thus distributed among the holders of the preferred stock shall be
insufficient to permit the payment to such holders the full preferential
amount, then the entire assets and funds of the Company legally available for
distribution will be distributed ratably among the holders of the preferred
stock in proportion to their liquidation preference (as defined).
All preferred shares are subject to repurchase by the Company.
Common stock
During the period ended September 30, 1996, the Company issued 16,000,000
shares of its common stock to the founders under stock purchase agreements.
During the year ended September 30, 1997, the Company issued 4,372,010 shares
of common stock to employees and non-employees at prices ranging from $.05 to
$4.50 per share. Each share of common stock is entitled to one vote. The
holders of common stock are also entitled to receive dividends whenever funds
are legally available and when declared by the board of directors, subject to
the prior rights of holders of all classes of stock outstanding.
At September 30, 1996 and 1997, 13,700,000 of the shares issued to the founders
were subject to repurchase by the Company at the purchase price upon
termination of employment.
F-14
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Beginning in May 1998, the Company offered 666,667 shares of common stock for
sale. The initial offering price of $6.00 was subsequently revised to $1.50. As
of June 30, 1998, net proceeds of $570,666 had been received for 400,272 shares
subscribed.
9. STOCK OPTIONS AND WARRANTS
Stock options
In 1996, the Company adopted the 1996 Stock Option Plan (the "Plan"). At
September 30, 1996 and 1997, respectively, there were 6,400,000 and 5,923,093
shares of common stock reserved for issuance to employees of the Company
pursuant to the Plan. Under the Plan, incentive options may be granted at
prices not lower than fair market value at the date of grant or 110% of the
fair market value if the optionee, immediately prior to the grant, owns stock
representing 10% or more of the voting power or value of all securities.
Nonstatutory options may be granted at prices not lower than 85% of fair market
value at the date of grant or 100% of the fair market value if the optionee,
immediately prior to the grant, owns stock representing 10% or more of the
voting power or value of all securities. Stock options granted under the Plan
are exercisable and vest at such times and under such conditions as determined
by the board of directors.
During the periods ended September 30, 1996 and 1997 the Company issued 25,000
and 100,374 options, respectively, for the purchase of shares of common stock
to non-employees in return for services provided. These stock options are
exercisable and vest at such times and under such conditions as determined by
the board of directors.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), the Company retained its prior method of accounting for stock
compensation. As required by SFAS 123, the following information represents pro
forma net loss as if the Company had accounted for its employee stock options
under the fair value method prescribed by the standard.
The fair value of each option grant to an employee is estimated on the date of
grant using the Black-Scholes option valuation model with the following
weighted average assumptions:
FOR THE FOR THE
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
Interest rate..................................... 6.5% 6.5%
Expected life..................................... 9.7 years 9.8 years
Expected volatility............................... 0.1% 0.1%
Dividend yield.................................... -- --
F-15
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
issued to employees is amortized to expense over the options' vesting periods.
The pro forma information for the Company follows:
FOR THE PERIOD ENDED FOR THE PERIOD ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------------ --------------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
----------- ----------- ------------ ------------
Net loss................ $(1,872,879) $(1,874,631) $(14,579,138) $(14,746,109)
Basic and diluted net
loss per common share.. $ (0.13) $ (0.13) $ (0.76) $ (0.77)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts as additional awards are anticipated in future
years.
A summary of stock option transactions is as follows:
FOR THE PERIOD ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
---------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------ --------------------- ---------
Outstanding at beginning of
period......................... -- -- 1,677,200 $0.25
Granted....................... 1,677,200 $ .25 2,810,100 1.91
Exercised..................... -- -- (459,991) 0.54
Cancelled..................... -- (1,769,546) 1.28
------------ -------- ---------- -----
Outstanding at end of period.... 1,677,200 $ .25 2,257,763 $1.50
============ ======== ========== =====
Exercisable at end of period.... 33,750 $0.05 292,650 $0.58
Weighted-average fair value of
options granted during the
period......................... $0.12 $0.85
The following table summarizes information about the fixed-price stock options
outstanding at September 30, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF SHARES REMAINING AVERAGE SHARES AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISABLE
PRICES AT 9/30/97 LIFE PRICE AT 9/30/97 PRICE
-------- ----------- ----------- --------- ----------- -----------
$.05-.08............. 750,500 7.9 years $0.06 115,000 $0.05
$.60-.80............. 776,689 8.9 years 0.73 161,650 0.70
$3.00-4.50........... 730,574 9.5 years 3.76 16,000 3.06
--------- -------
2,257,763 $1.50 292,650 $0.58
========= =======
In September 1998, the Company adopted the 1998 Senior Employee Stock Option
Plan (the "1998 Plan") and reserved 1,500,000 shares for issuance pursuant to
the 1998 Plan. The terms of the 1998 Plan are similar to those of the 1996
Stock Option Plan described above.
F-16
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Warrants
On May 17, 1996, the Company issued a warrant, in connection with the Series B
preferred stock financing, to purchase up to 1,500,000 shares of the Company's
Series C preferred stock at $0.75 per share if exercised prior to the second
anniversary of the date of issuance; $0.83 per share after the second
anniversary and prior to the third anniversary of the date of issuance; $0.91
per share if exercised after the third anniversary and or prior to the fourth
anniversary of the date of issuance; and $1.00 per share if exercised after a
later date. The warrants are exercisable at any time and expire May 16, 2001 or
upon the effective date of an initial public offering by the Company, whichever
is shorter.
Pursuant to the April 1998 guarantee of bank debt, warrants to purchase 825,000
shares of common stock were issued to three shareholders. These warrant shares
shall be purchasable at $1.00 per share if exercised prior to the first
anniversary of the guarantors' agreement, $1.10 per share after the first
anniversary and prior to the second anniversary, $1.20 per share after the
second anniversary and prior to the third anniversary, $1.35 per share after
the third anniversary and prior to the fourth anniversary, and $1.50 per share
after the fourth anniversary and prior to the fifth anniversary. The warrants
are exercisable at any time and have a term of five years or upon the effective
date of an initial public offering by the Company, whichever is shorter. The
value of these warrants, net of proceeds, of $400,000 was recorded as deferred
financing costs and is being amortized over the life of the debt, which is
twelve months.
10. RELATED PARTY TRANSACTIONS
As of September 30, 1997, Zitel Corporation owned 78% of the total issued
preferred stock, or 33% of all stock outstanding. The Company has a sales
representative agreement with Zitel in which the shareholder will introduce
interested parties to the Company. The Company also has an agreement to provide
1,000 hours of training and support to Zitel at no charge. Three board members
of the Company are officers of Zitel Corporation. Since June 30, 1998, the
Company has received $2.5 million in loans from Zitel Corporation. Interest
accrues at 7%. Principal and interest are payable on demand. See Note 14,
Subsequent Events.
On October 1, 1996, the Company entered into a consulting agreement with BRC
Holdings, Inc. ("BRC") which expires December 31, 1999, under which their
Chairman and Chief Executive Officer will serve as Chairman of the Board for
MatriDigm. In return for such services, during the term of the consulting
agreement, BRC will receive 5% of the Company's cumulative pretax earnings up
to $100,000,000 of MatriDigm's cumulative earnings. When pretax earnings reach
$100,000,000, the percentage will incrementally decline until the Company's
cumulative earnings reach $1 billion, at which point the percentage will remain
at 1% until the end of the contract. On October 23, 1996, BRC purchased
2,000,000 shares of common stock at $.75 per share. The shares have certain
repurchase rights in the event of the cancellation of the consulting agreement.
The Company has also entered into a sales representative agreement with BRC
under which the shareholder will offer the Company's services to its clients.
In January 1998, BRC made a
F-17
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
prepayment of $1 million which is being applied to charges for code being
renovated for BRC customers in accordance with the related agreement. In
October 1998, the BRC consulting agreement was amended to rescind the sections
of that agreement related to services provided by BRC's Chairman and Chief
Executive Officer and to the compensation due to BRC related to such services.
The repurchase rights related to the 2,000,000 shares of common stock purchased
by BRC in October, 1996 were also waived with regard to certain specified
transfers and with respect to the Merger (see Note 12).
In May 1996, an entity affiliated with the Chairman of the Board purchased the
2,000,000 shares of MatriDigm's Series B preferred stock for $1,500,000 and was
issued a warrant to purchase up to 1,500,000 shares of MatriDigm's Series C
preferred stock. Effective September 8, 1997, MatriDigm granted a non-statutory
stock option to purchase 75,000 shares of common stock to another entity
affiliated with the Chairman of the Board in connection with raising capital
for the Company and setting up certain relationships.
11. EMPLOYEE BENEFIT PLANS
During the year ended September 30, 1996, the Company adopted a contributory
retirement and savings plan which meets the requirements of Section 401(k) of
the Internal Revenue Code. The plan allows for a discretionary matching
contribution by the Company as determined by the Company's board of directors.
No contributions to the Plan have been made by the Company.
The Company offered 200,000 shares of common stock to employees and directors
at $4.50 per share pursuant to the August 1997 Employee Stock Purchase Plan
(the "1997 Stock Plan"). Initially, employees were each eligible to purchase
shares with a value of up to 15% of their annual salary; officers and directors
were eligible to purchase up to 10,000 shares. As provided for in the 1997
Stock Plan, these maximums were increased. As of September 10, 1997, the final
date for acquisitions according to the offering, 162,019 common shares were
purchased under the 1997 Stock Plan.
12. FINANCING
On December 4, 1997, the Company obtained financing of $4 million from related
parties pursuant to three Convertible Promissory Notes and Agreements. The
terms of these agreements provide for conversion of the outstanding principal
of the notes into shares of common stock at a conversion rate calculated in
accordance with the agreement, or payment of the principal after expiration of
the conversion period in six equal monthly installments. The conversion period
under the notes ends on or around June 1, 1998. The conversion rate per share
defined in the agreements is based upon the Company's profit as defined for the
period January 1 through March 31, 1998. Interest is payable quarterly
beginning on December 31, 1997, and upon any conversion.
F-18
MATRIDIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. UNCERTAINTIES
Subsequent to September 30, 1997, the Company emerged from the development
stage. Revenues since September 30, 1997 have not generated sufficient funds to
finance operations. The Company will require additional financing until
operations generate adequate cash flow to meet its financial obligations.
Management is pursuing various funding alternatives and obtained financing from
and signed a definitive agreement to merge with Zitel as described in Note 14.
Consummation of the merger is subject to certain conditions and there can be no
assurance that these conditions will be met. The conditions of the definitive
agreement and other existing obligations could make it difficult to obtain
alternative financing. There can be no assurance that additional financing will
be available.
14. SUBSEQUENT EVENTS (UNAUDITED)
In July 1998, the Company reduced its workforce by one-third. Benefits paid and
expenses recorded as a result of this action were $307,000 and $204,000,
respectively.
On October 5, 1998 the Company signed a definitive agreement with various
parties, including Zitel Corporation, whereby the shares of common stock of the
Company, other than shares held by Zitel, will be exchanged for shares of a
newly created company based on an exchange ratio of .6504. All shares of
preferred stock of the Company and all warrants to purchase common and
preferred stock shall have been converted prior to the exchange. For accounting
purposes, the merger will be accounted for using the purchase method of
accounting with Zitel being the accounting acquiror. As part of the October 5,
1998 definitive agreement, Zitel agreed to continue to fund the working capital
requirements of MatriDigm. The merger agreement is subject to certain
conditions. There can be no assurance these conditions will be met.
F-19
ANNEX A
AGREEMENT AND
PLAN OF REORGANIZATION AND MERGER
BY AND AMONG
ZITEL CORPORATION,
MILLENNIUM HOLDING CORP.,
ZENITH ACQUISITION CORP.,
MILLENNIUM ACQUISITION I CORP.,
AND
MATRIDIGM CORPORATION
DATED AS OF
OCTOBER 5, 1998
TABLE OF CONTENTS
ARTICLE I
THE MERGERS
Section 1.1 The Mergers............................................... A-2
Section 1.2 Closing................................................... A-2
Section 1.3 Effective Time............................................ A-2
Section 1.4 Effects of the Merger..................................... A-3
Section 1.5 Charter and By-Laws....................................... A-3
Section 1.6 Directors................................................. A-3
Section 1.7 Officers.................................................. A-3
Section 1.8 Shareholders' Meeting..................................... A-4
Section 1.9 Consent Solicitation...................................... A-4
Section 1.10 Proxy Statement/Prospectus/Consent Solicitation;
Registration Statement.................................... A-4
ARTICLE II
EFFECTS OF THE MERGERS ON THE CAPITAL STOCKOF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES
Section 2.1 Effect on Parent Capital Stock............................ A-5
Section 2.2 Effect on Company Common Stock............................ A-7
Section 2.3 Exchange of Shares and Certificates....................... A-10
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.1 Organization.............................................. A-12
Section 3.2 Capitalization............................................ A-13
Section 3.3 Corporate Authorization; Validity of Agreement; Company
Action.................................................... A-14
Section 3.4 Consents and Approvals; No Violations..................... A-14
Section 3.5 Absence of Certain Changes................................ A-15
Section 3.6 No Undisclosed Liabilities................................ A-15
Section 3.7 Information in Consents and Registration Statement........ A-15
Section 3.8 Employee Benefit Plans; ERISA............................. A-16
Section 3.9 Labor Matters............................................. A-18
Section 3.10 Litigation; Compliance with Law........................... A-19
Section 3.11 No Default................................................ A-19
Section 3.12 Taxes..................................................... A-20
Section 3.13 Material Contracts........................................ A-20
Section 3.14 Assets.................................................... A-21
Section 3.15 Environmental Matters..................................... A-21
Section 3.16 Transactions with Affiliates.............................. A-21
Section 3.17 Opinion of Financial Advisor.............................. A-22
Section 3.18 Intellectual Property..................................... A-22
Section 3.19 Insurance................................................. A-24
Section 3.20 Accounts Receivable....................................... A-24
Section 3.21 Financial Statements...................................... A-25
Section 3.22 Full Disclosure........................................... A-25
i
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT, HOLDCO, ZENITH ACQUISITION AND
MILLENNIUM ACQUISITION
Section 4.1 Organization.............................................. A-26
Section 4.2 Capitalization............................................ A-26
Section 4.3 Authorization; Validity of Agreement; Necessary Action.... A-27
Section 4.4 Consents and Approvals; No Violations..................... A-28
Section 4.5 Information in Proxy Statement/Prospectus................. A-28
Section 4.6 SEC Reports and Financial Statements...................... A-29
Section 4.7 Absence of Certain Changes................................ A-29
Section 4.8 Rights Agreement.......................................... A-29
Section 4.9 Activities of Zenith Acquisition and Millennium
Acquisition............................................... A-30
Section 4.10 Opinion of Financial Advisor.............................. A-30
Section 4.11 No Default................................................ A-30
Section 4.12 Full Disclosure........................................... A-30
Section 4.13 Litigation................................................ A-30
Section 4.14 Taxes..................................................... A-30
Section 4.15 Employee Benefit Plans; ERISA............................. A-31
Section 4.16 No Undisclosed Liabilities................................ A-31
Section 4.17 Transactions with Affiliates.............................. A-31
ARTICLE V
COVENANTS
Section 5.1 Interim Operations of the Company......................... A-32
Section 5.2 Interim Operations of Parent and Holdco................... A-35
Section 5.3 Access to Information..................................... A-35
Section 5.4 Consents and Approvals.................................... A-36
Section 5.5 Additional Agreements..................................... A-36
Section 5.6 Publicity................................................. A-36
Section 5.7 Notification of Certain Matters........................... A-36
Section 5.8 Directors' and Officers' Insurance and Indemnification.... A-37
Section 5.9 Cooperation............................................... A-38
Section 5.10 Nasdaq Listing Application................................ A-38
Section 5.11 Affiliate Agreements...................................... A-38
Section 5.12 Letters of Accountants.................................... A-39
Section 5.13 Working Capital Funds..................................... A-39
Section 5.14 Financial Statements...................................... A-39
ARTICLE VI
CONDITIONS
Section 6.1 Conditions to the Obligations of Each Party............... A-39
Section 6.2 Conditions to the Obligations of Parent, Holdco, Zenith
Acquisition and Millennium Acquisition.................... A-40
Section 6.3 Conditions to the Obligations of the Company.............. A-41
ii
ARTICLE VII
TERMINATION
Section 7.1 Termination.............................................. A-42
Section 7.2 Effect of Termination.................................... A-42
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Fees and Expenses........................................ A-43
Section 8.2 Finders' Fees............................................ A-43
Section 8.3 Amendment and Modification............................... A-44
Section 8.4 Nonsurvival of Representations and Warranties............ A-44
Section 8.5 Notices.................................................. A-44
Section 8.6 Interpretation........................................... A-45
Section 8.7 Counterparts............................................. A-45
Section 8.8 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership................................................ A-45
Section 8.9 Severability............................................. A-45
Section 8.10 Governing Law............................................ A-46
Section 8.11 Assignment............................................... A-46
EXHIBIT A-1 Form of Shareholder Agreement............................ A-1-1
EXHIBIT A-2 Form of Lock-Up Agreement................................ A-2-1
EXHIBIT B-1 Agreement of Merger, dated as of the Closing Date, among
Holdco, Parent and Zenith Acquisition.................... B-1-1
EXHIBIT B-2 Agreement of Merger, dated as of the Closing Date, among
Holdco, the Company and Millennium Acquisition........... B-2-1
EXHIBIT C-1 Certificate of Incorporation of Zenith Acquisition with
attached Amendment No. 1 to the same..................... C-1-1
EXHIBIT C-2 Bylaws of Zenith Acquisition with attached Amendment No.
1 to the same............................................ C-2-1
EXHIBIT D-1 Certificate of Incorporation of Millennium Acquisition
with attached Amendment No. 1 to the same................ D-1-1
EXHIBIT D-2 Bylaws of Millennium Acquisition with attached Amendment
No. 1 to the same........................................ D-2-1
EXHIBIT E Form of Affiliates Agreement for Affiliates of the
Company.................................................. E-1
EXHIBIT F Form of Affiliates Agreement for Affiliates of Parent.... F-1
EXHIBIT G Request for Working Capital Funds........................ G-1
EXHIBIT H Millennium Key Employees................................. H-1
iii
LIST OF DEFINED TERMS
Agreement.............................................................. Preamble
Assertion.............................................................. 5.8
Audit.................................................................. 3.12(b)
Certificates........................................................... 2.3(b)
CGCL................................................................... 1.1(a)
Closing................................................................ 1.2
Closing Date........................................................... 1.2
Code................................................................... Recitals
Company................................................................ Preamble
Company Agreements..................................................... 3.4
Company Balance Sheets................................................. 3.20
Company Capital Stock.................................................. 2.2(b)
Company Common Stock................................................... 2.2(b)
Company Convertible Securities......................................... 2.2(d)
Company Disclosure Schedule............................................ 3.0
Company Material Adverse Effect........................................ 3.1
Company Opinion........................................................ 3.17
Company Option......................................................... 2.2(d)
Company Plans.......................................................... 3.8
Company Preferred Stock................................................ 2.2(b)
Company Stock Plan..................................................... 2.2(d)
Computer Software...................................................... 3.18(b)
Confidentiality Agreement.............................................. 5.3
Consent Solicitation................................................... 1.9
Consents............................................................... 1.9
DGCL................................................................... 1.3
Effective Time......................................................... 1.3
Engagement Letter...................................................... 8.1
Environmental Claims................................................... 3.15(b)
Environmental Laws..................................................... 3.15(a)
ERISA Affiliate........................................................ 3.8
ERISA Plans............................................................ 3.8
Exchange Act........................................................... 1.8
Exchange Agent......................................................... 2.3
Exchange Fund.......................................................... 2.3
GAAP................................................................... 3.5
Governmental Entity.................................................... 3.4
Holdco................................................................. Preamble
Holdco Common Stock.................................................... 2.1(b)
Indemnified Liability.................................................. 5.8
Indemnified Parties.................................................... 5.8
Indemnified Party...................................................... 5.8
Indemnitors............................................................ 5.8
Independent Director................................................... 1.6
Intellectual Property.................................................. 3.18(c)
Materials of Environmental Concern..................................... 3.15(a)
Merger Agreements...................................................... 1.3
Mergers................................................................ Recitals
Millennium Acquisition................................................. Preamble
Millennium Dissenting Shares........................................... 2.2(c)
Millennium Exchange Ratio.............................................. 2.2(b)
Millennium Merger...................................................... Recitals
Millennium Merger Agreement............................................ 1.3
Millennium Surviving Corporation....................................... 1.1(b)
Parent................................................................. Preamble
Parent Common Stock.................................................... 2.1(b)
Parent Disclosure Schedule............................................. 4.0
Parent Opinion......................................................... 4.10
Parent Material Adverse Effect......................................... 4.1
Parent Option.......................................................... 2.1(d)
Parent Preferred Stock................................................. 4.2
Parent SEC Documents................................................... 4.6
Parent Stock Plan...................................................... 2.1(d)
Person................................................................. 3.16
Proxy Statement/Prospectus/Consent Solicitation........................ 1.10
Registration Statement................................................. 1.10
Rights................................................................. 3.2(b)
Rights Agreement....................................................... 4.8
SEC.................................................................... 1.10
Securities Act......................................................... 1.10
Shareholder Agreement.................................................. Recitals
SPD.................................................................... 3.8(b)
Special Meeting........................................................ 1.8
Subsidiary............................................................. 4.1
Tax.................................................................... 3.12(b)
Tax Authority.......................................................... 3.12(b)
Tax Returns............................................................ 3.12(b)
Taxes.................................................................. 3.12(b)
WARN Act............................................................... 3.9(b)
Zenith Acquisition..................................................... Preamble
Zenith Dissenting Shares............................................... 2.1(c)
Zenith Exchange Ratio.................................................. 2.1(b)
Zenith Merger.......................................................... Recitals
Zenith Merger Agreement................................................ 1.3
Zenith Plans........................................................... 4.15(a)
Zenith Surviving Corporation........................................... 1.1(a)
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (hereinafter defined as this
"Agreement"), dated October 5, 1998, by and among Zitel Corporation, a
California corporation ("Parent"), Millennium Holding Corp., a Delaware
corporation and a direct wholly-owned subsidiary of Parent ("Holdco"), Zenith
Acquisition Corp., a Delaware corporation and a direct wholly-owned subsidiary
of Holdco ("Zenith Acquisition"), Millennium Acquisition I Corp., a Delaware
corporation and a direct wholly-owned subsidiary of Holdco ("Millennium
Acquisition"), and MatriDigm Corporation, a California corporation (the
"Company").
RECITALS
WHEREAS, the respective Boards of Directors of Parent, Holdco and Zenith
Acquisition have approved the merger (the "Zenith Merger") of Zenith
Acquisition with and into Parent, upon the terms and subject to the conditions
set forth in this Agreement, and have approved this Agreement;
WHEREAS, the respective Boards of Directors of Holdco, Millennium Acquisition
and the Company have approved the merger (the "Millennium Merger", and together
with the Zenith Merger, the "Mergers") of Millennium Acquisition with and into
the Company, upon the terms and subject to the conditions set forth in this
Agreement, and have approved this Agreement;
WHEREAS, Parent and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Mergers, and to
prescribe various conditions to the Mergers;
WHEREAS, for Federal income tax purposes, it is intended that the Mergers
qualify as nonrecognition transfers under the Internal Revenue Code of 1986, as
amended (the "Code");
WHEREAS, concurrently with the execution of this Agreement and as a condition
and inducement to the willingness of Parent to enter into this Agreement,
certain shareholders of the Company have entered into Shareholder Agreements in
the form of Exhibit A-1 hereto (each a "Shareholder Agreement") with Parent
pursuant to which each such shareholder has agreed to: (i) vote such
shareholder's shares of Company Common Stock (as hereinafter defined) in favor
of the Millennium Merger and the approval and adoption of this Agreement and to
execute a written consent in furtherance thereof, and (ii) convert any shares
of Company Preferred Stock (as hereinafter defined) held by such shareholder
into shares of Company Common Stock; and
WHEREAS, concurrently with the execution of this Agreement and as a condition
and inducement to the willingness of Parent to enter into this Agreement,
certain shareholders of the Company have entered into Lock-Up Agreements in the
form of Exhibit A-2 hereto, pursuant to which each such shareholder has agreed
not to sell or transfer any of the shares of Holdco Common Stock (as defined
below) acquired by such shareholder in connection with the Millennium Merger
for a specified period of time following the Closing hereunder as set forth
therein;
NOW, THEREFORE, in consideration of the foregoing premises and the respective
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
A-1
ARTICLE I
THE MERGERS
Section 1.1 THE MERGERS. (a) Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with sections 1110 et seq. of the
California General Corporation Law (the "CGCL"), Zenith Acquisition shall be
merged with and into Parent at the Effective Time of the Mergers (as defined in
Section 1.3 hereof). Following the Zenith Merger, the separate corporate
existence of Zenith Acquisition shall cease and Parent shall continue as the
surviving corporation (the "Zenith Surviving Corporation") and shall succeed to
and assume all the rights, properties, liabilities and obligations of Zenith
Acquisition in accordance with the CGCL.
(b) Upon the terms and subject to the conditions set forth in this Agreement,
and in accordance with sections 1100 et seq. of the CGCL, Millennium
Acquisition shall be merged with and into the Company at the Effective Time of
the Mergers. Following the Millennium Merger, the separate corporate existence
of Millennium Acquisition shall cease and the Company shall continue as the
surviving corporation (the "Millennium Surviving Corporation") and shall
succeed to and assume all the rights, properties, liabilities and obligations
of Millennium Acquisition in accordance with the CGCL.
Section 1.2 CLOSING. The closing of the Mergers (the "Closing") shall take
place at 10:00 a.m., San Francisco time, on a date to be specified by the
parties, which shall be no later than the second business day after
satisfaction or waiver of all of the conditions set forth in Article VI (the
"Closing Date"), at the offices of Skadden, Arps, Slate, Meagher & Flom LLP,
525 University Avenue, Suite 220, Palo Alto, California 94301, unless another
time, date or place is agreed to in writing by the parties hereto.
Section 1.3 EFFECTIVE TIME. Upon the terms and subject to the conditions set
forth in Article VI of this Agreement and the Agreement of Merger among Holdco,
Parent and Zenith Acquisition together with the related officers' certificates
required by section 1103 of the CGCL, in the form attached to this Agreement as
Exhibit B-1 (the "Zenith Merger Agreement") and the Agreement of Merger among
Holdco, the Company and Millennium Acquisition together with the related
officers' certificates required by section 1103 of the CGCL, in the form
attached to this Agreement as Exhibit B-2 (the "Millennium Merger Agreement"
and together with the Zenith Merger Agreement, the "Merger Agreements"), the
parties hereto shall file the Zenith Merger Agreement and the Millennium Merger
Agreement with the Secretary of State of the State of California, whereupon
Zenith Acquisition shall be merged with and into Parent, and Millennium
Acquisition shall be merged with and into the Company, each such Merger
pursuant to sections 1100 et seq. of the CGCL. Concurrently with the filing of
the Merger Agreements with the Secretary of State of the State of California
and upon the terms and subject to the conditions set forth in Article VI of
this Agreement, the parties hereto shall file Certificates of Merger with the
Secretary of State of Delaware in accordance with the relevant provisions of
the Delaware General Corporation Law (the "DGCL"). The parties hereto shall
make all other filings, recordings or publications required by the CGCL and the
DGCL in connection with the Mergers. Each Merger shall become effective at the
time specified in the Merger Agreement or Certificates of Merger, as the case
may be, which specified time shall be
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the same in each of the Merger Agreements and Certificates of Merger (the time
the Mergers become effective being the "Effective Time" of the Mergers).
Section 1.4 EFFECTS OF THE MERGER. The Zenith Merger and the Millennium Merger
shall have the effects set forth in section 1107 of the CGCL and section 259 of
the DGCL.
Section 1.5 CHARTER AND BY-LAWS. (a) As of the Effective Time of the Mergers,
the articles of incorporation of the Zenith Surviving Corporation shall be as
set forth in Exhibit C-1 to this Agreement, and such articles of incorporation
shall be the articles of incorporation of Zenith Surviving Corporation until
thereafter amended as provided by law and such articles of incorporation of the
Zenith Surviving Corporation.
(b) As of the Effective Time of the Mergers, the by-laws of the Zenith
Surviving Corporation shall be as set forth in Exhibit C-2 to this Agreement,
and such by-laws shall be the by-laws of Zenith Surviving Corporation until
thereafter amended as provided by law and such by-laws of Zenith Surviving
Corporation.
(c) As of the Effective Time of the Mergers, the articles of incorporation of
the Millennium Surviving Corporation shall be as set forth in Exhibit D-1 to
this Agreement, and such articles of incorporation shall be the articles of
incorporation of Millennium Surviving Corporation until thereafter amended as
provided by law and such articles of incorporation of Millennium Surviving
Corporation.
(d) As of the Effective Time of the Mergers, the by-laws of the Millennium
Surviving Corporation shall be as set forth in Exhibit D-2 to this Agreement,
and such by-laws shall be the by-laws of Millennium Surviving Corporation until
thereafter amended as provided by law and such by-laws of Millennium Surviving
Corporation.
Section 1.6 DIRECTORS. The directors of Parent and the Company at the Effective
Time of the Mergers shall be the directors of Zenith Surviving Corporation and
Millennium Surviving Corporation, respectively, until the earlier of their
resignation or removal or until their respective successors are duly elected
and qualified, as the case may be. The directors of Holdco at the Effective
Time shall be seven members consisting of three members elected or appointed
from designees of the Company, three members elected or appointed from
designees of Parent, and one member to be mutually agreed upon by the parties
hereto, which person shall be unaffiliated with the Company or Parent (such
director being an "Independent Director").
Section 1.7 OFFICERS. Except as provided in this Section 1.7, the officers of
Parent and the Company at the Effective Time of the Mergers shall be the
officers of Zenith Surviving Corporation and Millennium Surviving Corporation,
respectively, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
Immediately after the Effective Time of the Mergers, Jack H. King will assume
the position of president of Zenith Surviving Corporation, and Richard Ormond
will assume the position of president and chief executive officer of Holdco.
Holdco shall take all action necessary to elect additional members of
management and executive officers of Holdco.
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Section 1.8 SHAREHOLDERS' MEETING. In order to consummate the Zenith Merger,
Parent, acting through its board of directors, shall, in accordance with
applicable law, duly call, give notice of, convene and hold a special meeting
of its shareholders (the "Special Meeting"), as soon as practicable after the
Registration Statement (as defined in Section 1.10 hereof) is declared
effective, for the purpose of considering and taking action upon this
Agreement. Subject to the fiduciary duties of Parent's board of directors under
applicable law, Parent shall include in the Proxy Statement/Prospectus/Consent
Solicitation (as defined in Section 1.10 hereof) the recommendation of the
Board of Directors of Parent that shareholders of Parent vote in favor of the
Zenith Merger, the issuance of shares of Holdco Common Stock (as defined in
Section 2.1(b)) pursuant to this Agreement and the consummation of the
transactions contemplated hereby. Nothing contained in the preceding sentence
shall prohibit Parent from taking and disclosing to its shareholders a position
contemplated by Rule 14e-2 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
Section 1.9 CONSENT SOLICITATION. As soon as practicable after the Registration
Statement is declared effective, in order to consummate the Millennium Merger,
the Company shall commence a solicitation of consents (the "Consents") from the
holders of all outstanding shares of the capital stock of the Company (the
"Consent Solicitation") to approve the Millennium Merger and the transactions
contemplated thereunder. The Consent Solicitation shall be included in the
Proxy Statement/Prospectus/Consent Solicitation (as hereinafter defined). The
effectiveness of such approval will be conditioned upon obtaining valid
affirmative consents from holders of not less than a majority of the
outstanding shares of Company Common Stock and the outstanding shares of
Company Preferred Stock. Subject to the fiduciary duties of the Company's board
of directors under applicable law, and to Section 7.1(c)(iii) hereof, the
Company shall include in the Consent Solicitation, the recommendation of its
board of directors that the shareholders vote in favor of the Millennium Merger
and the related transactions. Except as may be required by the Company's Board
of Directors acting in compliance with their fiduciary duties, the Company
shall use its best efforts in the making of the Consent Solicitation and in
causing the approval of the Millennium Merger and the related transactions to
become effective as soon as practicable after the Registration Statement is
declared effective, including but not limited to, fixing a record date for the
purpose of determining the holders of capital stock entitled to consent to the
approval of the Millennium Merger and the related transactions and distributing
the consents to the holders of capital stock of the Company. The Company shall
deliver to Parent, promptly after receipt, but in no case, more than 2 business
days after receipt, notice of receipt of all consents received pursuant to the
Consent Solicitation and filing of such consents with the Secretary of the
Company. The Company shall promptly file with the Secretary of the Company
after receipt, but in no case, more than one (1) business day after receipt,
all consents received pursuant to the Consent Solicitation. The Company shall
ensure that the Consent Solicitation is conducted in accordance with all
applicable laws.
Section 1.10 PROXY STATEMENT/PROSPECTUS/CONSENT SOLICITATION; REGISTRATION
STATEMENT. In connection with the solicitation of approval of this Agreement,
the issuance of Holdco Common Stock pursuant to this Agreement and the Zenith
Merger by Parent's shareholders, Parent shall prepare and file with the
Securities and Exchange Commission (the "SEC") a preliminary proxy statement
relating to the Zenith Merger and this Agreement and use its best efforts to
obtain and furnish the information required to be included by the SEC in the
Proxy
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Statement/Prospectus/Consent Solicitation and, after consultation with the
Company, to respond promptly to any comments made by the SEC with respect to
the preliminary proxy statement and cause a definitive proxy statement to be
mailed to its shareholders. Subject to Section 7.1(d)(iii) hereof, Parent shall
include in the Proxy Statement/Prospectus/Consent Solicitation the
recommendation of the board of directors of Parent that the shareholders of
Parent vote in favor of the Zenith Merger, the issuance of Holdco Common Stock
in connection with the Mergers and the transactions contemplated by this
Agreement. Such definitive proxy statement shall also constitute a prospectus
of Parent with respect to the Holdco Common Stock (as defined in Section
2.1(b)) to be issued in the Mergers and to be filed by Parent with the SEC as
part of a registration statement on Form S-4 (the "Registration Statement")
filed by Parent with the SEC for the purpose of registering such shares of
Holdco Common Stock (as defined in Section 2.1(b)) under the Securities Act of
1933, as amended (the "Securities Act"), the Consent Solicitation of the
Company (such proxy statement, prospectus and Consent Solicitation being
hereinafter referred to as the "Proxy Statement/Prospectus/Consent
Solicitation"), and the definitive proxy statement to be distributed to
Parent's shareholders relating to the approval of the Zenith Merger, the
issuance of Holdco Common Stock (as defined in Section 2.1(b)) in the Mergers,
and the transactions contemplated by this Agreement. The Company and Parent
shall cooperate to promptly file the Registration Statement and shall use their
reasonable efforts to have the Registration Statement declared effective by the
SEC.
ARTICLE II
EFFECTS OF THE MERGERS ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES
Section 2.1 EFFECT ON PARENT CAPITAL STOCK. In accordance with the Zenith
Merger Agreement, as of the Effective Time of the Mergers, by virtue of the
Zenith Merger and without any action on the part of the holders of any shares
of Parent Common Stock or any shares of common stock of Zenith Acquisition:
(a) CAPITAL STOCK OF ZENITH ACQUISITION. Each issued and outstanding share of
common stock, par value $0.01 per share, of Zenith Acquisition shall be
converted into one fully paid and nonassessable share of common stock, par
value $0.01 per share, of the Zenith Surviving Corporation.
(b) CONVERSION OF PARENT COMMON STOCK. Subject to Section 2.1(c) and Section
2.3(e) hereof, each issued and outstanding share of common stock, par value
$0.01 per share ("Parent Common Stock"), of Parent shall be converted into the
right to receive one fully paid and nonassessable share of common stock, par
value $0.01 per share, of Holdco (the "Holdco Common Stock") (the "Zenith
Exchange Ratio"). As of the Effective Time of the Mergers, all such shares
shall no longer be outstanding and shall automatically be cancelled and retired
and shall cease to exist. As of the Effective Time of the Mergers, each
certificate theretofor representing shares of Parent Common Stock, without any
action on the part of Holdco, Parent or the holder thereof, shall be deemed to
represent that number of shares of Holdco Common Stock determined by
multiplying the shares of Parent Common Stock represented thereby by the Zenith
Exchange Ratio. Each holder of a certificate representing any shares of Parent
Common Stock shall cease to have any rights with respect thereto,
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except the right to receive, upon the surrender of any such certificates,
certificates representing the shares of Holdco Common Stock and any cash in
lieu of fractional shares of Holdco Common Stock to be issued or paid in
consideration therefor upon surrender of such certificate in accordance with
Section 2.3 hereof, without interest.
(c) APPRAISAL RIGHTS. Holders of all shares of the outstanding capital stock of
Parent for which dissenters' rights, if any, shall have been perfected under
section 1300 et seq. of the CGCL (the "Zenith Dissenting Shares") shall have
those rights, but only those rights, of holders of "dissenting shares" under
section 1300 et seq. of the CGCL. Parent shall give the Company prompt notice
of any demand, purported demand or other communication received by Parent with
respect to any Zenith Dissenting Shares or shares claimed to be Zenith
Dissenting Shares, and the Company shall have the right to participate in all
negotiations and proceedings with respect to such shares.
(d) ASSUMPTION AND CONVERSION OF PARENT OPTIONS. (i) As of the Effective Time
of the Mergers, each outstanding option or warrant to purchase Parent Common
Stock (a "Parent Option") issued under each stock option or warrant plan,
program, agreement or arrangement of Parent (each a "Parent Stock Plan") shall
thereafter entitle the holder thereof to receive, upon the exercise thereof,
that number of shares of Holdco Common Stock equal to the number of shares of
Parent Common Stock subject to such Parent Option immediately prior to the
Effective Time of the Mergers, at an exercise price for each full share of
Holdco Common Stock subject to such Parent Option equal to the exercise price
per share of Parent Common Stock subject to such Parent Option. The number of
shares of Holdco Common Stock that may be purchased by a holder upon the
exercise of any Parent Option shall not include any fractional share of Holdco
Common Stock but shall be rounded, in the case of any Parent Option other than
an "incentive stock option" (within the meaning of section 422 of the Code), up
and, in the case of any incentive stock option, down to the nearest whole
share, if necessary.
(ii) As of the Effective Time of the Mergers, Holdco shall assume in full each
Parent Option and all of the other rights and obligations of Parent under the
Parent Stock Plans as provided herein. Section 4.2 of the Parent Disclosure
Schedule sets forth a list summarizing all Parent Options under all of the
Parent Stock Plans, including the term and the exercise price of each Parent
Option. The assumption of a Parent Option by Holdco shall not terminate or
modify (except as required hereunder) any right of first refusal, right of
repurchase, vesting schedule or other restriction on transferability relating
to a Parent Option. Continuous employment with Parent shall be credited to an
optionee for purposes of determining the number of shares subject to exercise,
vesting or repurchase after the Effective Time of the Mergers, and the
provisions in the Parent Stock Plans and/or in any stock option agreement
evidencing the terms and conditions of any Parent Option relating to the
exercisability of any Parent Option upon termination of an optionee's
employment or service as a director shall not be deemed triggered until such
time as such optionee shall be neither an employee or officer nor serving as a
director of Holdco or any subsidiary. After such assumption, Holdco shall
issue, upon any partial or total exercise of any Parent Option, in lieu of
shares of Parent Common Stock, the number of shares of Holdco Common Stock to
which the holder of the Parent Option is entitled pursuant to this Agreement.
The assumption by Holdco of Parent Options shall not give holders of such
Parent Options any additional benefits which they did not have immediately
prior to the Effective Time of the Mergers. Nothing contained in this Section
2.1(d) shall require Holdco to offer or sell shares of
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Holdco Common Stock upon the exercise of Parent Options assumed by Holdco if,
in the reasonable judgment of Holdco or its counsel, such offer or sale would
not be in accordance with the applicable federal or state securities laws or
would require registration thereunder other than as contemplated in the
following sentence. Holdco shall file with the SEC within two (2) days
following the Effective Time of the Mergers a registration statement on Form S-
8 under the Securities Act covering, to the extent applicable, the shares of
Holdco Common Stock to be issued upon the exercise of Parent Options assumed by
Holdco. Holdco shall use its reasonable efforts to qualify as soon as
practicable after the Effective Time of the Mergers under the applicable state
securities laws the issuance of the shares of Holdco Common Stock to be issued
upon exercise of such Parent Options. Prior to the Effective Time of the
Mergers, Parent shall make such amendments, if any, to the Parent Stock Plans
as shall be necessary to permit such assumption in accordance with this Section
2.1(d).
(iii) It is the intention of the parties that, to the extent that any
Parent Option constitutes an incentive stock option immediately prior to
the Effective Time of the Mergers, such Parent Option shall continue to
qualify as an incentive stock option to the maximum extent permitted by
section 422 of the Code, and that the assumption of Parent Options provided
by this Section 2.1(d) shall satisfy the conditions of section 424(a) of
the Code.
Section 2.2 EFFECT ON COMPANY COMMON STOCK. In accordance with the Millennium
Merger Agreement, as of the Effective Time of the Mergers, by virtue of the
Millennium Merger and without any action on the part of the holder of any
shares of Company Common Stock or any shares of common stock of Millennium
Acquisition:
(a) CAPITAL STOCK OF MILLENNIUM ACQUISITION. Each issued and outstanding share
of common stock, par value $0.01 per share, of Millennium Acquisition shall be
converted into that number of fully paid and nonassessable shares of common
stock, par value $0.01 per share, of Millennium Surviving Corporation equal to
the Millennium Exchange Ratio multiplied by one.
(b) CONVERSION OF COMPANY CAPITAL STOCK. The parties hereto intend that the
Millennium Exchange Ratio (as defined below) shall be calculated with the
purpose of ensuring that the value of the Millennium Exchange Ratio shall
result in a valuation that gives the shareholders of Parent immediately prior
to the Effective Time of the Mergers an equity interest in Holdco that equals
55.5% after taking into consideration the conversion of convertible debt and
any options exercised by optionholders of Parent and the Company. Subject to
Sections 2.2(c), 2.2(d) and 2.3(e) hereof, (i) each issued and outstanding
share of the common stock, no par value, of the Company (the "Company Common
Stock"), shall be converted into the right to receive .6504 of a fully paid and
nonassessable share of Holdco Common Stock (the "Millennium Exchange Ratio"),
subject to adjustment for any Company Options exercised from the date hereof
through the date of mailing of the Proxy Statement/Prospectus/Consent
Solicitation to the shareholders of Parent, and (ii) each issued and
outstanding share of preferred stock of the Company, no par value, (the
"Company Preferred Stock", and together with the Company Common Stock, the
"Company Capital Stock") shall be converted into the right to receive that
number of fully paid and nonassessable shares of Holdco Common Stock that the
holder of such shares of Company Preferred Stock would have been entitled to
receive had such Company Preferred Stock been converted to Company Common
Stock, in accordance with its terms, immediately prior to the Effective Time.
As of the Effective Time of the Mergers, all such shares of Company Capital
Stock shall no longer be outstanding and shall
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automatically be canceled and retired and shall cease to exist. As of the
Effective Time of the Mergers, each certificate theretofor representing shares
of Company Common Stock, without any action on the part of Holdco, the Company
or the holder thereof, shall be deemed to represent that number of shares of
Holdco Common Stock determined by multiplying the shares of Company Capital
Stock by the Millennium Exchange Ratio. Each holder of a certificate
representing any shares of Company Capital Stock shall cease to have any rights
with respect thereto, except the right to receive, upon the surrender of any
such certificates, certificates representing the shares of Holdco Common Stock
and any cash in lieu of fractional shares of Holdco Common Stock to be issued
or paid in consideration therefor upon surrender of such certificate in
accordance with Section 2.3 hereof, without interest.
(c) APPRAISAL RIGHTS. Holders of all shares of the outstanding capital stock of
the Company for which dissenters' rights shall have been perfected under
section 1300 et seq. of the CGCL (the "Millennium Dissenting Shares") shall
have those rights, but only those rights, of holders of "dissenting shares"
under section 1300 et seq. of the CGCL. The Company shall give Parent prompt
notice of any demand, purported demand or other communication received by the
Company with respect to any Millennium Dissenting Shares or shares claimed to
be Millennium Dissenting Shares, and Parent shall have the right to participate
in all negotiations and proceedings with respect to such shares. The Company
agrees that, without the prior written consent of Parent, it shall not
voluntarily make any payment with respect to, or settle or offer to settle, any
demand or purported demand respecting such shares.
(d) ASSUMPTION AND CONVERSION OF COMPANY OPTIONS. (i) As of the Effective Time
of the Mergers, each outstanding option to purchase Company Common Stock (a
"Company Option") issued under each stock option plan, program, agreement or
arrangement of the Company (each a "Company Stock Plan") shall thereafter
entitle the holder thereof to receive, upon the exercise thereof that number of
shares of Holdco Common Stock determined by multiplying the number of shares of
Company Common Stock subject to such Company Option immediately prior to the
Effective Time of the Mergers by the Millennium Exchange Ratio, at an exercise
price for each full share of Holdco Common Stock subject to such Company Option
equal to the quotient obtained by dividing the exercise price per share of
Company Common Stock subject to such Company Option by the Millennium Exchange
Ratio, which exercise price per share shall be rounded up to the nearest two-
place decimal. The number of shares of Holdco Common Stock that may be
purchased by a holder upon the exercise of any Company Option shall not include
any fractional share of Holdco Common Stock but shall be rounded, in the case
of any Company Option other than an incentive stock option, up and, in the case
of any incentive stock option, down to the nearest whole share, if necessary.
(ii) As of the Effective Time of the Mergers, any securities convertible into
shares of Company Common Stock immediately prior to the Effective Time of the
Mergers, including without limitation that certain $5,000,000 Convertible
Promissory Note and Agreement, dated June 11, 1997, as amended and
supplemented, from time to time, other than warrants to purchase Company
Capital Stock ("Company Convertible Securities") shall thereafter entitle the
holder thereof to receive, upon the exercise thereof that number of shares of
Holdco Common Stock determined by multiplying the number of shares of Company
Common Stock subject to such Company Convertible Security
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immediately prior to the Effective Time of the Mergers by the Millennium
Exchange Ratio, at an exercise price for each full share of Holdco Common Stock
subject to such Company Convertible Security equal to the quotient obtained by
dividing the exercise price per share of Company Common Stock subject to such
Company Convertible Security by the Millennium Exchange Ratio, which exercise
price per share shall be rounded up to the nearest two-place decimal.
(iii) As of the Effective Time of the Mergers, Holdco shall assume in full each
Company Option and all of the other rights and obligations of the Company under
the Company Stock Plans as provided herein. Section 3.2 of the Company
Disclosure Schedule sets forth a list summarizing all Company Options under all
of the Company Stock Plans, including the term and the exercise price of each
Company Option. The assumption of a Company Option by Holdco shall not
terminate or modify (except as required hereunder or under the terms of any
Company Stock Plan or any stock option agreement in effect as of the date
hereof evidencing any Company Option) any right of first refusal, right of
repurchase, vesting schedule or other restriction on transferability relating
to a Company Option. Continuous employment with the Company shall be credited
to an optionee for purposes of determining the number of shares subject to
exercise, vesting or repurchase after the Effective Time of the Mergers, and
the provisions in the Company Stock Plans and/or in any stock option agreement
evidencing the terms and conditions of any Company Option relating to the
exercisability of any Company Option upon termination of an optionee's
employment or service as a director shall not be deemed triggered until such
time as such optionee shall be neither an employee or officer nor serving as a
director of Holdco or any subsidiary. After such assumption, Holdco shall
issue, upon any partial or total exercise of any Company Option, in lieu of
shares of Company Common Stock, the number of shares of Holdco Common Stock to
which the holder of the Company Option is entitled pursuant to this Agreement.
The assumption by Holdco of Company Options shall not give holders of such
Company Options any additional benefits which they did not have immediately
prior to the Effective Time of the Mergers. Nothing contained in this Section
2.2(d) shall require Holdco to offer or sell shares of Holdco Common Stock upon
the exercise of Company Options assumed by Holdco if, in the reasonable
judgment of Holdco or its counsel, such offer or sale would not be in
accordance with the applicable federal or state securities laws or would
require registration thereunder other than as contemplated in the following
sentence. Holdco shall file with the SEC within two (2) days following the
Effective Time of the Mergers a registration statement on Form S-8 under the
Securities Act covering, to the extent applicable, the shares of Holdco Common
Stock to be issued upon the exercise of Company Options assumed by Holdco.
Holdco shall use its reasonable efforts to qualify as soon as practicable after
the Effective Time of the Mergers under the applicable state securities laws
the issuance of the shares of Holdco Common Stock to be issued upon exercise of
such Company Options. Prior to the Effective Time of the Mergers, the Company
shall make such amendments, if any, to the Company Stock Plans as shall be
necessary to permit such assumption in accordance with this Section 2.2(d).
(iv) It is the intention of the parties that, to the extent that any Company
Option constitutes an incentive stock option immediately prior to the Effective
Time of the Mergers, such Company Option shall continue to qualify as an
incentive stock option to the maximum extent permitted by section 422 of the
Code, and that the assumption of Company Options provided by this Section
2.2(d) shall satisfy the conditions of section 424(a) of the Code.
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(e) TREATMENT OF COMPANY COMMON STOCK HELD BY PARENT. Notwithstanding anything
in this Agreement to the contrary, each issued and outstanding share of Company
Common Stock held by Parent, Holdco or any of their respective subsidiaries
(including any such shares acquired by Holdco simultaneously with the Effective
Time of the Mergers and any such shares held by corporations (other than the
Company) that become subsidiaries of Holdco simultaneously with the Effective
Time of the Mergers (but excluding any shares acquired pursuant to Section
2.2(a) hereof)) shall be converted into .6504 of a fully paid and nonassessable
share of common stock of the Millennium Surviving Corporation.
Section 2.3 EXCHANGE OF SHARES AND CERTIFICATES. (a) EXCHANGE AGENT. As of the
Effective Time of the Mergers, Holdco shall deposit with American Stock
Transfer & Trust Company or such other bank or trust company as may be
designated by Holdco (the "Exchange Agent"), for the benefit of the holders of
shares of Parent Common Stock and Company Common Stock, for exchange in
accordance with this Article II, through the Exchange Agent, certificates
representing the shares of Holdco Common Stock (such shares of Holdco Common
Stock, together with any dividends or distributions with respect thereto with a
record date after the Effective Time of the Mergers, being hereinafter referred
to as the "Exchange Fund") issuable pursuant to Sections 2.1 and 2.2 hereof in
exchange for outstanding shares of Parent Common Stock and Company Common
Stock.
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the Effective
Time of the Mergers, the Exchange Agent shall mail to each holder of record of
a certificate or certificates which immediately prior to the Effective Time of
the Mergers represented outstanding shares of Parent Common Stock or Company
Common Stock (the "Certificates") whose shares were converted into the right to
receive shares of Holdco Common Stock pursuant to Section 2.1 or 2.2 hereof,
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent and shall be in such form
and have such other provisions as Holdco may reasonably specify), and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of Holdco Common Stock. Upon surrender of
a Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Holdco, together with such letter of transmittal,
duly executed, and such other documents as may reasonably be required by the
Exchange Agent, the holder of such Certificate shall be entitled to receive in
exchange therefor a certificate representing that number of whole shares of
Holdco Common Stock which such holder has the right to receive pursuant to the
provisions of this Article II, and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of Parent Common
Stock or Company Common Stock which is not registered in the transfer records
of Parent or the Company, as applicable, a certificate representing the proper
number of shares of Holdco Common Stock may be issued to a person other than
the person in whose name the Certificate so surrendered is registered, if such
Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the person requesting such payment shall pay any transfer or other
taxes required by reason of the issuance of shares of Holdco Common Stock to a
person other than the registered holder of such Certificate or establish to the
satisfaction of Holdco that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.3, each Certificate shall be
deemed at any time after the Effective Time of the Mergers to represent only
the right to receive upon such surrender the certificate representing shares of
Holdco Common Stock and cash in lieu of any fractional shares of
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Holdco Common Stock as contemplated by this Section 2.3. No interest shall be
paid or accrue on any cash payable in lieu of any fractional shares of Holdco
Common Stock.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or other
distributions with respect to Holdco Common Stock with a record date after the
Effective Time of the Mergers shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Holdco Common Stock represented
thereby, and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to Section 2.3(e) hereof, until the surrender of such
Certificate in accordance with this Article II. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall be
paid to the holder of the certificate representing whole shares of Holdco
Common Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of any cash payable in lieu of a fractional share of
Holdco Common Stock to which such holder is entitled pursuant to Section 2.3(e)
and the amount of dividends or other distributions with a record date after the
Effective Time of the Mergers theretofor paid with respect to such whole shares
of Holdco Common Stock, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time of
the Mergers but prior to such surrender and a payment date subsequent to such
surrender payable with respect to such whole shares of Holdco Common Stock.
(d) NO FURTHER OWNERSHIP RIGHTS IN PARENT COMMON STOCK AND COMPANY CAPITAL
STOCK. All shares of Holdco Common Stock issued upon the surrender for exchange
of Certificates in accordance with the terms of this Article II (including any
cash paid pursuant to Section 2.3(c) or 2.3(e) hereof) shall be deemed to have
been issued (and paid) in full satisfaction of all rights pertaining to the
shares of Parent Common Stock or Company Capital Stock theretofor represented
by such Certificates, subject, however, to the obligation of the Zenith
Surviving Corporation or the Millennium Surviving Corporation, as applicable,
to pay any dividends or make any other distributions with a record date prior
to the Effective Time of the Mergers which may have been declared or made by
Parent or the Company, as applicable, on such shares of Parent Common Stock and
Company Capital Stock in accordance with the terms of this Agreement and which
remain unpaid at the Effective Time of the Mergers, and there shall be no
further registration of transfers on the stock transfer books of the Zenith
Surviving Corporation or the Millennium Surviving Corporation, as applicable,
of the shares of Parent Common Stock or Company Capital Stock which were
outstanding immediately prior to the Effective Time of the Mergers. If, after
the Effective Time of the Mergers, Certificates are presented to the Zenith
Surviving Corporation or the Millennium Surviving Corporation or the Exchange
Agent for any reason, they shall be canceled and exchanged as provided in this
Article II, except as otherwise provided by law.
(e) FRACTIONAL SHARES. (i) No certificates representing fractional shares of
Holdco Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests shall not entitle the owner
thereof to vote or to any other rights of a stockholder of Holdco.
(ii) Notwithstanding any other provision of this Agreement, each holder of
shares of Parent Common Stock or Company Capital Stock converted pursuant to
the Mergers who would otherwise have been entitled to receive a fraction of a
share of Holdco Common Stock (after taking into account all Certificates
delivered by such holder) shall receive, in lieu thereof, cash (without
interest) in an amount equal to (i) such fraction multiplied by (ii) the
average of the closing price of a share of
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Parent Common Stock for the ten most recent trading days that Parent Common
Stock has traded ending on the trading day immediately prior to the Effective
Time of the Mergers, as reported on the Nasdaq National Market.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time of the Mergers shall be delivered to Holdco, upon demand,
and any holders of the Certificates who have not theretofore complied with this
Article II shall thereafter look only to Holdco for payment of their claim for
Holdco Common Stock, any cash in lieu of fractional shares of Holdco Common
Stock and any dividends or distributions with respect to Holdco Common Stock.
(g) NO LIABILITY. None of Parent, Holdco, Zenith Acquisition, Millennium
Acquisition, the Company or the Exchange Agent shall be liable to any person in
respect of any shares of Holdco Common Stock (or dividends or distributions
with respect thereto) or cash from the Exchange Fund delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any Certificates shall not have been surrendered prior to seven years after
the Effective Time of the Mergers, or immediately prior to such earlier date on
which any shares of Holdco Common Stock, any cash in lieu of fractional shares
of Holdco Common Stock or any dividends or distributions with respect to Holdco
Common Stock in respect of such Certificate would otherwise escheat to or
become the property of any Governmental Entity, any such shares, cash,
dividends or distributions in respect of such Certificate shall, to the extent
permitted by applicable law, become the property of the Zenith Surviving
Corporation or the Millennium Surviving Corporation, as applicable, free and
clear of all claims or interest of any person previously entitled thereto.
(h) INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by Holdco, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
Holdco.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the schedule delivered to Parent prior to the execution
of this Agreement setting forth specific exceptions to the Company's
representations and warranties set forth herein (the "Company Disclosure
Schedule"), the Company represents and warrants to Parent, Holdco, Zenith
Acquisition, and Millennium Acquisition as set forth below. Each exception set
forth in the Company Disclosure Schedule is identified by reference to, or has
been grouped under a heading referring to, a specific individual section of
this Agreement and, except as otherwise specifically stated with respect to
such exception, relates only to such section.
Section 3.1 ORGANIZATION. The Company is a corporation, duly organized, validly
existing, duly qualified or licensed to do business and in good standing under
the laws of the State of California and in each jurisdiction in which the
nature of the business conducted by it makes such qualification or licensing
necessary, and has all requisite corporate or other power and authority and all
necessary governmental approvals to own, lease and operate its properties and
to carry on its business as now being conducted, except where the failure to be
so organized, existing and in good standing or to
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have such power, authority, and governmental approvals would not have a Company
Material Adverse Effect. Except as disclosed in Section 3.1 of the Company
Disclosure Schedule, the Company does not presently own or control, directly or
indirectly, and has no stock or other interest as owner or principal in, any
other corporation or partnership, joint venture, association or other business
venture or entity. As used in this Agreement, "Company Material Adverse Effect"
means any event, change in or effect, individually or in the aggregate with
such other events, changes or effects, on the business of the Company, that is
or could reasonably be expected to be materially adverse to (i) the business,
operations, properties (including intangible properties), condition (financial
or otherwise), results of operations, assets, liabilities, regulatory status or
prospects of the Company, or (ii) the ability of the Company to consummate any
of the transactions or to perform its obligations under this Agreement or any
other agreements executed in connection herewith, it being understood that none
of the following shall be deemed by itself or by themselves, either alone or in
combination, to constitute a Company Material Adverse Effect: (a) conditions
affecting the computer industry or companies providing services similar to
those provided by the Company, as a whole,(b) any matter identified in Section
3.5 of the Company Disclosure Schedule, or (c) any requirement by the Company
for working capital contemplated to be provided by Parent pursuant to Section
5.13 hereof.
Section 3.2 CAPITALIZATION. (a) The authorized capital stock of the Company
consists of 100,000,000 shares of Company Common Stock and 30,000,000 shares of
Company Preferred Stock. As of the date hereof, (i) 21,335,602 shares of
Company Common Stock are issued and outstanding, (ii) 9,600,000 shares of
Series A Company Preferred Stock are issued and outstanding, (iii) 2,000,000
shares of Series B Company Preferred Stock are issued and outstanding, (iv) no
shares of Series C Company Preferred Stock are issued and outstanding, (v)
2,000,000 shares of Series D Company Preferred Stock are issued and
outstanding, (vi) no shares of Series E Company Preferred Stock are issued and
outstanding, (vii) no shares of Series F Company Preferred Stock are issued and
outstanding, and (viii) 5,827,973 shares of Company Common Stock are reserved
for issuance pursuant to the Company Stock Plans and all other employee benefit
plans of the Company, including (A) 3,732,518 shares reserved for issuance
pursuant to outstanding awards and 2,057,474 shares reserved for issuance
pursuant to future awards under the Millennium 1996 and 1998 Stock Option
Plans, and (B) no shares reserved for issuance pursuant to outstanding awards
and 37,981 shares reserved for issuance pursuant to future awards under the
Millennium 1997 Employee Stock Purchase Plan. As of the Effective Time of the
Mergers, no shares of the Company Preferred Stock will be issued and
outstanding. All of the issued and outstanding shares of Company Common Stock
are validly issued, fully paid and nonassessable.
(b) Except as disclosed in Section 3.2(b) of the Company Disclosure Schedule,
(i) there is no outstanding right, subscription, warrant, call, option or other
agreement or arrangement of any kind (collectively, "Rights") to purchase or
otherwise to receive from the Company any of the outstanding authorized but
unissued or treasury shares of the capital stock or any other security of the
Company, (ii) there is no outstanding security of any kind convertible into or
exchangeable for such capital stock, and (iii) there is no voting trust or
other agreement or understanding to which the Company is a party or is bound
with respect to the voting of the capital stock of the Company.
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Section 3.3 CORPORATE AUTHORIZATION; VALIDITY OF AGREEMENT; COMPANY
ACTION. (a) The Company has full corporate power and authority to execute and
deliver this Agreement and any other agreements executed in connection herewith
to which it is a party and, subject to obtaining any necessary approval of its
shareholders as contemplated by Section 1.9 hereof with respect to the
Millennium Merger, to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance by the Company of this
Agreement and any other agreements executed in connection herewith to which it
is a party, and the consummation by it of the transactions contemplated hereby
and thereby, have been duly and validly authorized by the Company's board of
directors, and subject only to approval of the Millennium Merger by the
Company's shareholders and the filing and recordation of the Millennium Merger
Agreement pursuant to the CGCL, no other corporate action on the part of the
Company is necessary to authorize the execution and delivery by the Company of
this Agreement and any other agreements executed in connection herewith and the
consummation by it of the transactions contemplated hereby and thereby. Each of
this Agreement and any other agreements executed in connection herewith to
which it is a party have been duly executed and delivered by the Company and,
assuming each of this Agreement and such other agreements constitutes a valid
and binding obligation of the other parties hereto and thereto, constitutes a
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, except that (i) such enforcement may be subject to
applicable bankruptcy, insolvency or other similar laws, now or hereafter in
effect, affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject
to equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(b) The board of directors of the Company has duly and validly approved and
taken all corporate action required to be taken by such board of directors for
the consummation of the transactions contemplated by this Agreement and the
other agreements executed in connection herewith to which it is a party. The
affirmative votes of the holders of a majority of the outstanding shares of
Company Common Stock and the outstanding shares of Company Preferred Stock are
the only votes of the holders of any class or series of Company capital stock
necessary to approve the Millennium Merger. To the best of the Company's
knowledge, no other state takeover statute or similar statute or regulation
applies or purports to apply to the Millennium Merger, this Agreement, any
other agreements executed in connection herewith or any of the transactions
contemplated by this Agreement or in any such other agreements.
Section 3.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as disclosed in
Section 3.4 of the Company Disclosure Schedule and for filings, permits,
authorizations, consents and approvals as may be required under the Exchange
Act, the approval of this Agreement and the Millennium Merger by the Company's
shareholders and the filing and recordation of the Certificate of Merger as
required by the DGCL and the Millennium Merger Agreement as required by the
CGCL, none of the execution, delivery or performance of this Agreement or any
other agreement executed in connection herewith by the Company nor the
consummation by the Company of the transactions contemplated hereby or thereby
nor compliance by the Company with any of the provisions hereof or thereof,
will (i) conflict with or result in any breach of any provision of the articles
of incorporation of the Company, (ii) require any filing with, or permit,
authorization, consent or approval of, any court, arbitral tribunal,
administrative agency or commission or other governmental or other regulatory
authority or agency
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(a "Governmental Entity"), (iii) except as set forth in Section 3.4 of the
Company Disclosure Schedule, result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise
to any right of termination, amendment, cancellation or acceleration) under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, guarantee, other evidence of indebtedness, lease, license, contract,
agreement or other instrument or obligation to which the Company is a party or
by which it or any of its properties or assets may be bound (collectively, the
"Company Agreements"), or (iv) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to the Company, or any of its properties
or assets, except in the case of clause (ii), (iii) or (iv) where the failure
to obtain such permits, authorizations, consents or approvals or to make such
filings, or where such violations, breaches or defaults would not have a
Company Material Adverse Effect.
Section 3.5 ABSENCE OF CERTAIN CHANGES. Except to the extent disclosed in
Section 3.5 of the Company Disclosure Schedule, since September 30, 1997, the
Company has conducted its business and operations consistent with past practice
only in the ordinary and usual course. Except to the extent disclosed in
Section 3.5 of the Company Disclosure Schedule, from September 30, 1997 through
the date of this Agreement, there has not occurred (i) any event, change, or
effect (including the incurrence of any liabilities of any nature, whether or
not accrued, contingent or otherwise) having a Company Material Adverse Effect,
(ii) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to the equity
interests of the Company, or (iii) any change by the Company in accounting
principles or methods, except insofar as may be required by a change in United
States generally accepted accounting principles ("GAAP"). Since September 30,
1997, other than those corporate actions approved by the Company's Board of
Directors and specified in the minutes of the meetings of the Company's Board
of Directors, the Company has not taken any of the actions prohibited by
Section 5.1 hereof.
Section 3.6 NO UNDISCLOSED LIABILITIES. Except for liabilities and obligations
incurred in the ordinary course of business and consistent with past practice,
since September 30, 1997 and except as set forth in Section 3.6 of the Company
Disclosure Schedule, the Company has not incurred any liabilities or
obligations of any nature, whether or not accrued, contingent or otherwise,
that would be required to be reflected or reserved against on a balance sheet
of the Company (including the notes thereto) prepared in accordance with GAAP
as applied in preparing the balance sheets of the Company as of September 30,
1997, December 31, 1997, March 31, 1998 and June 30, 1998. Section 3.6 of the
Company Disclosure Schedule sets forth the amount of principal and unpaid
interest outstanding under each instrument evidencing indebtedness of the
Company which will accelerate or become due or result in a right of redemption
or repurchase on the part of the holder of such indebtedness (with or without
due notice or lapse of time) as a result of this Agreement, any of the other
agreements executed in connection herewith, the Millennium Merger or the other
transactions contemplated hereby or thereby.
Section 3.7 INFORMATION IN CONSENTS AND REGISTRATION STATEMENT. The Proxy
Statement/ Prospectus/Consent Solicitation will not, at the date mailed to the
shareholders of the Company and at the time of the effectiveness of the
Registration Statement, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements made therein, in light of the circumstances under which
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they are made, not misleading, except that no representation is made by the
Company with respect to statements made therein based on information supplied
by Parent, Holdco, Zenith Acquisition or Millennium Acquisition in writing
expressly for inclusion in the Proxy Statement/Prospectus/Consent Solicitation.
None of the information supplied in writing by the Company expressly for
inclusion or incorporation by reference in the Registration Statement will, at
the date it becomes effective and at the time of the Special Meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Company agrees to correct promptly any such information
provided by it that shall have become false or misleading in any material
respect and to take all steps necessary to file with the SEC and have declared
effective or cleared by the SEC any amendment or supplement to the Registration
Statement or the Proxy Statement/Prospectus/Consent Solicitation so as to
correct the same and to cause the Proxy Statement/Prospectus/Consent
Solicitation as so corrected to be disseminated to Parent's shareholders and
the Company's shareholders to the extent required by applicable law. The
Registration Statement and the Proxy Statement/Prospectus/Consent Solicitation
shall comply as to form in all material respects with the provisions of the
Securities Act, the Exchange Act and other applicable laws.
Section 3.8 EMPLOYEE BENEFIT PLANS; ERISA. (a) Section 3.8 of the Company
Disclosure Schedule contains a true and complete list of each employment,
bonus, deferred compensation, incentive compensation, stock purchase, stock
option, stock appreciation right or other stock-based incentive, severance,
change-in-control, or termination pay, hospitalization or other medical,
disability, life or other insurance, supplemental unemployment benefits,
profit-sharing, pension, or retirement plan, program, agreement or arrangement
and each other employee benefit plan, program, agreement or arrangement,
sponsored, maintained or contributed to or required to be contributed to by the
Company or by any trade or business, whether or not incorporated (an "ERISA
Affiliate"), that together with the Company would be deemed a "single employer"
within the meaning of section 4001(b)(1) of ERISA, for the benefit of any
current or former employee or director of the Company, or any ERISA Affiliate
(the "Company Plans"). Section 3.8(a) of the Company Disclosure Schedule
identifies each of the Company Plans that is an "employee welfare benefit
plan," or "employee pension benefit plan" as such terms are defined in sections
3(1) and 3(2) of ERISA (such plans being hereinafter referred to collectively
as the "ERISA Plans"). Neither the Company nor any ERISA Affiliate has any
formal plan or commitment, whether legally binding or not, to create any
additional Company Plan or modify or change any existing Company Plan that
would affect any current or former employee or director of the Company, or any
ERISA Affiliate.
(b) With respect to each of the Company Plans, the Company has heretofore
delivered to the Parent true and complete copies of each of the following
documents, as applicable:
(i) a copy of the Company Plan documents (including all amendments thereto) for
each written Company Plan or a written description of any Company Plan that is
not otherwise in writing;
(ii) a copy of the annual report or Internal Revenue Service Form 5500 Series,
if required under ERISA, with respect to each ERISA Plan for the last three
plan years ending prior to the date of this Agreement for which such a report
was filed;
(iii) a copy of the actuarial report, if required under ERISA, with respect to
each ERISA Plan for the last three plan years ending prior to the date of this
Agreement;
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(iv) a copy of the most recent Summary Plan Description ("SPD"), together with
all Summaries of Material Modification issued with respect to such SPD, if
required under ERISA, with respect to each ERISA Plan, and all other material
employee communications relating to each ERISA Plan;
(v) if the Company Plan is funded through a trust or any other funding vehicle,
a copy of the trust or other funding agreement (including all amendments
thereto) and the latest financial statements thereof, if any;
(vi) all contracts relating to the Company Plans with respect to which the
Company or any ERISA Affiliate may have any liability, including insurance
contracts, investment management agreements, subscription and participation
agreements and record keeping agreements; and
(vii) the most recent determination letter received from the IRS with respect
to each Company Plan that is intended to be qualified under section 401(a) of
the Code.
(c) None of the Company Plans is subject to Title IV of ERISA, and neither the
Company nor any ERISA Affiliate has at any time sponsored, maintained,
contributed to or been required to make contributions to any employee pension
benefit plan (as defined in section 3(2) of ERISA) subject to Title IV of ERISA
(including without limitation any "multiemployer plan" as defined in
Section 3(37) or Section 4001(a)(3) of ERISA). No liability under Title IV of
ERISA has been incurred by the Company, or any ERISA Affiliate since the
effective date of ERISA that has not been satisfied in full, and no condition
exists that presents a material risk to the Company or any ERISA Affiliate of
incurring any liability under such Title.
(d) None of the Company, any ERISA Affiliate, any of the ERISA Plans, any trust
created thereunder, nor to the Company's knowledge, any trustee or
administrator thereof has engaged in a transaction or has taken or failed to
take any action in connection with which the Company or any ERISA Affiliate
could be subject to any material liability for either a civil penalty assessed
pursuant to section 409 or 502(i) of ERISA or a tax imposed pursuant to section
4975(a) or (b), 4976 or 4980B of the Code.
(e) All contributions and premiums which the Company or any ERISA Affiliate is
required to pay under the terms of each of the ERISA Plans have, to the extent
due, been paid in full or properly recorded on the financial statements or
records of the Company.
(f) Each of the Company Plans has been operated and administered in all
material respects in accordance with applicable laws, including but not limited
to ERISA and the Code.
(g) Each of the ERISA Plans that is intended to be "qualified" within the
meaning of section 401(a) of the Code is so qualified. The Company has applied
for and received a currently effective determination letter from the IRS
stating that it is so qualified, and no event has occurred which would affect
such qualified status.
(h) Any fund established under an ERISA Plan that is intended to satisfy the
requirements of section 501(c)(9) of the Code has so satisfied such
requirements.
(i) No amounts payable under any of the Company Plans or any other contract,
agreement or arrangement with respect to which the Company may have any
liability could fail to be deductible for Federal income tax purposes by virtue
of section 162(m) or section 280G of the Code.
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(j) No Company Plan provides benefits, including without limitation death or
medical benefits (whether or not insured), with respect to current or former
employees of the Company or any ERISA Affiliate after retirement or other
termination of service (other than (i) coverage mandated by applicable laws,
(ii) death benefits or retirement benefits under any "employee pension plan,"
as that term is defined in section 3(2) of ERISA, (iii) deferred compensation
benefits accrued as liabilities on the books of the Company or an ERISA
Affiliate, or (iv) benefits, the full direct cost of which is borne by the
current or former employee (or beneficiary thereof)).
(k) The consummation of the transactions contemplated by this Agreement will
not, either alone or in combination with any other event, (i) entitle any
current or former employee, officer or director of the Company or any ERISA
Affiliate to severance pay, unemployment compensation or any other similar
termination payment, or (ii) accelerate the time of payment or vesting, or
increase the amount of or otherwise enhance any benefit due any such employee,
officer or director.
(l) There are no pending or, to the Company's knowledge, threatened or
anticipated claims by or on behalf of any Company Plan, by any employee or
beneficiary under any such Company Plan or otherwise involving any such Company
Plan (other than routine claims for benefits).
Section 3.9 LABOR MATTERS. (a) Except as set forth in Section 3.9 of the
Company Disclosure Schedule, there is no labor strike, dispute, slowdown,
stoppage or lockout actually pending, or to the knowledge of the Company,
threatened against or affecting the Company and since inception there has not
been any such action; to the knowledge of the Company, no union claims to
represent the employees of the Company; the Company is not a party to or bound
by any collective bargaining or similar agreement with any labor organization,
or work rules or practices agreed to with any labor organization or employee
association applicable to employees of the Company; none of the employees of
the Company are represented by any labor organization and the Company has no
knowledge of any current union organizing activities among the employees of the
Company, nor does any question concerning representation exist concerning such
employees; there are no written personnel policies, rules or procedures
applicable to employees of the Company, other than those set forth in Section
3.9 of the Company Disclosure Schedule, true, correct and complete copies of
which have heretofore been delivered to Parent; the Company is, and has at all
times been, in material compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment, wages,
hours of work, immigration, equal employment opportunity, and occupational
safety and health, and are not engaged in any unfair labor practices as defined
in the National Labor Relations Act or other applicable law, ordinance or
regulation; there is no unfair labor practice charge or complaint against the
Company pending or, to the knowledge of the Company, threatened before the
National Labor Relations Board or any similar state agency; there is no
grievance or arbitration proceeding arising out of any collective bargaining
agreement or other grievance procedure relating to the Company; to the
knowledge of the Company, no charges with respect to or relating to the Company
are pending before the Equal Employment Opportunity Commission or any other
agency responsible for the prevention of unlawful employment practices; to the
knowledge of the Company, no federal, state, or local agency responsible for
the enforcement of labor or employment laws intends to conduct an investigation
with respect to or relating to the Company and no such investigation is in
progress; and there are no complaints, controversies, lawsuits or other
proceedings pending or, to the knowledge of the Company, threatened to be
brought
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by any applicant for employment or current or former employees, or classes of
the foregoing, alleging breach of any express or implied contract for
employment, any law or regulation governing employment or the termination
thereof or other discriminatory, wrongful or tortious conduct in connection
with the employment relationship. Except as set forth in Section 3.9 of the
Company Disclosure Schedule, there are no employment contracts, severance
agreements, or confidentiality agreements with any employees of the Company.
The execution of this Agreement and the consummation of the transactions
contemplated hereby shall not result in a breach or other violation of any
collective bargaining agreement or any other employment contract or agreement
to which the Company is a party.
(b) Since the enactment of Worker Adjustment and Retraining Notification Act of
1988 (the "WARN Act"), the Company has not effectuated a "plant closing" (as
defined in the WARN Act) affecting any site of employment or one or more
facilities or operating units within any site of employment or facility of the
Company, or a "mass layoff" (as defined in the WARN Act) affecting any site of
employment or facility of the Company; nor has the Company been affected by any
transaction or engaged in layoffs or employment terminations sufficient in
number to trigger application of any similar state or local law. Except as set
forth in Section 3.9 of the Company Disclosure Schedule, none of the employees
of the Company has suffered an "employment loss" (as defined in the WARN Act)
during the ninety day period prior to the execution of this Agreement.
Section 3.10 LITIGATION; COMPLIANCE WITH LAW. (a) Except to the extent
disclosed in Section 3.10 of the Company Disclosure Schedule, there is no suit,
claim, action, proceeding or investigation pending or, to the best knowledge of
the Company, threatened against or affecting, the Company which would have a
Company Material Adverse Effect.
(b) The Company has complied in a timely manner and in all material respects,
with all laws, statutes, regulations, rules, ordinances, and judgments,
decrees, orders, writs and injunctions, of any court or governmental entity
relating to any of the property owned, leased or used by them, or applicable to
their business, including, but not limited to, laws relating to equal
employment opportunity, discrimination, occupational safety and health,
environmental, interstate commerce and antitrust.
Section 3.11 NO DEFAULT. The business of the Company is not being conducted in
default or violation of any term, condition or provision of (i) its respective
articles of incorporation and by-laws, (ii) any Company Agreement, or (iii) any
United States federal, state, local or foreign law, statute, regulation, rule,
ordinance, judgment, decree, order, writ, injunction, concession, grant,
franchise, permit or license or other governmental authorization or approval
applicable to the Company, excluding from the foregoing clauses (ii) and (iii),
defaults or violations that would not have a Company Material Adverse Effect.
As of the date of this Agreement, no investigation or review by any
Governmental Entity or other entity with respect to the Company is pending or,
to the best knowledge of the Company, threatened, nor has any Governmental
Entity or other entity indicated an intention to conduct the same, other than,
in each case, those the outcome of which, as far as reasonably can be foreseen,
in the future will not have a Company Material Adverse Effect.
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Section 3.12 TAXES.
(a) Except as set forth in Section 3.12 of the Company Disclosure Schedule:
(i) the Company has timely filed (or has had timely filed on its behalf) with
the appropriate Tax Authorities (as hereinafter defined) all Tax Returns (as
hereinafter defined) required to be filed by the Company and such Tax Returns
are true, correct, and complete in all respects;
(ii) the Company has paid, or where payment is not yet due, has established (or
has had established on its behalf and for its sole benefit and recourse) an
adequate accrual in accordance with GAAP for the payment of, all Taxes (as
hereinafter defined) for all periods ending through the date hereof;
(iii) there are no liens for Taxes upon any property or assets of the Company,
except for liens for Taxes not yet due and for which adequate reserves have
been established in accordance with GAAP;
(iv) no Federal, state, local or foreign Audits (as hereinafter defined) are
presently pending with regard to any Taxes or Tax Returns of the Company and to
the best knowledge of the Company no Audit is threatened;
(v) the Tax Returns of the Company have been examined by the applicable Tax
Authority (or the applicable statutes of limitation for the assessment of Taxes
for such periods have expired), and for any year that a Tax Return was
examined, no material adjustments were asserted as a result of such examination
which have not been resolved and fully paid, and no issue has been raised by
any Tax Authority in any Audit of the Company that, if raised with respect to
any other period not so audited, could be expected to result in a proposed
deficiency for any such period not so audited;
(vi) there are no outstanding requests, agreements, consents or waivers to
extend the statutory period of limitations applicable to the assessment of any
Taxes or deficiencies against the Company, and no power of attorney granted by
the Company with respect to any Taxes is currently in force;
(vii) the Company is not a party to any agreement providing for the allocation,
indemnification, or sharing of Taxes; and
(viii) the Company has not been a member of any "affiliated group" (as defined
in section 1504(a) of the Code) and is not subject to Treas. Reg. 1.1502-6 for
any period.
(b) "AUDIT" means any audit, assessment, or other examination relating to Taxes
by any Tax Authority or any judicial or administrative proceedings relating to
Taxes. "Tax" or "Taxes" means all Federal, state, local, and foreign taxes, and
other assessments of a similar nature (whether imposed directly or through
withholding), including any interest, additions to tax, or penalties applicable
thereto, imposed by any Tax Authority. "Tax Authority" means the Internal
Revenue Service and any other domestic or foreign governmental authority
responsible for the administration of any Taxes. "Tax Returns" mean all
Federal, state, local, and foreign tax returns, declarations, statements,
reports, schedules, forms, and information returns and any amendments thereto.
Section 3.13 MATERIAL CONTRACTS. Each Company Agreement is valid, binding and
enforceable and in full force and effect, except where failure to be valid,
binding and enforceable and in full force and effect would not have a Company
Material Adverse Effect and there are no defaults thereunder,
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except those defaults that would not have a Company Material Adverse Effect.
Section 3.13 of the Company Disclosure Schedule sets forth a true and complete
list of all material Company Agreements entered into by the Company since its
inception that remain in full force and effect and all amendments to any such
Company Agreements, and all non-competition agreements imposing restrictions on
the ability of the Company to conduct business in any jurisdiction or
territory.
Section 3.14 ASSETS. The Company has all assets, properties, rights and
contracts necessary to permit the Company to conduct its business as it is
currently being conducted, except where the failure to have such assets,
properties, rights and contracts would not have a Company Material Adverse
Effect.
Section 3.15 ENVIRONMENTAL MATTERS. Except as set forth in Section 3.15 of the
Company Disclosure Schedule and except as would not, individually or in the
aggregate, have a Company Material Adverse Effect:
(a) the Company is not in violation of any federal, state, local and foreign
laws and regulations relating to pollution or protection of human health or the
environment, including, without limitation, laws and regulations relating to
emissions, discharges, releases or threatened releases of toxic or hazardous
substances, materials or wastes, or petroleum and petroleum products
("Materials of Environmental Concern"), or otherwise relating to the
generation, storage, disposal, transport or handling of materials of
Environmental Concern (collectively, "Environmental Laws"), and including, but
not limited to, noncompliance with any permits or other governmental
authorizations or the terms and conditions thereof.
(b) the Company has not received any communication or notice (written or oral),
whether from a Governmental Entity or otherwise, alleging any violation of or
noncompliance with any Environmental Laws; there is no pending or threatened
claim, action, investigation or notice (written or oral) by any person or
entity alleging potential liability for investigatory, cleanup or governmental
response costs, or natural resources or property damages, or personal injuries,
attorney's fees or penalties relating to (i) the presence, or release into the
environment, of any Materials of Environmental Concern at any location owned or
operated by the Company, now or in the past, or (ii) any violation, or alleged
violation, of any Environmental Law (collectively, "Environmental Claims"); and
there are no past or present circumstances, conditions, or incidents that could
reasonably form the basis of any Environmental Claim against the Company or
against any person or entity whose liability for any Environmental Claim the
Seller has retained or assumed either contractually or by operation of law.
Section 3.16 TRANSACTIONS WITH AFFILIATES. Except as set forth in Section 3.16
of the Company Disclosure Schedule, no contracts, agreements or other
arrangements (oral or written) are in effect as of the date hereof between (i)
on the one hand, the Company and (ii) on the other hand, any of its directors
or their respective affiliates. For purposes of this Section 3.16 an
"affiliate" of any Person shall mean any other person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For purposes of this definition, "control", when used with respect
to such Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have the meanings that correspond to the foregoing.
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For purposes of this Agreement, "Person" shall mean any individual,
partnership, corporation, unincorporated association, joint venture or other
entity (including without limitation, any government or political subdivision
of agency, department or instrumentality thereof).
Section 3.17 OPINION OF FINANCIAL ADVISOR. The Company has received the written
opinion of Robert E. LaBlanc Associates Inc., to the effect that the
consideration to be received in the Merger by the Company's shareholders is
fair to the Company's shareholders from a financial point of view (the "Company
Opinion"), a copy of which opinion has been delivered to Parent and will be
included in the Proxy Statement/Prospectus/Consent Solicitation delivered to
the Company's shareholders. Robert E. LaBlanc Associates Inc. shall redeliver
the Company Opinion, dated as of the date of mailing of the Proxy
Statement/Prospectus/Consent Solicitation on the date of mailing, and consent
to the inclusion of the Company Opinion in the Proxy
Statement/Prospectus/Consent Solicitation.
Section 3.18 INTELLECTUAL PROPERTY. (a) Section 3.18(a) of the Company
Disclosure Schedule is a true and complete list of all (i) patents and patent
applications, (ii) trademark registrations and applications, (iii) service mark
registrations and applications, (iv) Computer Software (as hereinafter
defined), (v) copyright registrations and applications, (vi) material
unregistered trademarks, service marks, and copyrights, and (vii) Internet
domain names used or held for use in connection with the business of the
Company, together with all licenses related to the foregoing (whether the
Company is the licensee or licensor thereunder). Other than as listed in
Section 3.18 of the Company Disclosure Schedule, no agreement licensing the
Intellectual Property (as hereinafter defined) of the Company to any licensee
creates an option for such licensee to purchase any of the Intellectual
Property owned by the Company or its affiliates, or would in any other way
require the transfer of the Intellectual Property owned by the Company or any
affiliate of the Company to such licensee. The Company currently is listed in
the records of the appropriate United States, state or foreign agency as the
sole owner of record for each application and registration listed in Section
3.18 of the Company Disclosure Schedule.
(b) The term "Computer Software" shall mean other than off-the-shelf
applications, (i) any and all material computer programs and applications
consisting of sets of statements and instructions to be used directly or
indirectly in computer software or firmware whether in source code or object
code form, (ii) material databases and compilations, including without
limitation any and all data and collections of data, whether machine readable
or otherwise, (iii) all versions of the foregoing including, without
limitation, all screen displays and designs thereof, and all component modules
of source code or object code or natural language code therefor, and whether
recorded on papers, magnetic media or other electronic or non-electronic
device, (iv) all descriptions, flow-charts and other work product used to
design, plan, organize and develop any of the foregoing, (v) all documentation,
including without limitation all technical and user manuals and training
materials, relating to the foregoing, and (vi) all Internet domain names and
content contained on all World Wide Web sites of the Company, in any such case
utilized by the Company in connection with the conduct of its business as
presently conducted or currently contemplated to be conducted, and can
correctly process date data for all dates including those before, on or after
1999 without any loss of functionality or performance.
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(c) Except as set forth on Section 3.18(c) of the Company Disclosure Schedule,
the Company owns or has the right to use all patents, patent applications,
patent rights, copyrights, trademarks, trademark rights, trade names, trade
name rights, service marks and service mark rights, and all goodwill of the
business associated therewith, trade secrets, technology and know-how, Computer
Software, Internet domain names, registrations for and applications for
registration of trademarks, service marks and copyrights, and other
confidential or proprietary rights and information and all technical and user
manuals and documentation made or used in connection with any of the foregoing,
used or held for use anywhere in the world in connection with the business of
the Company as currently conducted (collectively, the "Intellectual Property"),
free and clear of all liens or other encumbrances of any nature, except where
the failure to so own or use such Intellectual Property would not have a
Company Material Adverse Effect.
(d) All patents, registrations and applications for Intellectual Property that
are used in and are material to the conduct of the business of the Company as
currently conducted (i) are valid, subsisting, in proper form and enforceable,
and have been duly maintained, including the submission of all necessary
filings and fees in accordance with the legal and administrative requirements
of the appropriate jurisdictions, and (ii) have not lapsed, expired or been
abandoned, and no patent, registration or application of Intellectual Property
therefor is the subject of any opposition, interference, cancellation
proceeding or other legal or governmental proceeding before any governmental,
registration or other authority in any jurisdiction.
(e) To the knowledge of the Company, the conduct of the business of the Company
as currently conducted does not conflict with or infringe in any way on any
proprietary right of any third party, which conflict or infringement would have
a Company Material Adverse Effect. Other than as set forth in Section 3.18(d)
of the Company Disclosure Schedule, there is no claim, suit, action or
proceeding pending or, to the knowledge of the Company, threatened against the
Company (i) alleging any such conflict or infringement with any third party's
proprietary rights, or (ii) challenging the ownership, use, validity or
enforceability of the Intellectual Property. To the knowledge of the Company,
no third party is infringing the Intellectual Property.
(f) The Computer Software used by the Company in the conduct of its business
was either: (i) developed by employees of the Company within the scope of their
employment; (ii) developed on behalf of the Company by a third party, and all
ownership rights therein have been assigned or otherwise transferred to or
vested in the Company pursuant to written agreements; or (iii) licensed or
acquired from a third party pursuant to a written license, assignment, or other
contract which is in full force and effect, does not contain any change of
control or other provision that would prevent Millennium Surviving Corporation
from using such Computer Software and of which the Company is not in material
breach except where the failure to have Computer Software so developed,
licensed or acquired would not have a Company Material Adverse Effect. Except
as set forth on Section 3.18(f) of the Company Disclosure Schedule, (x) no
third party has had access to any of the source code for any of the Computer
Software described in clause (i) or (ii) hereof and (y) no act has been done or
omitted to be done by the Company to impair or dedicate to the public or
entitle any Governmental Entity to hold abandoned any of such Computer
Software.
(g) Except as set forth on Section 3.18(g) of the Company Disclosure Schedule,
all consents, filings, and authorizations by or with governmental authorities
or third parties necessary with respect to the
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consummation of the transactions contemplated hereby as they may affect the
Intellectual Property have been obtained, except where the failure to obtain or
make such consents, filings and authorizations will not prohibit the
consummation of the Millennium Merger or have a Company Material Adverse
Effect.
(h) The Company has not entered into any material consent, indemnification,
forbearance to sue, settlement agreement or cross-licensing arrangement with
any person relating to the Intellectual Property or the intellectual property
of any third party other than as may be contained in the license agreements
listed in Section 3.18(h) of the Company Disclosure Schedule.
(i) Except as set forth on Section 3.18(i) of the Company Disclosure Schedule,
the Company is not, nor will it be as a result of the execution and delivery of
this Agreement or the performance of its obligations under this Agreement, in
breach of any license, sublicense or other agreement relating to the
Intellectual Property.
(j) No former or present employees, officers or directors of the Company hold
any right, title or interest directly or indirectly, in whole or in part, in or
to any Intellectual Property.
(k) No material trade secret or confidential know-how or other material
confidential information relating to the Company has been disclosed or
authorized to be disclosed to any third party, other than pursuant to a non-
disclosure agreement that protects the Company's interests in and to such
confidential information.
Section 3.19 INSURANCE. The Company has policies of insurance and bonds of the
type and in amounts customarily carried by persons conducting businesses or
owning assets similar to those of the Company. Except as disclosed in Section
3.19 of the Company Disclosure, there is no material claim pending under any of
such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid and the Company is
otherwise in compliance in all material respects with the terms of such
policies and bonds. Except as disclosed in Section 3.19 of the Company
Disclosure, the Company has no knowledge of any threatened termination of, or
material premium increase with respect to, any of such policies.
Section 3.20 ACCOUNTS RECEIVABLE. Except as disclosed in Section 3.20 of the
Company Disclosure Schedule, subject to any reserves set forth in the balance
sheets of the Company at September 30, 1997, December 31, 1997, March 31, 1998,
and June 30, 1998 (the "Company Balance Sheets"), the accounts receivable shown
in the Company Balance Sheets arose in the ordinary course of business, were
not, as of the respective dates of the Company Balance Sheets, subject to any
material discount, contingency, claim of offset or recoupment or counterclaim,
and represented, as of the respective dates of the Company Balance Sheets, bona
fide claims against debtors for sales, leases, licenses and other charges. All
accounts receivable of the Company arising after June 30, 1998 through the date
of the Agreement arose in the ordinary course of business and, as of the date
of this Agreement, are not subject to any material discount, contingency, claim
of offset or recoupment or counterclaim, except for normal reserves consistent
with past practice. The amount carried for doubtful accounts and allowances
disclosed in the Company Balance Sheet dated June 30, 1998 is believed by the
Company as of the date of the Agreement to be sufficient to provide
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for any losses which may be sustained or realization of the accounts receivable
shown in the Company Balance Sheet dated June 30, 1998.
Section 3.21 FINANCIAL STATEMENTS. Set forth in Section 3.21 of the Company
Disclosure Schedule are (i) the Company Balance Sheets (including the related
notes, if any), together with the related statements of operations and cash
flows (including the related notes) for the respective periods then ended, and
(ii) monthly financial statements for each month from the date of the most
recent Company Balance Sheet to the date hereof. Each of the financial
statements included in Section 3.21 of the Company Disclosure Schedule
(including the notes thereto) fairly presents the financial position of the
Company as of the respective dates thereof and the results of operations and
cash flows for the respective periods therein, subject to adjustments made
thereto with respect to subsequent periods; provided, however, that the most
recent Company Balance Sheet and each monthly financial statement provided to
Parent pursuant to clauses (i) and (ii) above contain no material misstatement
and fairly present the financial position of the Company as of June 30, 1998
and each such month end, respectively, in light of the circumstances then
prevailing at the time of preparation of such financial statements. Each of the
financial statements included in Section 3.21 of the Company Disclosure
Schedule has been prepared in accordance with GAAP on a consistent basis during
the periods involved, subject in the case of the December 31, 1997, March 31,
1998 and June 30, 1998 Company Balance Sheets and related states of operations
and cash flows, to normal year-end audit adjustments in the ordinary course
(none of which, individually or in the aggregate, would be material). Reserves
are reflected on the September 30, 1997 Company Balance Sheet against all
liabilities in amounts that have been established on a basis consistent with
past practice and in accordance with GAAP, and such reserves are adequate,
reasonable and appropriate. Except as set forth in Section 3.21 of the Company
Disclosure Schedule, there have been no changes in reserves of the Company
since the June 30, 1998 Company Balance Sheet.
Section 3.22 FULL DISCLOSURE. The Company has not knowingly failed to disclose
to Parent any facts material to the Company's business, results of operations,
assets, liabilities, financial condition or prospects. No representation or
warranty by the Company in this Agreement and no statement by the Company in
any document referred to herein (including the schedules and exhibits hereto),
contains any untrue statements of a material fact or omits to state any
material fact necessary, in order to make the statement made herein or therein,
in light of the circumstances under which they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT, HOLDCO, ZENITH ACQUISITION AND
MILLENNIUM ACQUISITION
Except as set forth in the schedule delivered to the Company prior to the
execution of this Agreement setting forth specific exceptions to Parent's
representations and warranties set forth herein (the "Parent Disclosure
Schedule"), Parent represents and warrants to the Company as set forth below.
Each exception set forth in the Parent Disclosure Schedule is identified by
reference to, or has been grouped under a heading referring to, a specific
individual section of this Agreement and, except as otherwise specifically
stated with respect to such exception, relates only to such section.
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Section 4.1 ORGANIZATION. Each of Parent and its Subsidiaries is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and has all requisite corporate or other
power and authority and all necessary governmental approvals to own, lease and
operate its properties and to carry on its business as now being conducted,
except where the failure to be so organized, existing and in good standing or
to have such power, authority, and governmental approvals would not have a
Parent Material Adverse Effect. Each of Parent and its Subsidiaries is duly
qualified or licensed to do business and in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary,
except where the failure to be so duly qualified or licensed and in good
standing would not have a Parent Material Adverse Effect. Section 4.1 of the
Parent Disclosure Schedule sets forth a true, correct and complete list of the
Subsidiaries of Parent. The term "Subsidiary", for purposes of this Agreement,
shall mean, with respect to any party, any corporation or other organization,
whether incorporated or unincorporated, of which (i) such party or any other
Subsidiary of such party is a general partner (excluding such partnerships
where such party and its subsidiaries, taken together, of such party are not
the majority holder of voting interests therein), or (ii) at least a majority
of the securities or other interests having by their terms ordinary voting
power to elect a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such party or by any one or more
of its Subsidiaries, or by such party and one or more of its Subsidiaries. As
used in this Agreement, "Parent Material Adverse Effect" means any event,
change in or effect, individually or in the aggregate with such other events,
changes or effects, on the business of Parent or its Subsidiaries, taken as a
whole, that is or could reasonably be expected to be materially adverse to (i)
the business, operations, properties (including intangible properties),
condition (financial or otherwise), results of operations, assets, liabilities,
or regulatory status of Parent or its Subsidiaries, taken as a whole, or (ii)
the ability of Parent, Holdco, Zenith Acquisition or Millennium Acquisition to
consummate any of the transactions or to perform its obligations under this
Agreement or any other agreements executed in connection herewith, it being
understood that none of the following shall be deemed by itself or by
themselves, either alone or in combination, to constitute a Parent Material
Adverse Effect: a change in the market price or trading volume of Parent Common
Stock, a failure by Parent to meet the revenue or earnings predictions of
equity analysts as reflected in the First Call consensus estimate, or any other
revenue or earnings estimate, or any other revenue or earnings predictions or
expectations, for any period ending (or for which earnings are released) on or
after the date of this Agreement and prior to the Closing Date, conditions
affecting the computer industry as a whole or the U.S. economy as a whole, any
effect arising out of or resulting from actions contemplated by the parties in
connection with, or which is attributable to, the announcement of this
Agreement and the transactions contemplated hereby, or any matter identified in
Section 4.7 of the Parent Disclosure Schedule.
Section 4.2 CAPITALIZATION. (a) The authorized capital stock of Parent consists
of: (i) 40,000,000 shares of Parent Common Stock, and (ii) 1,000 shares of
Preferred Stock, no par value of Parent (the "Parent Preferred Stock"). As of
the date hereof, (i) 20,511,772 shares of Parent Common Stock are issued and
outstanding, (ii) no shares of the Parent Preferred Stock are issued and
outstanding and (iii) 3,606,423 shares of Parent Common Stock are reserved for
issuance pursuant to the Parent Stock Plans including (A) 1,989,090 shares
reserved for issuance pursuant to outstanding awards and
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438,333 shares reserved for issuance pursuant to future awards under the Zenith
1990 Stock Option Plan, (B) 81,000 shares reserved for issuance pursuant to
outstanding awards and 98,000 shares reserved for issuance pursuant to future
awards under the Zenith 1995 Non-Employee Directors' Stock Option Plan, and (C)
111,211 shares reserved for issuance pursuant to future awards under the Zenith
Employee Stock Purchase Plan. The authorized capital Stock of Holdco consists
of 60,000,000 shares of Holdco Common Stock and 5,000,000 shares of Holdco
preferred stock, par value $.001 per share. As of the date hereof, 1,000 shares
of Holdco Common Stock are issued and outstanding. All of the issued and
outstanding shares of Parent Common Stock and Holdco Common Stock are validly
issued, fully paid and nonassessable and all shares of Holdco Common Stock are
held by Parent. The authorized capital stock of Zenith Acquisition consists of
1,000 shares of common stock, par value $0.01 per share. As of the date hereof,
100 shares of Zenith Acquisition common stock are issued and outstanding, all
of which are held by Holdco. The authorized capital stock of Millennium
Acquisition consists of 1,000 shares of common stock, par value $0.01 per
share. As of the date hereof, 100 shares of Millennium Acquisition common stock
are issued and outstanding, all of which are held by Holdco.
(b) Except as disclosed in Section 4.2(b) of the Parent Disclosure Schedule,
(i) there is no outstanding right to purchase or otherwise to receive from
Parent or any of its Subsidiaries, including Holdco, any of the outstanding
authorized but unissued shares of the capital stock of Parent or any of its
Subsidiaries, (ii) there is no outstanding security of any kind convertible
into or exchangeable for such capital stock and (iii) there is no voting trust
or other agreement or understanding to which Parent or any of its Subsidiaries,
is a party or is bound with respect to the voting of the capital Stock of
Parent or any of its Subsidiaries.
Section 4.3 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY ACTION. Each of
Parent, Holdco, Zenith Acquisition and Millennium Acquisition has full
corporate power and authority to execute and deliver this Agreement and the
other agreements executed in connection herewith to which it is a party and to
consummate the transactions contemplated hereby and thereby. The execution,
delivery and performance of this Agreement and the other agreements executed in
connection herewith and the consummation of the Zenith Merger and of the other
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of Parent, Holdco, Zenith Acquisition or
Millennium Acquisition and, subject to obtaining the approval of Parent's
shareholders as contemplated by Section 2.1 hereof, no other corporate
proceedings on the part of Parent, Holdco, Zenith Acquisition or Millennium
Acquisition are necessary to authorize this Agreement or any other agreements
executed in connection herewith or to consummate the transactions so
contemplated. Each of this Agreement and the other agreements executed in
connection herewith to which Parent, Holdco, Zenith Acquisition or Millennium
Acquisition is a party has been duly executed and delivered by Parent, Holdco,
Zenith Acquisition or Millennium Acquisition and, assuming each of this
Agreement and such other agreements constitute a valid and binding obligation
of the other parties hereto and thereto, constitutes a valid and binding
obligation of each of Parent, Holdco, Zenith Acquisition or Millennium
Acquisition enforceable against them in accordance with its respective terms,
except that (i) such enforcement may be subject to applicable bankruptcy,
insolvency or other similar laws, now or hereafter in effect, affecting
creditors' rights generally, and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any
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proceeding therefor may be brought. The shares of Holdco Common Stock to be
issued pursuant to the Merger will be duly authorized, validly issued, fully
paid and nonassessable and not subject to preemptive rights.
Section 4.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for filings, permits,
authorizations, consents and approvals as may be required under, and other
applicable requirements of, the Exchange Act, the Securities Act, the Merger
Agreement as required by the CGCL, state blue sky laws and any applicable state
takeover laws, and the approval by Parent's shareholders of the formation of
Holdco and the issuance of Holdco Common Stock in the Merger, none of the
execution, delivery or performance of this Agreement or any other agreement
executed in connection herewith by Parent, Holdco, Zenith Acquisition and
Millennium Acquisition nor the consummation by any of them of the transactions
contemplated hereby or thereby, nor compliance by any of them with any of the
provisions hereof or thereof will (i) conflict with or result in any breach of
any provision of the respective articles or certificates of incorporation or
by-laws of Parent or any of its Subsidiaries, (ii) require any filing with, or
permit, authorization, consent or approval of, any Governmental Entity, (iii)
except as set forth in Section 4.4 of Parent Disclosure Schedule, result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration) under, any of the terms, conditions or provisions of any
material note, bond, mortgage, indenture, license, lease, contract, agreement
or other instrument or obligation to which Parent or any of its Subsidiaries is
a party or by which any of them or any of their properties or assets may be
bound, or (iv) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Parent, any of its Subsidiaries or any of their
properties or assets, except in the case of clauses (ii), (iii) and (iv) where
the failure to obtain such permits, authorizations, consents or approvals or to
make such filings, or where such violations, breaches or defaults would not
have a Parent Material Adverse Effect.
Section 4.5 INFORMATION IN PROXY STATEMENT/PROSPECTUS. The Registration
Statement (or any amendment thereof or supplement thereto) will not, at the
date it becomes effective and at the time of the Special Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements made therein,
in light of the circumstances under which they are made, not misleading, except
that no representation is made by Parent, Holdco, Zenith Acquisition or
Millennium Acquisition with respect to statements made therein based on
information supplied by the Company in writing expressly for inclusion in the
Registration Statement. The Registration Statement will comply in all material
respects with the provisions of the Securities Act and the rules and
regulations thereunder. Each of Parent, Holdco, Zenith Acquisition, and
Millennium Acquisition agrees to correct promptly any such information provided
by it that shall have become false or misleading in any material respect and to
take all steps necessary to file with the SEC and have declared effective or
cleared by the SEC any amendment or supplement to the Registration Statement or
the Proxy Statement/Prospectus/Consent Solicitation so as to correct the same
and to cause the Proxy Statement/Prospectus/Consent Solicitation as so
corrected to be disseminated to Parent's shareholders and the Company's
shareholders to the extent required by applicable law. The Registration
Statement and the Proxy Statement/Prospectus/Consent Solicitation shall comply
as to form in all material respects with the provisions of the Securities Act,
the Exchange Act and other applicable laws.
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Section 4.6 SEC REPORTS AND FINANCIAL STATEMENTS. Parent has filed with the
SEC, and has heretofore made available to the Company true and complete copies
of, all forms, reports, schedules, statements and other documents required to
be filed by it and its Subsidiaries since October 1, 1995 under the Exchange
Act or the Securities Act (as such documents have been amended since the time
of their filing, collectively, the "Parent SEC Documents"). As of their
respective dates or, if amended, as of the date of the last such amendment, the
Parent SEC Documents, including, without limitation, any financial statements
or schedules included therein (a) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading, and (b) complied in
all material respects with the applicable requirements of the Exchange Act and
the Securities Act, as the case may be, and the applicable rules and
regulations of the SEC thereunder. Each of the consolidated financial
statements included in the Parent SEC Documents have been prepared from, and
are in accordance with, the books and records of Parent and its Subsidiaries,
comply in all material respects with applicable accounting requirements and
with the published rules and regulations of the SEC with respect thereto, have
been prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present the consolidated financial position and the consolidated results of
operations and cash flows of the Parent and its consolidated Subsidiaries as at
the dates thereof or for the periods presented therein.
Section 4.7 ABSENCE OF CERTAIN CHANGES. Except to the extent disclosed in the
Parent SEC Documents filed prior to the date of this Agreement, since December
31, 1997 through the date of this Agreement, Parent and its Subsidiaries have
conducted their respective businesses and operations in all material respects
consistent with past practice only in the ordinary and usual course. From
December 31, 1997 through the date of this Agreement, there has not occurred
(i) any event, change, or effect (including the incurrence of any liabilities
of any nature, whether or not accrued, contingent or otherwise) having or,
which would have a Parent Material Adverse Effect, (ii) any declaration,
setting aside or payment of any dividend or other distribution (whether in
cash, stock or property) with respect to the equity interests of Parent or of
any of its Subsidiaries other than regular quarterly cash dividends or
dividends paid by wholly owned Subsidiaries, or (iii) any change by Parent or
any of its Subsidiaries in accounting principles or methods, except insofar as
may be required by a change in GAAP.
Section 4.8 RIGHTS AGREEMENT. Parent has taken all action that may be necessary
under that certain Rights Agreement, dated as of June , 1996, between Parent
and American Stock Transfer & Trust Company (the "Rights Agreement") so that
(i) the execution of this Agreement and the other agreements executed in
connection with the Zenith Merger, and any amendments hereto and thereto by the
parties hereto and the consummation of the transactions contemplated hereby
shall not cause (A) the Company to become an "Acquiring Person" (as defined in
the Rights Agreement), or (B) a Distribution Date or a Shares Acquisition Date
(as such terms are defined in the Rights Agreement) to occur, irrespective of
the consummation of the transactions contemplated hereby and (ii) the Rights
Agreement is otherwise inapplicable to this Agreement and the transactions
contemplated hereby. Parent has furnished to the Company true and complete
copies of all amendments to the Rights Agreement that satisfy the requirements
of this Section 4.8 and such amendments are in full force and effect.
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Section 4.9 ACTIVITIES OF ZENITH ACQUISITION AND MILLENNIUM ACQUISITION. Each
of Holdco, Zenith Acquisition and Millennium Acquisition was formed for the
purpose of participating in the Zenith Merger and Millennium Merger, as
applicable, as contemplated in this Agreement. None of Holdco, Zenith
Acquisition or Millennium Acquisition has carried on any business.
Section 4.10 OPINION OF FINANCIAL ADVISOR. The Board of Directors of Parent has
received the opinion of Salomon Smith Barney Inc., dated the date of this
Agreement, to the effect that, as of such date, the Zenith Exchange Ratio is
fair to holders of the Parent Common Stock from a financial point of view (the
"Parent Opinion"), a copy of the written opinion of which will be delivered to
the Company promptly after receipt thereof by Parent.
Section 4.11 NO DEFAULT. The businesses of Parent and its Subsidiaries are not
being conducted in default or violation of any term, condition or provision of
(i) its respective articles of incorporation and by-laws, (ii) any note, bond,
mortgage, indenture, guarantee, other instrument or obligation to which Parent
is a party or by which it or any of its properties or assets may be bound, or
(iii) any United States federal, state, local or foreign law, statute,
regulation, rule, ordinance, judgment, decree, order, writ, injunction,
concession, grant, franchise, permit or license or other governmental
authorization or approval applicable to Parent, excluding from the foregoing
clauses (ii) and (iii), defaults or violations that would not have a Parent
Material Adverse Effect. As of the date of this Agreement, no investigation or
review by any Governmental Entity or other entity with respect to Parent or any
of its Subsidiaries is pending or, to the best knowledge of Parent, threatened,
nor has any Governmental Entity or other entity indicated an intention to
conduct the same, other than, in each case, those the outcome of which, as far
as reasonably can be foreseen, in the future will not have a Parent Material
Adverse Effect.
Section 4.12 FULL DISCLOSURE. Parent has not knowingly failed to disclose to
the Company any facts material to the business, results of operations, assets,
liabilities or financial condition of Parent and its subsidiaries taken as a
whole. No representation or warranty by Parent in this Agreement and no
statement by Parent in any document referred to herein (including the schedules
and exhibits hereto), contains any untrue statements of a material fact or
omits to state any material fact necessary, in order to make the statements
made herein or therein, in light of the circumstances under which they were
made, not misleading.
Section 4.13 LITIGATION. As of the date hereof, except as set forth in Section
4.13 of the Parent Disclosure Schedule or as disclosed in the Parent SEC
Documents, there is no action, suit, proceeding or, to the best knowledge of
Parent, investigation pending or, to the best knowledge of Parent, threatened,
involving Parent or any of its Subsidiaries, by or before any court,
governmental or regulatory authority or by any third party that would have a
Parent Material Adverse Effect.
Section 4.14 TAXES. Except as set forth in Section 4.14 of the Parent
Disclosure Schedule:
(a) Parent and each of its Subsidiaries has timely filed (or has had timely
filed on its behalf) with the appropriate Tax Authorities all Tax Returns
required to be filed by, Parent and each of its Subsidiaries, and such Tax
Returns are true, correct, and complete in all material respects;
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(b) Parent and each of its Subsidiaries has paid, or where payment is not yet
due, has established (or has had established on its behalf and for its sole
benefit and recourse) an adequate accrual in accordance with GAAP for the
payment of, all Taxes for all periods ending through the date hereof;
(c) there are no liens for Taxes upon any property or assets of Parent or any
of its Subsidiaries, except for liens for Taxes not yet due and for which
adequate reserves have been established in accordance with GAAP;
(d) no Federal, state, local or foreign Audits are presently pending with
regard to any Taxes or Tax Returns of Parent and its Subsidiaries and to the
best knowledge of Parent, no such Audit is threatened;
(e) the Tax Returns of Parent and each of its Subsidiaries have been examined
by the applicable Tax Authority (or the applicable statutes of limitation for
the assessment of Taxes for such periods have expired), and for any year that a
Tax Return was examined, no material adjustments were asserted as a result of
such examination which have not been resolved and fully paid, and no issue has
been raised by any Tax Authority in any Audit of Parent or any of its
Subsidiaries that, if raised with respect to any other period not so audited,
could be expected to result in a proposed deficiency for any such period not so
audited;
(f) there are no outstanding requests, agreements, consents or waivers to
extend the statutory period of limitations applicable to the assessment of any
Taxes or deficiencies against Parent or any of its Subsidiaries, and no power
of attorney granted by Parent or any of its Subsidiaries with respect to any
Taxes is currently in force;
(g) neither Parent nor any of its Subsidiaries is a party to any agreement
providing for the allocation, indemnification, or sharing of Taxes; and
(h) neither Parent nor any of its Subsidiaries has been a member of any
"affiliated group" (as defined in section 1504(a) of the Code) and is not
subject to Treas. Reg. 1.1502-6 for any period.
Section 4.15 EMPLOYEE BENEFIT PLANS; ERISA. Except as set forth in Section 4.15
of the Zenith Disclosure Schedule:
(a) The Parent SEC Documents contain a list of each material employee benefit
plan, program, policy or arrangement and each material employment, consulting,
severance, change in control or similar agreement under which Zenith or any
Subsidiary has any liability (the "Zenith Plans").
(b) None of the Zenith Plans is subject to Title IV of ERISA, and neither
Zenith nor any ERISA Affiliate has at any time sponsored, maintained,
contributed to or been required to make contributions to any employee pension
benefit plan (as defined in Section 3(2) of ERISA) subject to Title IV of
ERISA. No liability under Title IV of ERISA has been incurred by Zenith, any of
its Subsidiaries or any ERISA Affiliate since the effective date of ERISA that
has not been satisfied in full, and no condition exists that presents a
material risk to Zenith or any of its Subsidiaries or any ERISA Affiliate of
incurring any liability under such Title.
(c) Each of the Zenith Plans has been operated and administered in all material
respects in accordance with applicable laws, including but not limited to ERISA
and the Code.
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(d) No amounts payable under any of the Zenith Plans or any other contract,
agreement or arrangement with respect to which Zenith or any of its
Subsidiaries may have any liability could fail to be deductible for federal
income tax purposes by virtue of section 162(m) or section 280G of the Code.
(e) No Zenith Plan provides benefits, including without limitation death or
medical benefits (whether or not insured), with respect to current or former
employees of Zenith, its Subsidiaries or any ERISA Affiliate after retirement
or other termination of service (other than (i) coverage mandated by applicable
laws, (ii) death benefits or retirement benefits under any "employee pension
plan," as that term is defined in Section 3(2) of ERISA, (iii) deferred
compensation benefits accrued as liabilities on the books of Zenith, any of its
Subsidiaries or an ERISA Affiliate, or (iv) benefits, the full direct cost of
which is borne by the current or former employee (or beneficiary thereof)).
(f) The consummation of the transactions contemplated by this Agreement will
not, either alone or in combination with any other event, (i) entitle any
current or former employee, officer or director of Zenith, any of its
Subsidiaries or any ERISA Affiliate to severance pay, unemployment compensation
or any other similar termination payment, or (ii) accelerate the time of
payment or vesting, or increase the amount of or otherwise enhance any benefit
due any such employee, officer or director.
Section 4.16 NO UNDISCLOSED LIABILITIES. Except for liabilities and obligations
incurred in the ordinary course of business and consistent with past practice,
since December 31, 1997 through the date of this Agreement and except as set
forth in Section 4.16 of the Parent Disclosure Schedule, Parent has not
incurred any liabilities or obligations of any nature, whether or not accrued,
contingent or otherwise, that have a Parent Material Adverse Effect or would be
required to be reflected or reserved against on a balance sheet of Parent
(including the notes thereto) prepared in accordance with GAAP as applied in
preparing the balance sheet of Parent as of December 31, 1997. Section 4.16 of
the Parent Disclosure Schedule sets forth the amount of principal and unpaid
interest outstanding under each instrument evidencing indebtedness of Parent
which will accelerate or become due or result in a right of redemption or
repurchase on the part of the holder of such indebtedness (with or without due
notice or lapse of time) as a result of this Agreement, any of the other
agreements executed in connection herewith, the Zenith Merger or the other
transactions contemplated hereby or thereby.
Section 4.17 TRANSACTIONS WITH AFFILIATES. Except as set forth in Section 4.17
of the Parent Disclosure Schedule, or in the Parent SEC Documents filed prior
to the date hereof, since December 31, 1997 there have been no transactions,
agreements, arrangements or understandings between Parent or its Subsidiaries,
on the one hand, and their respective affiliates, on the other hand, that would
be required to be disclosed under Item 404 of Regulation S-K under the
Securities Act.
ARTICLE V
COVENANTS
Section 5.1 INTERIM OPERATIONS OF THE COMPANY. The Company covenants and agrees
that, except as expressly provided in this Agreement, or (ii) with the prior
written consent of Parent, after the date hereof and prior to the Effective
Time:
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(a) the business of the Company shall be conducted only in the ordinary and
customary course consistent with past practice, and the Company shall use its
best efforts to preserve its business organization intact and maintain its
existing relations with customers, suppliers, employees, creditors and business
partners;
(b) the Company will not, directly or indirectly, split, combine or reclassify
the outstanding Company Common Stock or Company Preferred Stock;
(c) the Company shall not: (i) amend its articles of incorporation or by-
laws,(ii) declare, set aside or pay any dividend or other distribution payable
in cash, stock or property with respect to its capital stock, (iii) issue,
sell, transfer, pledge, dispose of or encumber any additional shares of, or
securities convertible into or exchangeable for, or options (except options
issued to newly hired employees consistent with past practice), warrants,
calls, commitments or rights of any kind to acquire, any shares of capital
stock of any class of the Company, other than issuances pursuant to the
exercise of Company Options outstanding on the date hereof, (iv) transfer,
lease, license, sell, mortgage, pledge, dispose of, or encumber any material
assets other than in the ordinary and usual course of business and consistent
with past practice, or (v) redeem, purchase or otherwise acquire directly or
indirectly any of its capital stock;
(d) the Company shall not modify, amend or terminate any of the Company
Agreements or waive, release or assign any material rights or claims, except in
the ordinary course of business and consistent with past practice;
(e) the Company shall not permit any material insurance policy naming it as a
beneficiary or a loss payable payee to be canceled or terminated without notice
to Parent, except in the ordinary course of business and consistent with past
practice;
(f) the Company shall not: (i) incur or assume any long-term debt, except for
amounts not in excess of $50,000 in the aggregate, or except in the ordinary
course of business consistent with past practice, incur or assume any short-
term indebtedness in amounts not consistent with past practice, (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other Person, except in
the ordinary course of business and consistent with past practice, (iii) make
any loans, advances or capital contributions to, or investments in, any other
Person (other than customary loans or advances to employees in accordance with
past practice), or (iv) except as specifically contemplated herein, enter into
any material commitment or transaction (including, but not limited to, any
borrowing, capital expenditure or purchase, sale or lease of assets) and other
than capital expenditures pursuant to the Company's capital expenditures budget
previously delivered to Parent and other capital expenditures that do not
exceed $25,000 in the aggregate since June 30, 1998;
(g) the Company shall not: (i) change any of the accounting principles used by
it unless required by GAAP, or (ii) take or knowingly allow to be taken any
action which would jeopardize qualification of the Millennium Merger as a
nonrecognition transfer under the Code;
(h) the Company shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction of any such
claims, liabilities or obligations (x) in the ordinary course of business and
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consistent with past practice, or claims, liabilities or obligations reflected
or reserved against in, or contemplated by, the financial statements (or the
notes thereto) of the Company, or (y) which are legally required to be paid,
discharged or satisfied (provided that if such claims, liabilities or
obligations referred to in this clause (y) are legally required to be paid and
are also not otherwise payable in accordance with clause (x) above, the Company
will notify Parent in writing if such claims, liabilities or obligations
exceed, individually or in the aggregate, $50,000 in value, reasonably in
advance of their payment);
(i) the Company shall not adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or other
reorganization of the Company (other than the Millennium Merger);
(j) the Company shall not take, or agree to commit to take, any action that
would make any representation or warranty of the Company contained herein
inaccurate in any respect at, or as of any time prior to, the Effective Time;
(k) the Company shall not voluntarily make or agree to make any changes in Tax
accounting methods or any material Tax election, waive or consent to the
extension of any statute of limitations with respect to Taxes, or consent to
any assessment of Taxes, or settle or compromise any Audit; and
(l) the Company shall not (i) make any change in the compensation payable or to
become payable to any of its officers, directors, employees, agents or
consultants (other than general increases in wages to employees who are not
officers or directors or affiliates in the ordinary course consistent with past
practice, as disclosed in Section 3.8 of the Company Disclosure Schedule), or
to persons providing management services; (ii) enter into or amend any
employment, severance, consulting, termination or other agreement or employee
benefit plan; or (iii) make any loans to any of its officers, directors,
employees, affiliates, agents or consultants or make any change in its existing
borrowing or lending arrangements for or on behalf of any of such persons,
whether pursuant to an employee benefit plan or otherwise;
(m) except as specifically described on Schedule 5.1(m) of the Company
Disclosure Schedule, the Company shall not (i) pay or agree to pay or make any
accrual or arrangement for payment of any severance, pension, retirement
allowance or other employee benefit pursuant to any existing plan, agreement or
arrangement to any officer, director, employee or affiliate except in the
ordinary course of business consistent with past practice; (ii) pay or agree to
pay or make any accrual or arrangement for payment to any officers, directors,
employees or affiliates of the Company of any amount relating to unused
vacation days, except payments and accruals made in the ordinary course
consistent with past practice; (iii) adopt or pay, grant, issue, accelerate or
accrue salary or other payments or benefits pursuant to any pension, profit-
sharing, bonus, extra compensation, incentive, deferred compensation, stock
purchase, stock option, stock appreciation right, group insurance, severance
pay, retirement or other employee benefit plan, agreement or arrangement, or
any employment or consulting agreement with or for the benefit of any director,
officer, employee, agent or consultant, whether past or present; or (iv) amend
in any material respect any such existing plan, agreement or arrangement in a
manner inconsistent with the foregoing;
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(n) From and after the date hereof, the Company shall not effectuate (i) a
"plant closing" (as defined in the WARN Act) affecting any site of employment
or one or more facilities or operating units within any site of employment of
the Company, or (ii) a "mass layoff" (as defined in the WARN Act) affecting any
site of employment of the Company, without complying fully with any and all
notice obligations (and/or pay and benefits in lieu of notice) under the WARN
Act or any similar obligation under applicable state or local law requiring
notice (and/or pay and benefits in lieu of notice) to employees in the event of
a plant closing or layoff. For purposes of the WARN Act and this Agreement, the
Effective Time of the Mergers is and shall be the same as the "effective date"
within the meaning of the WARN Act; and
(o) the Company shall not enter into an agreement, contract, commitment or
arrangement to do any of the foregoing, or to authorize, recommend, propose or
announce an intention to do any of the foregoing.
Section 5.2 INTERIM OPERATIONS OF PARENT AND HOLDCO. Parent covenants and
agrees that, except (i) as expressly provided in this Agreement, (ii) with
respect to the amendment of the Zenith 1995 Non-Employee Directors' Stock
Option Plan pursuant to a proposal as set forth in Section 5.2 of the Parent
Disclosure Schedule, or (iii) with the prior written consent of the Company,
after the date hereof and prior to the Effective Time:
(a) Parent will not, directly or indirectly, split, combine or reclassify the
outstanding Parent Common Stock or Holdco Common Stock;
(b) Neither Parent nor Holdco shall: (i) amend its articles or certificate of
incorporation or by-laws, or (ii) declare, set aside or pay any dividend or
other distribution payable in cash, stock or property with respect to its
capital Stock other than regular quarterly cash dividends consistent with past
practice;
(c) neither Parent nor Holdco shall: (i) change any of the accounting
principles used by it unless required by GAAP, or (ii) take or knowingly allow
to be taken any action which would jeopardize qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code;
(d) neither Parent, Holdco, nor any of their respective Subsidiaries will take,
or agree to commit to take, any action that would make any representation or
warranty of Parent, Holdco, Zenith Acquisition and Millennium Acquisition
contained herein inaccurate in any respect at, or as of any time prior to, the
Effective Time; and
(e) neither Parent, Holdco, nor any of their respective Subsidiaries will enter
into an agreement, contract, commitment or arrangement to do any of the
foregoing, or to authorize, recommend, propose or announce an intention to do
any of the foregoing.
Section 5.3 ACCESS TO INFORMATION. Each of the Company and Parent shall afford
to the officers, employees, accountants, counsel, financing sources and other
representatives of Parent or the Company, as applicable, access, during normal
business hours, during the period prior to the Effective Time of the Mergers,
to all of its properties, books, contracts, commitments and records and, during
such period, each of the Company and Parent shall furnish promptly to Parent or
the Company, as applicable, all information concerning its business, properties
and personnel as such
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other party may reasonably request. Unless otherwise required by law, until the
Effective Time, each such party will hold any such information which is
nonpublic in confidence in accordance with the provisions of that certain
Confidentiality Agreement between the Company and Parent, dated as of November
21, 1997 (the "Confidentiality Agreement"), subject to the requirements of
applicable law. For purposes of this Section 5.3 only, Parent shall be deemed
to include each of Parent's Subsidiaries.
Section 5.4 CONSENTS AND APPROVALS. Each of the Company, Parent, Holdco, Zenith
Acquisition and Millennium Acquisition will take all reasonable actions
necessary to comply promptly with all legal requirements which may be imposed
on it with respect to this Agreement and the transactions contemplated hereby
(which actions shall include, without limitation, furnishing all information in
connection with approvals of or filings with any Governmental Entity) and will
promptly cooperate with and furnish information to each other in connection
with any such requirements imposed upon any of them or any of their
Subsidiaries in connection with this Agreement, the other agreements executed
in connection herewith and the transactions contemplated hereby and thereby.
Each of the Company, Parent, Holdco, Zenith Acquisition and Millennium
Acquisition will, and will cause its respective Subsidiaries, if any, to, take
all reasonable actions necessary to obtain any consent, authorization, order or
approval of, or any exemption by, any Governmental Entity or other public or
private third party required to be obtained or made by Parent, Holdco, Zenith
Acquisition, Millennium Acquisition, the Company or any of their respective
Subsidiaries, if any, in connection with the Mergers or the taking of any
action contemplated thereby or by this Agreement or any other agreement
executed in connection herewith.
Section 5.5 ADDITIONAL AGREEMENTS. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable, whether under applicable laws and
regulations or otherwise, or to remove any injunctions or other impediments or
delays, legal or otherwise, to consummate and make effective the Mergers and
the other transactions contemplated by this Agreement and any other agreement
executed in connection herewith. In case at any time after the Effective Time
of the Mergers any further action is necessary or desirable to carry out the
purposes of this Agreement or any other agreement executed in connection
herewith, the proper officers and directors of the Company and Parent shall use
all reasonable efforts to take, or cause to be taken, all such necessary
actions.
Section 5.6 PUBLICITY. So long as this Agreement is in effect, neither the
Company, Parent nor any of their respective affiliates shall issue or cause the
publication of any press release or other announcement with respect to the
Mergers, this Agreement, any other agreement executed in connection herewith,
or the other transactions contemplated hereby or thereby without the prior
consultation of the other party, except as may be required by law or by any
listing agreement with the Nasdaq Stock Market.
Section 5.7 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt
notice to Parent and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event the occurrence or non-occurrence of
which would cause any representation or warranty contained in this Agreement to
be untrue or inaccurate in any material respect at or prior to the Effective
Time of the Mergers, and (ii) any material failure of the Company or Parent, as
the case may be, to comply
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with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder or under any other agreement executed in connection
herewith; provided, however, that the delivery of any notice pursuant to this
Section 5.7 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
Section 5.8 DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION. Holdco
agrees that at all times after the Effective Time, it shall indemnify, or shall
cause the Millennium Surviving Corporation to indemnify, each person who is
now, or has been at any time prior to the date hereof, a director or officer of
Parent, the Company, any of their respective subsidiaries or affiliates, or of
any of their respective successors and assigns (individually an "Indemnified
Party" and collectively the "Indemnified Parties"), to the same extent and in
the same manner as is now provided in the charter or by-laws of Parent or the
Company, as the case may be, or otherwise in effect on the date hereof
(pursuant to an indemnification agreement or otherwise), with respect to any
claim, liability, loss, damage, cost or expense (whenever asserted or claimed)
("Indemnified Liability") based in whole or in part on, or arising in whole or
in part out of, any matter existing or occurring at or prior to the Effective
Time. Holdco shall, or shall cause the Millennium Surviving Corporation to,
maintain in effect for not less than six years after the Effective Time the
current policies of directors' and officers' liability insurance maintained by
Parent or the Company, as the case may be, on the date hereof (provided that
Parent or the Company, as the case may be, may substitute therefor policies
having at least the same coverage and containing terms and conditions which are
no less advantageous to the persons currently covered by such policies as
insured) with respect to matters existing or occurring at or prior to the
Effective Time. Without limiting the foregoing, in the event any Indemnified
Party becomes involved in any capacity in any action, proceeding or
investigation based in whole or in part on, or arising in whole or in part out
of, any matter, including the transactions contemplated hereby, existing or
occurring at or prior to the Effective Time, then to the extent permitted by
law Holdco shall, or shall cause the Millennium Surviving Corporation or the
Zenith Surviving Corporation to, periodically advance to such Indemnified Party
its legal and other expenses (including the cost of any investigation and
preparation incurred in connection therewith), subject to the provision by such
Indemnified Party of an undertaking to reimburse the amounts so advanced in the
event of a final determination by a court of competent jurisdiction that such
Indemnified Party is not entitled thereto. Promptly after receipt by an
Indemnified Party of notice of the assertion (an "Assertion") of any claim or
the commencement of any action against him or her in respect to which indemnity
or reimbursement may be sought against Parent, the Company, the Millennium
Surviving Corporation, the Zenith Surviving Corporation, or a Subsidiary of the
Company or the Zenith Surviving Corporation ("Indemnitors") hereunder, such
Indemnified Party shall notify any Indemnitor in writing of the Assertion, but
the failure to so notify any Indemnitor shall not relieve any Indemnitor of any
liability it may have to such Indemnified Party hereunder except where such
failure shall have materially prejudiced Indemnitor in defending against such
Assertion. Indemnitors shall be entitled to participate in and, to the extent
Indemnitors elect by written notice to such Indemnified Party within 30 days
after receipt by any Indemnitor of notice of such Assertion, to assume, the
defense of such Assertion, at their own expense, with counsel chosen by
Indemnitors and reasonably satisfactory to such Indemnified Party.
Notwithstanding that Indemnitors shall have elected by such written notice to
assume the defense of any Assertion, such Indemnified Party shall have the
right to participate in the investigation and defense thereof, with
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separate counsel chosen by such Indemnified Party, but in such event the fees
and expenses of such counsel shall be paid by such Indemnified Party, unless,
in the opinion of such separate counsel, (i) such Indemnified Party has
available to him one or more defenses to such Assertion that may not be
available to the Indemnitors, (ii) there is otherwise a conflict of interest
between the Indemnified Party, on the one hand, and the Indemnitors, on the
other hand, or (iii) the Indemnitors fail to vigorously pursue the defense of
the asserted claim. No Indemnified Party shall settle any Assertion without the
prior written consent of Parent, nor shall Parent settle any Assertion without
either (i) the written consent of all Indemnified Parties against whom such
Assertion was made, or (ii) obtaining a general release from the party making
the Assertion for all Indemnified Parties as a condition of such settlement.
The provisions of this Section 5.8 are intended for the benefit of, and shall
be enforceable by, the respective Indemnified Parties. The provisions of this
Section 5.8 are not intended to constitute insurance. To the extent that any
policy of insurance shall provide all or any part of the indemnity owed to the
Indemnified Parties, or any of them, hereunder, the Indemnitors shall be
relieved of their obligation with regard thereto. No acceptance by an
Indemnified Party of any defense from any third party with respect to an
Assertion shall be deemed to constitute a waiver by such Indemnified Party of
its rights under this Section 5.8 or to receive the full measure of the
indemnity provided for hereby.
Section 5.9 COOPERATION. Parent and the Company shall together, or pursuant to
an allocation of responsibility to be agreed upon between them, coordinate and
cooperate (i) in determining whether any action by or in respect of, or filing
with, any Governmental Entity is required, or any actions, consents approvals
or waivers are required to be obtained from parties to any material contracts,
in connection with the consummation of the transactions contemplated by this
Agreement and any other agreement executed in connection herewith, and (ii) in
seeking any such actions, consents, approvals or waivers or making any such
filings, furnishing information required in connection therewith and timely
seeking to obtain any such actions, consents approvals or waivers. Subject to
the terms and conditions of this Agreement, Parent and the Company will each
use its reasonable best efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable after the
Registration Statement is filed, and Parent and the Company shall, subject to
applicable law, confer on a regular and frequent basis with one or more
representatives of one another to report operational matters of significance to
the Mergers and the general status of ongoing operations insofar as relevant to
the Merger, provided that the parties will not confer on any matter to the
extent inconsistent with law.
Section 5.10 NASDAQ LISTING APPLICATION. Prior to the Effective Time of the
Mergers, Parent will file, or will cause Holdco to file, with the Nasdaq
National Market a notification for listing of shares covering the shares of
Holdco Common Stock issuable in the Mergers or as a result of Holdco's
assumption of the Company Options and the Parent Options described in Sections
2.1(d) and 2.2(d) hereof.
Section 5.11 AFFILIATE AGREEMENTS. (a) The Company has, concurrently with the
execution of this Agreement, delivered to Parent a list setting forth the names
of all persons who are expected to be, at the effective time of the consents
pursuant to the Consent Solicitation, in the Company's reasonable judgment,
"affiliates" of the Company for purposes of Rule 145 under the Securities Act.
The Company shall use its reasonable best efforts to cause each person who is
identified as an "affiliate"
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in the list furnished pursuant to this Section 5.11 to execute a written
agreement as soon as practicable after the date hereof, in substantially in the
form of Exhibit E hereto.
(b) Parent shall, within five business days of the date hereof, deliver to the
Company a list setting forth the names of all persons who are expected to be,
at the time of the Special Meeting, in Parent's reasonable judgment,
"affiliates" of Parent for purposes of Rule 145 under the Securities Act.
Parent shall use its reasonable best efforts to cause each person who is
identified as an "affiliate" in the list furnished pursuant to this Section
5.11 to execute a written agreement as soon as practicable after the date
hereof, in substantially in the form of Exhibit F hereto.
Section 5.12 LETTERS OF ACCOUNTANTS. The Company will use reasonable best
efforts to cause to be delivered to Parent a letter and consents from its
independent auditors, dated the date on which the Registration Statement shall
become effective, in form reasonably satisfactory to Parent and customary in
scope and substance for letters and consents delivered by independent public
accountants in connection with registration statements on Form S-4 under the
Securities Act.
Section 5.13 WORKING CAPITAL FUNDS. Parent hereby agrees to fund the working
capital requirements of the Company between the date of execution of this
Agreement and the Closing Date. In connection therewith, to the extent the
Company wishes to request a working capital advance at any time during the
period specified above, it shall submit a Request for Working Capital Funds in
the form of Exhibit G hereto.
Section 5.14 FINANCIAL STATEMENTS. The Company hereby agrees to deliver to
Parent copies of monthly financial statements with respect to each month ended
from the date of this Agreement through the Closing Date no later than fifteen
business days following the end of each such month.
ARTICLE VI
CONDITIONS
Section 6.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The obligations of the
Company, on the one hand, and Parent, Holdco, Zenith Acquisition and Millennium
Acquisition, on the other hand, to consummate the Mergers are subject to the
satisfaction (or, if permissible, waiver by the party for whose benefit such
conditions exist) at or before the Closing of the following conditions:
(a) this Agreement shall have been adopted and the Millennium Merger and the
transactions related thereto shall have been approved pursuant to the Consent
Solicitation by the shareholders of the Company in accordance with the CGCL;
(b) this Agreement shall have been adopted and the Zenith Merger, the issuance
of Holdco Common Stock in the Mergers and transactions related thereto shall
have been approved by the shareholders of Parent in accordance with the rules
of the Nasdaq National Market and the CGCL and the shares of Holdco Common
Stock to be so issued shall have been authorized for listing on the Nasdaq
National Market, upon official notice of issuance;
(c) no court, arbitrator or governmental body, agency or official shall have
issued any order, and there shall not be any statute, rule or regulation,
restraining or prohibiting the consummation of the
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Mergers or the effective operation of the business of Zenith Surviving
Corporation or Millennium Surviving Corporation after the Effective Time of the
Mergers;
(d) all actions by or in respect of or filings with any governmental body,
agency official, or authority required to permit the consummation of the
Mergers shall have been obtained but excluding any consent, approval, clearance
or confirmation the failure to obtain which would not have a Parent Material
Adverse Effect or, after the Effective Time, a material adverse effect on
Millennium Surviving Corporation or the Zenith Surviving Corporation; and
(e) the Registration Statement shall have become effective under the Securities
Act and no stop order suspending effectiveness of the Registration Statement
shall have been issued and no proceeding for that purpose shall have been
initiated or threatened by the SEC.
Section 6.2 CONDITIONS TO THE OBLIGATIONS OF PARENT, HOLDCO, ZENITH ACQUISITION
AND MILLENNIUM ACQUISITION. The obligations of Parent, Holdco, Zenith
Acquisition and Millennium Acquisition to consummate the Mergers are subject to
the satisfaction (or waiver by Parent) at or before the Closing of the
following further conditions:
(a) the representations and warranties of the Company shall have been true and
correct in all material respects (without giving effect to any limitation as to
"materiality" or "material adverse effect" set forth therein) both when made
and (except for those representations and warranties that address matters only
as of a particular date which need only be true and accurate as of such date)
as of the Effective Time as if made at and as of such time;
(b) the Company shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time;
(c) Parent shall have received a certificate executed by the President or a
Vice President of the Company, dated as of the Closing Date, to the effect that
the conditions set forth in paragraphs (a) and (b) of this Section 6.2 have
occurred;
(d) the Company shall have obtained, and there shall be in full force and
effect, the consents described in Section 6.2 of the Company Disclosure
Schedule;
(e) since the date of this Agreement, there shall not have occurred any event,
change or effect having, or which could have a Company Material Adverse Effect;
(f) all of the issued and outstanding Company Preferred Stock shall have been
converted to Company Common Stock and there shall be no class or series of any
capital stock of the Company outstanding other than Company Common Stock;
(g) the Company shall have caused all warrants to purchase Company Common Stock
and Company Preferred Stock including, without limitation, the warrants granted
in accordance with the Agreement to Guarantee, dated April 6, 1998, by and
among the Company, BRC Holdings, Inc., Parent and JBJ Partners, Inc., and the
Warrant to Purchase Series C Preferred Stock, dated as of May 17, 1996, held by
JBJ Partners, Ltd., to be converted into that number of shares of Company
Common Stock equal to the net number of shares of Company Common Stock into
which each such warrant would have
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been convertible pursuant to a cashless exercise procedure immediately prior to
the Effective Time of the Millennium Merger;
(h) any default under the terms and provisions of the Promissory Note and
related loan documentation, each dated as of April 2, 1998, between the Company
and Wells Fargo Bank (Texas), National Association, shall have been cured or
waived prior to the Effective Time of the Mergers;
(i) the respective shareholders of Parent and the Company shall not have
asserted in accordance with the CGCL appraisal rights for their shares of
Company Capital Stock and Parent Common Stock, respectively, for a material
amount;
(j) the persons identified on Exhibit H to this Agreement shall have entered
into Employment Agreements with the Company, in form and substance satisfactory
to Parent, and as of the Effective Time, at least 80% of the remaining persons
employed by the Company as of the date of this Agreement shall have consented
to assume comparable positions in the Millennium Surviving Corporation upon
consummation of the Millennium Merger, such consents to be in form and
substance satisfactory to Parent; and
(k) Parent shall have received an opinion of Skadden, Arps, Slate, Meagher &
Flom LLP, in form and substance reasonably satisfactory to Parent, dated the
Effective Time of the Mergers, substantially to the effect that, on the basis
of facts, representations and assumptions set forth in such opinion, for
Federal income tax purposes, the Zenith Merger will be treated as a
nonrecognition transfer of Parent Common Stock by those holders thereof to
Holdco for shares of Holdco Common Stock.
(l) In rendering such opinion, Skadden, Arps, Slate, Meagher & Flom LLP may
receive and rely upon representations contained in certificates of Parent,
Holdco, Zenith Acquisition, Millennium Acquisition, the Company, and others,
and the parties agree to provide Skadden, Arps, Slate, Meagher & Flom LLP with
such certificates as Skadden, Arps, Slate, Meagher & Flom LLP may reasonably
request in connection with rendering its opinion.
Section 6.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations of
the Company to consummate the Millennium Merger are subject to the satisfaction
(or waiver by the Company) at or prior to the Closing of the following further
conditions:
(a) the representations and warranties of Parent, Holdco, Zenith Acquisition
and Millennium Acquisition shall have been true and correct in all material
respects (without giving effect to any limitation as to "materiality" or
"material adverse effect" set forth therein) both when made and (except for
those representations and warranties that address matters only as of a
particular date which need only be true and accurate as of such date) as of the
Effective Time as if made at and as of such time;
(b) each of Parent, Holdco, Zenith Acquisition and Millennium Acquisition shall
have performed in all material respects all of the respective obligations
hereunder required to be performed by Parent, Holdco, Zenith Acquisition or
Millennium Acquisition, as the case may be, at or prior to the Effective Time
of the Mergers;
A-41
(c) the Company shall have received a certificate executed by the President or
a Vice President of Parent, dated as of the Closing Date, to the effect that
the conditions set forth in paragraphs (a) and (b) of this Section 6.3 have
occurred;
(d) since the date of this Agreement, there shall not have occurred any event,
change or effect having, or which would be reasonably likely to have a Parent
Material Adverse Effect; and
(e) the Company shall have received an opinion of Arter & Hadden, in form and
substance reasonably satisfactory to the Company, dated the Effective Time,
substantially to the effect that, on the basis of facts, representations and
assumptions set forth in such opinion, for Federal income tax purposes, the
Millennium Merger will be treated as a nonrecognition transfer of Company
Common Stock by those holders thereof (other than Parent) to Holdco for shares
of Holdco Common Stock.
In rendering such opinion, Arter & Hadden may receive and rely upon
representations contained in certificates of the Company and others, and the
parties agree to provide Arter & Hadden with such certificates as Arter &
Hadden may reasonably request in connection with rendering its opinion.
ARTICLE VII
TERMINATION
Section 7.1 TERMINATION. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated and the Mergers contemplated
herein may be abandoned at any time prior to the Effective Time of the Mergers,
whether before or after shareholder approval thereof:
(a) By the mutual consent of the Board of Directors of Parent and the Board of
Directors of the Company.
(b) By either of the Board of Directors of the Company or the Board of
Directors of Parent:
(i) if the Merger shall not have occurred on or prior to March 31, 1999;
provided, however, that the right to terminate this Agreement under this
Section 7.1(b)(i) shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the cause of, or resulted in, the
failure of the Mergers to occur on or prior to such date; or
(ii) if any Governmental Entity shall have issued an order, decree or ruling or
taken any other action (which order, decree, ruling or other action the parties
hereto shall use their reasonable efforts to lift), in each case permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated
by this Agreement and such order, decree, ruling or other action shall have
become final and non-appealable.
(c) By the Board of Directors of the Company:
(i) if Parent, Holdco, Zenith Acquisition or Millennium Acquisition breaches or
fails in any material respect to perform or comply with any of its material
covenants and agreements contained herein or breaches its representations and
warranties in any material respect and, in each case, such breach or failure
cannot be or has not been cured within 30 days after giving written notice to
the breaching party of such breach or failure;
A-42
(ii) if the approval of the shareholders of Parent contemplated by this
Agreement shall not have been obtained by reason of the failure to obtain the
required vote at a duly held meeting of shareholders or any adjournment
thereof; or
(iii) if the Board of Directors of the Company determines in its good faith
judgment, after consultation with its legal and financial advisors, that
failure to terminate this Agreement could result in the violation of the
fiduciary duties of the members of the Board of Directors of the Company under
applicable law.
(d) By the Board of Directors of Parent:
(i) if the Company breaches or fails in any material respect to perform or
comply with any of its material covenants and agreements contained herein or
breaches its representations and warranties in any material respect and, in
each case, such breach or failure cannot be or has not been cured within 30
days after giving written notice to the breaching party of such breach or
failure;
(ii) if the approval of the shareholders of the Company contemplated by this
Agreement shall not have been obtained by reason of the failure to obtain the
required vote in the Consent Solicitation; or
(iii) if the Board of Directors of Parent determines, in its good faith
judgment, after consultation with its legal and financial advisors, that
failure to terminate this Agreement could result in the violation of the
fiduciary duties of the members of the Board of Directors of Parent under
applicable law.
Section 7.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 7.1 hereof, written notice thereof shall
forthwith be given to the other party or parties specifying the provision
hereof pursuant to which such termination is made, and this Agreement shall
forthwith become null and void, and there shall be no liability on the part of
the Parent, Holdco, Zenith Acquisition, Millennium Acquisition or the Company
except (A) for fraud or for willful breach of this Agreement, and (B) as set
forth in Sections 8.1 and 8.2 hereof.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 FEES AND EXPENSES. Each of the parties hereto shall bear all costs
and expenses incurred by it in connection with this Agreement and the
consummation of the transactions contemplated hereby. Notwithstanding the
foregoing, (a) the non-cash portion of any fees of Salomon Smith Barney Inc. as
set forth in that certain engagement letter, dated December 15, 1997 (the
"Engagement Letter"), between Parent and Salomon Smith Barney Inc. shall be
borne by Holdco, and (b) in the event that Parent or the Company shall have
terminated this Agreement pursuant to Section 7.1 hereof other than Sections
7.1(c)(i) and 7.1(d)(i), all costs and expenses incurred in connection with
this Agreement and the consummation of the transactions contemplated hereby
shall be borne equally by Parent and the Company, including, but not limited
to, the cash portion of the fees of Salomon Smith Barney Inc. as set forth in
the Engagement Letter.
Section 8.2 FINDERS' FEES. (a) Except for Robert E. LaBlanc Associates, Inc.
and EFO Holdings, Inc., a copy of whose respective engagement agreements have
been provided to Parent and whose
A-43
fees will be paid by the Company, there is no investment banker, broker, finder
or other intermediary which has been retained by or is authorized to act on
behalf of the Company who might be entitled to any fee or commission from the
Company upon consummation of the transactions contemplated by this Agreement.
(b) Except for Salomon Smith Barney Inc., whose fees will be paid in accordance
with the Engagement Letter and Section 8.1 hereof, there is no investment
banker, broker, finder or other intermediary which has been retained by or is
authorized to act on behalf of Parent or its Subsidiaries who might be entitled
to any fee or commission from any such party upon consummation of the
transactions contemplated by this Agreement.
Section 8.3 AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified and supplemented in any and all respects,
whether before or after any vote or written consent of the shareholders of the
Company or Parent contemplated hereby, by written agreement of the parties
hereto, by action taken by their respective Boards of Directors, at any time
prior to the Closing Date with respect to any of the terms contained herein.
Section 8.4 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the
Effective Time.
Section 8.5 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed) or sent by an overnight courier service, such as FedEx, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Parent, Holdco, Zenith Acquisition or Millennium Acquisition, to:
Zitel Corporation
47211 Bayside Parkway
Fremont, California 94538
Attention: Jack H. King
Telephone: (510) 440-9600
Facsimile: (510) 440-8526
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue
Palo Alto, California 94301
Attention: Kenton J. King, Esq.
Telephone: (650) 470-4500
Facsimile: (650) 470-4570
and
A-44
(b) if to the Company, to:
MatriDigm Corporation
4777 Hellyer Avenue
San Jose, California 95138
Attention: Richard Ormond
Telephone: (408) 360-3200
Facsimile: (408) 225-0215
with a copy to:
Arter & Hadden LLP
1717 Main Street, Suite 4100
Dallas, Texas 75201
Attention: Jeffrey M. Sone, Esq.
Telephone: (214) 761-2100
Facsimile: (214) 741-7139
Section 8.6 INTERPRETATION. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. Whenever the words "include", "includes" or "including"
are used in this Agreement they shall be deemed to be followed by the words
"without limitation". The phrase "made available" in this Agreement shall mean
that the information referred to has been made available if requested by the
party to whom such information is to be made available. The phrases "the date
of this Agreement", "the date hereof", and terms of similar import, unless the
context otherwise requires, shall be deemed to refer to October 5, 1998. As
used in this Agreement, the term "affiliate(s)" shall have the meaning set
forth in Rule l2b-2 of the Exchange Act.
Section 8.7 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 8.8 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF
OWNERSHIP. This Agreement (together with any other agreement executed in
connection herewith), the Confidentiality Agreement (including the documents
and the instruments referred to herein and therein): (a) constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof, and (b)
except as provided in Section 5.8 hereof, are not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
Section 8.9 SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void, unenforceable or against its regulatory policy, the
remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
A-45
Section 8.10 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of California without giving effect to
the principles of conflicts of law thereof.
Section 8.11 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, except that Holdco, Zenith Acquisition or
Millennium Acquisition may assign, in its sole discretion, any or all of its
rights, interests and obligations hereunder to Parent or to any direct or
indirect wholly owned Subsidiary of Parent. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date and year first above
written.
ZITEL CORPORATION
By: /s/ JACK H. KING
Jack H. King
Chief Executive Officer
MILLENNIUM HOLDING CORP.
By: /s/ JACK H. KING
Jack H. King
President
ZENITH ACQUISITION CORP.
By: /s/ JACK H. KING
Jack H. King
President
MILLENNIUM ACQUISITION I CORP.
By: /s/ JACK H. KING
Jack H. King
President
MATRIDIGM CORPORATION
By: /s/ RICHARD W. ORMOND
Name: Richard W. Ormond
Title: President and Chief Executive Officer
A-46
ANNEX B
AGREEMENT OF MERGER
1.THE MERGER. Zenith Acquisition Corp., a Delaware corporation ("Zenith
Acquisition") and a wholly-owned subsidiary of Millennium Holding Corp., a
Delaware corporation ("Holdco"), shall be merged (the "Merger") with and into
Zitel Corporation, a California corporation ("Zitel"), with Zitel being the
surviving corporation (the "Surviving Corporation"). The Merger shall become
effective in accordance with the provisions of Sections 1103 and 1108 of the
General Corporation Law of the State of California (the "CGCL") upon the
filing of this Agreement of Merger, together with any required officers'
certificates in accordance with Section 1103 of the CGCL, with the Office of
the Secretary of State of the State of California. The date and time when the
Merger shall become effective is herein referred to as the "Effective Time".
2.EFFECT OF THE MERGER. At the Effective Time, the Surviving Corporation shall
assume all of the liabilities of Zenith Acquisition, and the Merger shall have
the effect required pursuant to Section 1107 of the CGCL and Section 259 of
the DGCL.
3.CONVERSION OF SHARES.
(a)Each issued and outstanding share of common stock, par value $0.01 per
share, of Zenith Acquisition shall be converted into one fully paid and
nonassessable share of common stock, par value $0.01 per share, of the
Surviving Corporation.
(b)Each issued and outstanding share of common stock, par value $0.01 per
share (the "Zitel Common Stock") of Zitel shall be converted into one fully
paid and nonassessable share of common stock, par value $0.01 per share, of
Holdco (the "Holdco Common Stock") (the "Exchange Ratio"). As of the Effective
Time of the Merger, all such shares shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist. As of the
Effective Time of the Merger, each certificate theretofor representing shares
of Zitel Common Stock, without any action on the part of Holdco, Zitel or the
holder thereof, shall be deemed to represent that number of shares of Holdco
Common Stock determined by multiplying the shares of Zitel Common Stock by the
Exchange Ratio. Each holder of a certificate representing any shares of Zitel
Common Stock shall cease to have any rights with respect thereto, except the
right to receive, upon the surrender of any such certificates, certificates
representing the shares of Holdco Common Stock and any cash in lieu of
fractional shares of Holdco Common Stock to be issued or paid in consideration
therefor upon surrender of such certificate, without interest.
4.DETERMINATION OF FAIR MARKET VALUE. Pursuant to subdivision (a) of Section
1301 of the CGCL, it is determined that $[ ] per share of Zitel Common
Stock is the fair market value of any Zitel Common Stock which constitutes
"dissenting shares" (as defined in Section 1300 of the CGCL) in the Merger.
B-1
5.AMENDMENT TO ARTICLES OF SURVIVING CORPORATION. Immediately following the
Effective Time of the Merger, the Articles of Incorporation of the Surviving
Corporation shall be amended and restated in their entirety as set forth in
Annex I hereto.
Dated: [ ], 1998
- -------------------------------------
[ ]
President
- -------------------------------------
[ ]
Secretary
B-2
ANNEX C
AGREEMENT OF MERGER
1.THE MERGER. Millennium Acquisition I Corp., a Delaware corporation
("Millennium Acquisition") and a wholly-owned subsidiary of Millennium Holding
Corp., a Delaware corporation ("Holdco"), shall be merged (the "Merger") with
and into MatriDigm Corporation, a California corporation (the "Company"), with
the Company being the surviving corporation (the "Surviving Corporation"). The
Merger shall become effective in accordance with the provisions of
Sections 1103 and 1108 of the General Corporation Law of the State of
California (the "CGCL") upon the filing of this Agreement of Merger, together
with any required officers' certificates in accordance with Section 1103 of
the CGCL, with the Office of the Secretary of State of the State of
California. The date and time when the Merger shall become effective is herein
referred to as the "Effective Time".
2.EFFECT OF THE MERGER. At the Effective Time, the Surviving Corporation shall
assume all of the liabilities of Millennium Acquisition, and the Merger shall
have the effect required pursuant to Section 1107 of the CGCL and Section 259
of the DGCL.
3.CONVERSION OF SHARES.
(a)Each issued and outstanding share of common stock, par value $0.01 per
share, of Millennium Acquisition shall be converted into [ ] of a
fully paid and nonassessable share of common stock, par value $0.01 per share,
of Surviving Corporation.
(b)Each issued and outstanding share of common stock, no par value (the
"Company Common Stock") of the Company shall be converted into the right to
receive [ ] (the "Exchange Ratio") of a fully paid and
nonassessable share of common stock, par value $0.01 per share, of Holdco (the
"Holdco Common Stock"). As of the Effective Time of the Merger, all such
shares of Company Common Stock shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist. As of the
Effective Time of the Merger, each certificate theretofore representing shares
of Company Common Stock, without any action on the part of Holdco, the Company
or the holder thereof, shall be deemed to represent that number of shares of
Holdco Common Stock determined by multiplying the shares of Company Common
Stock by the Exchange Ratio. Each holder of a certificate representing any
shares of Company Common Stock shall cease to have any rights with respect
thereto, except the right to receive, upon the surrender of any such
certificates, certificates representing the shares of Holdco Common Stock and
any cash in lieu of fractional shares of Holdco Common Stock to be issued or
paid in consideration therefor upon surrender of such certificate, without
interest.
4.DETERMINATION OF FAIR MARKET VALUE. Pursuant to subdivision (a) of Section
1301 of the CGCL, it is determined that $[ ] per share of Company Common
Stock is the fair market value of any Company Common Stock which constitutes
"dissenting shares" (as defined in Section 1300 of the CGCL) in the Merger.
C-1
5.AMENDMENT TO ARTICLES OF SURVIVING CORPORATION. Immediately following the
Effective Time of the Merger, the Articles of Incorporation of the Surviving
Corporation shall be amended and restated in their entirety as set forth in
Annex I hereto.
Dated: [ ], 1998
- -------------------------------------
[ ]
President
- -------------------------------------
[ ]
Secretary
C-2
ANNEX D
SHAREHOLDER AGREEMENT
SHAREHOLDER AGREEMENT (this "Agreement"), dated as of October 5, 1998, by and
between Zitel Corporation, a California corporation ("Parent") and
[ ] ("Shareholder").
WITNESSETH:
WHEREAS, concurrently with the execution of this Agreement, Parent, Millennium
Holding Corp. ("Holdco"), Millennium Acquisition I Corp., a Delaware
corporation and a wholly-owned subsidiary of Holdco ("Millennium
Acquisition"), Zenith Acquisition Corp., a Delaware corporation and a wholly-
owned subsidiary of Holdco, and MatriDigm Corporation, a California
corporation (the "Company") have entered into an Agreement and Plan of
Reorganization and Merger, dated of even date herewith (the "Merger
Agreement"), pursuant to which the parties thereto have agreed, among other
things, to merge Millennium Acquisition with and into the Company upon the
terms and subject to the conditions set forth therein (the "Millennium
Merger"); and
WHEREAS, as of the date hereof, Shareholder is the record and Beneficial Owner
(as defined hereinafter) of (i) [ ] shares of the Common Stock, no par
value, of the Company (the "Common Stock"), and (ii) [ ] shares of the
Preferred Stock, no par value, of the Company (the "Preferred Stock"); and
WHEREAS, as inducement and a condition to entering into the Merger Agreement,
Parent has required Shareholder to agree, and Shareholder has agreed, to enter
into this Agreement; and
WHEREAS, upon the terms and subject to the conditions set forth herein,
Shareholder desires to (i) vote all such Shareholder's shares of Common Stock
and Preferred Stock in favor of the Millennium Merger and the approval and
adoption of the Merger Agreement and to execute a written consent in
furtherance thereof, and (ii) as promptly as practicable hereafter, convert
any shares of Preferred Stock held by such Shareholder into shares of Common
Stock.
NOW, THEREFORE, in consideration of the foregoing and the mutual premises,
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
Section 1. CERTAIN DEFINITIONS. In addition to the terms defined elsewhere
herein, capitalized terms used and not defined herein have the respective
meanings ascribed to them in the Merger Agreement. For purposes of this
Agreement:
(a)"Beneficially Own" or "Beneficial Ownership" with respect to any securities
means having or sharing, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, voting power, including
the power to vote, or to direct the voting of, such securities, and/or
investment power, including the power to dispose, or to direct the
disposition, of such securities. Without duplicative counting of the same
securities by the same holder, securities Beneficially Owned by a person
include securities Beneficially Owned by all other persons with
D-1
whom such person acts in a partnership, limited partnership, syndicate or other
group for the purpose of acquiring, holding, or disposing of securities of the
same issuer.
(b)"Existing Shares" means shares of Common Stock and Preferred Stock
Beneficially Owned by Shareholder as of the date hereof.
(c)"Securities" means the Existing Shares together with any shares of Common
Stock, Preferred Stock or other securities of the Company acquired by
Shareholder in any capacity after the date hereof and prior to the termination
of this Agreement, whether upon the exercise of options, warrants or rights,
the conversion or exchange of convertible or exchangeable securities, or by
means of purchase, dividend, distribution, split-up, recapitalization,
combination, exchange of shares or the like, gift, bequest, inheritance or as a
successor in interest in any capacity or otherwise.
Section 2. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER. Shareholder
represents and warrants to Parent as follows:
(a)OWNERSHIP OF SHARES. Except as set forth in Schedule 2(a), Shareholder is
the sole record and Beneficial Owner of the number of shares of Common Stock
and Preferred Stock set forth opposite such Shareholder's name on Schedule A
hereto. Shareholder has sole voting power and sole power to issue instructions
with respect to the matters set forth in Sections 5, 7 and 8 hereof, sole power
of disposition, sole power of conversion, sole power to demand appraisal rights
and sole power to agree to all of the matters set forth in this Agreement, in
each case with respect to all of the Existing Shares with no limitations,
qualifications or restrictions on such rights, subject to the terms of this
Agreement. Shareholder does not own any securities of the Company on the date
hereof other than the shares of Common Stock and Preferred Stock set forth on
Schedule A and the options to purchase share of Common Stock, if any, specified
in Schedule 2(a).
(b)POWER; BINDING AGREEMENT. Shareholder has the legal capacity, power and
authority to enter into and perform all of Shareholder's obligations under this
Agreement. This Agreement has been duly and validly executed and delivered by
Shareholder and constitutes a valid and binding agreement of Shareholder,
enforceable against Shareholder in accordance with its terms except that (i)
such enforcement may be subject to applicable bankruptcy, insolvency or other
similar laws, now or hereafter in effect, affecting creditors' rights
generally, and (ii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
(c)NO CONFLICTS. Except as disclosed in the Merger Agreement, no filing with,
and no permit, authorization, consent or approval of, any state or federal
public body or authority ("Governmental Entity") is necessary for the execution
of this Agreement by Shareholder and the consummation by Shareholder of the
transactions contemplated hereby, none of the execution and delivery of this
Agreement by Shareholder, the consummation by Shareholder of the transactions
contemplated hereby or compliance by Shareholder with any of the provisions
hereof shall (i) conflict with or result in any breach of any organizational
documents applicable to Shareholder, (ii) result in a violation or breach of,
or constitute (with or without notice or lapse of time or both) a default (or
give rise to any third party right of termination, cancellation, material
modification or acceleration) under any of the terms, conditions or provisions
of any note, loan agreement, bond, mortgage,
D-2
indenture, license, contract, commitment, arrangement, understanding, agreement
or other instrument or obligation of any kind to which Shareholder is a party
or by which Shareholder or any of its properties or assets may be bound, or
(iii) violate any order, writ, injunction, decree, judgment, order, statute,
rule or regulation applicable to Shareholder or any of Shareholder's properties
or assets.
(d)NO ENCUMBRANCE. Except as permitted by this Agreement, the Existing Shares
are now and, at all times during the term hereof, and the Securities will be,
held by Shareholder or by a nominee or custodian for the benefit of
Shareholder, free and clear of all mortgages, claims, charges, liens, security
interests, pledges or options, proxies, voting trusts or agreements,
understandings or arrangements or any other rights whatsoever (collectively,
"Encumbrances"), except for any such Encumbrances arising hereunder.
(e) NO FINDER'S FEES. No broker, investment banker, financial advisor or other
person is entitled to any broker's, finder's, financial adviser's or other
similar fee or commission in connection with the transactions contemplated
hereby based upon arrangements made by or on behalf of Shareholder.
(f)RELIANCE BY PARENT. Shareholder understands and acknowledges that Parent is
entering into the Merger Agreement in reliance upon Shareholder's execution and
delivery of this Agreement.
Section 3. REPRESENTATIONS AND WARRANTIES OF PARENT. Parent hereby represents
and warrants to Shareholder as follows:
(a)POWER; BINDING AGREEMENT. Parent has the corporate power and authority to
enter into and perform all of its obligations under this Agreement. This
Agreement has been duly and validly executed and delivered by Parent and
constitutes a valid and binding agreement of Parent, enforceable against Parent
in accordance with its terms, except that (i) such enforcement may be subject
to applicable bankruptcy, insolvency or other similar laws, now or hereafter in
effect, affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject
to equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(b)NO CONFLICTS. Except as disclosed in the Merger Agreement, no filing with,
and no permit, authorization, consent or approval of, any Governmental Entity
is necessary for the execution of this Agreement by Parent and the consummation
by Parent of the transactions contemplated hereby, and none of the execution
and delivery of this Agreement by each of Parent, the consummation by each of
Parent of the transactions contemplated hereby or compliance by each of Parent
with any of the provisions hereof shall (i) conflict with or result in any
breach of any organizational documents applicable to Parent, (ii) result in a
violation or breach of, or constitute (with or without notice or lapse of time
or both) a default (or give rise to any third party right of termination,
cancellation, material modification or acceleration) under any of the terms,
conditions or provisions of any note, loan agreement, bond, mortgage,
indenture, license, contract, commitment, arrangement, understanding, agreement
or other instrument or obligation of any kind to which Parent is a party or by
which Parent or any of its properties or assets may be bound, or (iii) violate
any order, writ, injunction, decree, judgment, order, statute, rule or
regulation applicable to Parent or any of its properties or assets.
D-3
Section 4. DISCLOSURE. Shareholder hereby agrees to permit Parent to publish
and disclose in the Proxy Statement/Prospectus and any press release or other
disclosure document which Parent, in its sole discretion, determines to be
necessary or desirable in connection with the Millennium Merger and any
transactions related thereto, Shareholder's identity and ownership of Common
Stock and Preferred Stock, and the nature of Shareholder's commitments,
arrangements and understandings under this Agreement.
Section 5. CERTAIN PROHIBITED TRANSFERS. Prior to the termination of this
Agreement, Shareholder agrees not to, directly or indirectly:
(a)except pursuant to the terms of the Merger Agreement or for distributions to
the partners or members, as applicable, of Shareholder, offer for sale, sell,
transfer, tender, pledge, encumber, assign or otherwise dispose of, or enter
into any contract, option or other arrangement or understanding with respect to
or consent to the offer for sale, sale, transfer, tender, pledge, encumbrance,
assignment or other disposition of any or all of the Securities or any interest
therein [including, without limitation, any sale, transfer or other disposition
pursuant to the Founders Agreement (as defined in Section 8 hereof)]*;
(b)grant any proxy, power of attorney, deposit any of the Securities into a
voting trust or enter into a voting agreement or arrangement with respect to
the Securities except as provided in this Agreement; or
(c)take any other action that would make any representation or warranty of
Shareholder contained herein untrue or incorrect or have the effect of
preventing or disabling Shareholder from performing its obligations under this
Agreement.
Section 6. CONVERSION OF PREFERRED SHARES. As promptly as practicable on or
following the date hereof, Shareholder shall deliver or cause to be delivered
to the Company all shares of Preferred Stock Beneficially Owned by such
Shareholder, together with written instructions directing the Company to cause
such shares to be converted into shares of Common Stock in accordance with the
applicable provisions of the Company's Articles of Incorporation and in full
satisfaction of all rights pertaining to such shares of Preferred Stock, such
conversion to be effective no later than the business day immediately preceding
the Effective Time of the Millennium Merger.
Section 7. VOTING OF SECURITIES. Shareholder hereby agrees that, during the
period commencing on the date hereof and continuing until the first to occur of
(a) the Effective Time, or (b) termination of this Agreement in accordance with
its terms, in connection with the Consent Solicitation, Shareholder will vote
or consent (or cause to be voted or consented) the Securities:
(A)in favor of the adoption of the Merger Agreement and the approval of the
Millennium Merger and the other transactions contemplated by the Merger
Agreement and this Agreement and any actions required in furtherance thereof
and hereof;
- --------
* Include in the Shareholder Agreement of each of the Founders only.
D-4
(B)against any action or agreement that would result in a breach in any respect
of any covenant, representation or warranty or any other obligation or
agreement of the Company under the Merger Agreement or this Agreement; and
(C)except as otherwise agreed to in writing in advance by Parent in its sole
discretion, against the following actions (other than the Millennium Merger and
the transactions contemplated by this Agreement and the Merger Agreement): (1)
any change in a majority of the persons who constitute the board of directors
of the Company; (2) any material change in the present capitalization of the
Company, including without limitation any proposal to sell a substantial equity
interest in the Company; (3) any amendment of the Company's Articles of
Incorporation or By-laws; (4) any other change in the Company's corporate
structure or business; or (5) any other action which, in the case of each of
the matters referred to in clauses (1), (2), (3) or (4), is intended, or could
reasonably be expected, to impede, interfere with, delay, postpone or
materially adversely affect the Millennium Merger and the transactions
contemplated by this Agreement and the Merger Agreement. Shareholder may not
enter into any agreement or understanding with any person the effect of which
would be inconsistent with or violative of any provision contained in this
Section 7.
Section 8. CONSENT SOLICITATION; FILING WITH SECRETARY. Promptly following
receipt thereof, Shareholder shall promptly execute and file such Shareholder's
written consent to the Millennium Merger with the Secretary of the Company in
accordance with the terms of the Consent Solicitation.
Section 9. AFFILIATES AGREEMENT. Promptly following the execution of this
Agreement and no later than 10 days from the date hereof, Shareholder agrees to
execute and deliver to Parent an Affiliates Agreement, substantially in the
form attached as Exhibit E to the Merger Agreement.
[Section [ ]. WARRANT TO PURCHASE SERIES C COMPANY PREFERRED STOCK Shareholder
agrees to execute all documents and to take all actions necessary to convert
the Warrant to Purchase Series C Preferred Stock, dated as of May 17, 1996,
held by Shareholder into that number of shares of Company Common Stock equal to
the net number of shares of Company Common Stock into which such warrant would
have been convertible pursuant to a cashless exercise procedure immediately
prior to the Effective Time of the Millennium Merger]**
[Section [ ]. WARRANT TO PURCHASE COMPANY COMMON STOCK. Shareholder agrees to
execute all documents and to take all actions necessary to convert the warrants
granted in accordance with the Agreement to Guarantee, dated April 6, 1998, by
and among the Company, Parent, Shareholder, BRC Holdings, Inc. and JBJ
Partners, Inc., held by Shareholder into that number of shares of Company
Common Stock equal to the net number of shares of Company Common Stock into
which such warrant would have been convertible pursuant to a cashless exercise
procedure immediately prior to the Effective Time of the Millennium Merger]***
- --------
** Include in JBJ Shareholder Agreement only.
*** Include in BRC Shareholder Agreement and JBJ Partners Shareholder
Agreement.
D-5
Section 10. PROXY.
(a)Shareholder hereby irrevocably grants to, and appoints, Parent and Jack H.
King and Henry C. Harris or any of them in their respective capacities as
officers of Parent and any individual who shall hereafter succeed to any such
office of Parent and each of them individually, such Shareholder's proxy and
attorney-in-fact (with full power of substitution), for and in the name, place
and stead of Shareholder, to grant a consent or approval in respect of the
Securities in connection with the Consent Solicitation.
(b)Shareholder understands and acknowledges that Parent is entering into the
Merger Agreement in reliance upon such Shareholder's execution and delivery of
this Agreement. Shareholder hereby affirms that the irrevocable proxy set forth
in this Section 10 is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the performance
of the duties of Shareholder under this Agreement. Shareholder hereby further
affirms that the irrevocable proxy is coupled with an interest and may under no
circumstances be revoked. Shareholder hereby ratifies and confirms all that
such irrevocable proxy may lawfully do or cause to be done by virtue hereof.
Such irrevocable proxy is executed and intended to be irrevocable in accordance
with the provisions of Section 705 of the General Corporation Law of the State
of California.
Section 11. STOP TRANSFER; LEGEND.
(a)Shareholder agrees with, and covenants to, Parent that Shareholder will not
request that the Company register the transfer of any certificate or
uncertificated interest representing any of the Securities, unless such
transfer is made in compliance with this Agreement.
(b)In the event of a stock dividend or distribution, or any change in the
Common Stock or Preferred Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of share or the like other than
pursuant to the Millennium Merger, the term "Existing Shares" will be deemed to
refer to and include the shares of Common Stock and Preferred Stock as well as
all such stock dividends and distributions and any shares into which or for
which any or all of the Securities may be changed or exchanged and appropriate
adjustments shall be made to the terms and provisions of this Agreement.
(c)Shareholder will promptly after the date hereof surrender to the Company all
certificates representing the Securities, and the Company will place the
following legend on such certificates in addition to any other legend required
to be placed thereon:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
TRANSFER SET FORTH IN THE SHAREHOLDER AGREEMENT, DATED AS OF OCTOBER [ ],
1998, BY AND AMONG ZITEL CORPORATION AND [ ]."
Section 12. BEST REASONABLE EFFORTS. Subject to the terms and conditions of
this Agreement, each of the parties hereto agrees to use its best reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper or advisable under
D-6
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement and the Merger Agreement. Each
party shall promptly consult with the other and provide any necessary
information and material with respect to all filings made by such party with
any Governmental Entity in connection with this Agreement and the Merger
Agreement and the transactions contemplated hereby and thereby.
Section 13. TERMINATION. This Agreement shall terminate on the earliest of (a)
termination of the Merger Agreement pursuant to its terms, (b) the agreement of
the parties hereto to terminate this Agreement, or (c) the consummation of the
Millennium Merger.
Section 14. MISCELLANEOUS.
(a)ENTIRE AGREEMENT. This Agreement (including the documents and instruments
referred to herein) constitutes the entire agreement and supersedes all other
prior agreements and understandings, both written and oral, among the parties,
or any of them, with respect to the subject matter hereof.
(b)SUCCESSORS AND ASSIGNS. This Agreement shall not be assigned by operation of
law or otherwise without the prior written consent of the other parties hereto.
This Agreement and the obligations set forth herein shall be binding upon each
party's respective heirs, beneficiaries, executors, representatives and
permitted assigns.
(c)AMENDMENT AND MODIFICATION. This Agreement may not be amended, altered,
supplemented or otherwise modified or terminated except upon the execution and
delivery of a written agreement executed by the parties hereto.
(d)NOTICES. All notices and other communications hereunder shall be in writing
and shall be deemed given upon (i) transmitter's confirmation of a receipt of a
facsimile transmission, (ii) confirmed delivery by a standard overnight carrier
or when delivered by hand or (iii) the expiration of five business days after
the day when mailed by certified or registered mail, postage prepaid, addressed
at the following addresses (or at such other address for a party as shall be
specified by like notice):
If to Parent, to:
Zitel Corporation
47211 Bayside Parkway
Fremont, California 94538
Attention: Jack H. King
Facsimile: (510) 440-8526
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue, Suite 220
Palo Alto, California 94301
Attention: Kenton J. King, Esq.
Facsimile: 650-470-4570
D-7
If to Shareholder, to:
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
with a copy to:
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
(e)SEVERABILITY. Any term or provision of this Agreement which is held to be
invalid, illegal or unenforceable in any respect in any jurisdiction shall, as
to that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
(f)SPECIFIC PERFORMANCE. Each of the parties hereto recognizes and acknowledges
a breach by it of any covenants or agreements contained in this Agreement will
cause the other party to sustain damages for which it would not have an
adequate remedy at law for money, damages, and therefore in the event of any
such breach the aggrieved party shall be entitled to the remedy of specified
performance of such covenants and agreements and injunctive and other equitable
relief in addition to any other remedy to which it may be entitled, at law or
in equity.
(g)NO WAIVER. The failure of any party hereto to exercise any right, power or
remedy provided under this Agreement or otherwise available in respect hereof
at law or in equity, or to insist upon compliance by any other party hereto
with its obligations hereunder, and any custom or practice of the parties at
variance with the terms hereof, will not constitute a waiver by such party of
its right to exercise any such or other right, power or remedy or to demand
such compliance.
(h)NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to confer upon
any person other than the parties hereto any rights or remedies hereunder.
(i)GOVERNING LAW. This Agreement shall be governed and construed in accordance
with the laws of the State of California, without giving effect to the
principles of conflict of law thereof.
(j)DESCRIPTIVE HEADING. The descriptive headings used herein are for reference
purposes only and will not affect in any way the meaning or interpretation of
this Agreement.
(k)EXPENSES. All costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such expenses.
D-8
(l)FURTHER ASSURANCES. From time to time, at any other party's request and
without further consideration, each party hereto shall execute and deliver such
additional documents and take all such further lawful action as may be
necessary or desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this
Agreement.
(m)COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original, but all of which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, Parent and Shareholder have caused this Agreement to be
duly executed as of the day and year first written above.
ZITEL CORPORATION
By:
----------------------------------
Name:
Title:
By:
----------------------------------
[Shareholder]****
- --------
**** In the event this Agreement covers shares held jointly or held
individually by related parties who will sign this together, each joint or
related party shall sign.
D-9
ANNEX E
FORM OF LOCK-UP LETTER
October 5, 1998
[MATRIDIGM SHAREHOLDER]
Millennium Holding Corp.
c/o Zitel Corporation
47211 Bayside Parkway
Fremont, California 94538
Dear Sirs:
The undersigned understands that Zitel Corporation, a California corporation
("Zitel") and Millennium Holding Corp., a Delaware corporation, on the date
hereof entered into that certain Agreement and Plan of Reorganization and
Merger by and among Zitel, Millennium Holding Corp., Zenith Acquisition Corp.,
Millennium Acquisition I Corp. and MatriDigm (the "Merger Agreement") pursuant
to which Zitel will acquire MatriDigm Corporation, a California corporation.
Under the Merger Agreement, the undersigned will receive shares of Holdco
Common Stock in exchange for shares of Company Common Stock held by the
undersigned immediately prior to the Effective Time. Capitalized terms used
but not otherwise defined herein shall have the respective meanings set forth
in the Merger Agreement.
To induce Zitel to enter into the Merger Agreement, during the period
commencing on the date hereof and ending (i) if the Merger is consummated
prior to January 29, 1999, on the second trading day following the public
announcement of the consolidated results of operations of Zitel and MatriDigm
for the fiscal quarter ended March 31, 1999, and (ii) if the Merger is
consummated after January 29, 1999, on the second trading day following the
public announcement of the consolidated results of operations of Zitel and
MatriDigm for the fiscal quarter ended June 30, 1999, the undersigned agrees
not to (x) offer, pledge, sell, contract to sell, sell any option or contract
to purchase, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any shares of Holdco Common
Stock or any securities convertible into or exercisable or exchangeable for
Holdco Common Stock (including, without limitation, shares of Holdco Common
Stock or securities convertible into or exercisable or exchangeable for Holdco
Common Stock which may be deemed to be beneficially owned by the undersigned
in accordance with the rules and regulations of the Securities and Exchange
Commission) or (y) enter into any swap or other arrangement that transfers all
or a portion of the economic consequences associated with the ownership of any
Holdco Common Stock (regardless of whether any of the transactions described
in clause (x) or (y) is to be settled by the delivery of Holdco Common Stock,
or such other securities, in cash or otherwise); provided, that during such
period the undersigned may make gifts of shares of Holdco Common Stock or
securities convertible into Holdco Common Stock upon the condition that the
donees agree to be bound by the foregoing restriction in the same manner as it
applies to the undersigned; and provided, further, that with respect to
securities convertible into or exercisable or
E-1
exchangeable for Holdco Common Stock, the undersigned may distribute such
securities to its partners or members, as the case may be, so long as the
recipients of such securities agree to be bound by the foregoing restriction in
the same manner as it applies to the undersigned; and provided, further, that
to the extent any of the provisions of any of the Lock-Up Letters, dated as of
October 5, 1998, from the signatories thereto (the "Lock-Up Signatories")
addressed to Holdco are amended, modified or waived by Holdco or Zitel and, in
connection therewith, any such shareholders are permitted to take any of the
actions with respect to the Holdco Common Stock held by it set forth in clauses
(x) and (y) above, the undersigned shall be permitted to take such actions as
and to the same extent, on a pro rata basis with all other Lock-Up Signatories,
with respect to the shares of Holdco Common Stock held by it [; and provided,
further, that during such period, the undersigned shall be entitled to sell
only that number of shares of Holdco Common Stock required to extinguish the
mortgage loan existing as of the date hereof on the undersigned's primary
residence, it being understood that such proceeds are to be used solely to
extinguish such mortgage loan and not for any other purpose whatsoever/1/].
The undersigned hereby represents and warrants that the undersigned has full
power and authority to enter into the agreement set forth herein, and that,
upon request, the undersigned will execute any additional documents necessary
or desirable in connection with the enforcement hereof. All authority herein
conferred or agreed to be conferred shall survive the death or incapacity of
the undersigned and any obligations of the undersigned shall be binding upon
the heirs, personal representatives, successors, and assigns of the
undersigned.
Very truly yours,
- -------------------------------------
(Name--Please Type)
(Address)
(Social Security or Taxpayer Identification No.)
- --------
/1/ Franklin Chiang letter only.
E-2
SCHEDULE I
Number of shares of capital stock of MatriDigm owned: ____________
Certificate Numbers: _____________________
_____________________
_____________________
Number of shares of Holdco Common Stock issuable upon exchange of such
securities:
E-3
ANNEX F-1
MatriDigm Corporation
4777 Hellyer Avenue
San Jose, California 95138
October 5, 1998
Ladies and Gentlemen:
I/1/ am a holder of shares of common stock, par value $0.01 per share ("Parent
Common Stock"), of Zitel Corporation, a California corporation ("Parent"). I am
aware that pursuant to the terms of the Agreement and Plan of Reorganization
and Merger, dated as of October 5, 1998 (the "Merger Agreement") by and among
Parent, Millennium Holding Corp., a Delaware corporation and a direct wholly-
owned subsidiary of Parent ("Holdco"), Zenith Acquisition Corp., a Delaware
corporation and a direct wholly-owned subsidiary of Holdco ("Zenith
Acquisition"), Millennium Acquisition I Corp., a Delaware corporation and a
direct wholly-owned subsidiary of Holdco ("Millennium Acquisition"), and
MatriDigm Corporation, a California corporation (the "Company"), pursuant to
which Zenith Acquisition will merge with and into Parent, with Parent
continuing as the surviving corporation (the "Zenith Merger"), and Millennium
Acquisition will merge with and into the Company, with the Company continuing
as the surviving corporation (the "Millennium Merger", and together with the
Zenith Merger, the "Mergers"), and each of the shares of Parent Common Stock
owned by me as of the Effective Time (as defined in the Merger Agreement) of
the Mergers shall be converted into shares of common stock, par value $0.01 per
share ("Holdco Common Stock"), of Holdco.
I have been advised that as of the date hereof, I may be deemed an "affiliate"
of the Company for purposes of Rule 145 ("Rule 145") promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), although nothing
contained herein should be construed as an admission of such fact.
If, in fact, I am deemed an "affiliate" under the Securities Act, my ability to
sell, assign or transfer Holdco Common Stock received by me in exchange for any
shares of Parent Common Stock pursuant to the Zenith Merger may be restricted
unless such transaction is registered under the Securities Act or an exemption
from such registration is available. I understand that such exemptions are
limited and I have obtained advice of counsel as to the provisions of this
letter agreement as well as the nature and conditions of such exemptions,
including information with respect to the applicability to the sale of such
securities of Rule 145(d) promulgated under the Securities Act, to the extent
applicable.
I have been informed and understand that the accuracy of my representations and
warranties and my compliance with the covenants set forth herein will be relied
upon by the Company, Parent, Holdco, their respective counsel, and shareholders
of the Company, Parent and Holdco.
- --------
/1/ To be conformed for institutional holders.
F-1-1
In connection with the above transactions, I represent and warrant to the
Company and agree that:
A.I have full power and authority to execute this Agreement, to make the
representations, warranties and covenants herein contained and to perform my
obligations hereunder.
B.I have been advised that the issuance of Holdco Common Stock to me pursuant
to the Zenith Merger will be registered with the SEC under the Securities Act
on a Registration Statement on Form S-4. I have also been advised, however,
that because I may be deemed to have been an "affiliate" of Parent at the time
the Zenith Merger was submitted for a vote of the shareholders of Parent, and
because any distribution by me of Holdco Common Stock has not been registered
under the Securities Act, I may not sell, transfer, exchange, pledge, or
otherwise dispose of, or make any offer or agreement relating to any of the
foregoing with respect to, any Restricted Securities, or any option, right or
other interest with respect to any Restricted Securities, unless (i) such
transaction is permitted pursuant to Rules 145(c) and 145(d) under the
Securities Act, (ii) counsel reasonably satisfactory to the Company shall have
advised the Company in a written opinion letter satisfactory to the Company and
the Company's legal counsel, and upon which the Company and its legal counsel
may rely, that no registration under the Securities Act would be required in
connection with the proposed sale, transfer or other disposition, (iii) a
registration statement under the Securities Act covering the Restricted
Securities proposed to be sold, transferred or otherwise disposed of,
describing the manner and terms of the proposed sale, transfer or other
disposition, and containing a current prospectus, shall have been file with the
SEC and made effective under the Securities Act, or (iv) an authorized
representative of the SEC shall have rendered written advice to me (sought by
me or counsel representing me, with a copy thereof and all other related
communications delivered to the Company) to the effect that the SEC would take
no action, or that the Staff of the SEC would not recommend that the SEC take
action, with respect to the proposed disposition if consummated.
C.I have no present plan or intent to dispose of the Holdco Common Stock
acquired by me pursuant to the Zenith Merger, or any securities that may be
paid as a dividend or otherwise distributed thereon or with respect thereto or
issued or delivered in exchange or substitution therefor (all such shares and
other securities of Holdco being herein sometimes collectively referred to as
"Restricted Securities") and I shall not formulate prior to the Effective Time
(as defined in the Merger Agreement) of the Zenith Merger any such plan or
intent to dispose of such Restricted Securities.
D.I will not make any sale, transfer or other disposition of Restricted
Securities in violation of the Securities Act or the rules and regulations
promulgated thereunder.
E.I understand that Holdco is under no obligation to register the sale,
transfer or other disposition of Restricted Securities by me or on my behalf
under the Securities Act or to take any other action necessary in order to make
compliance with an exemption from such registration available.
F.From and after the Effective Time (as defined in the Merger Agreement) of the
Mergers and for so long as is necessary in order to permit me to sell the
Restricted Securities held by and pursuant to Rule 145 and, to the extent
applicable, Rule 144 under the Securities Act, Holdco will use its best efforts
to file on a timely basis all reports required to be filed by it pursuant to
Section 13 of the Securities Exchange Act of 1934, as amended, referred to in
paragraph (c)(1) of Rule 144 under the
F-1-2
Securities Act. Holdco is under no obligation to register the sale, transfer or
other disposition of any Restricted Securities by me or on my behalf.
G.I understand that, in addition to the restrictions imposed under this
Agreement, the provisions of Rule 145 limit any public resale by me of
Restricted Securities and that the restrictive legends described below will be
placed upon the Restricted Securities.
H.I understand that stop transfer instructions will be given to the registrar
of the certificates for the shares of Holdco Common Stock and that there will
be placed on the certificates for the shares of Holdco Common Stock, or any
substitutions therefor, a legend stating in substance:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION (THE
ACQUISITION OF ZITEL CORPORATION) PURSUANT TO WHICH RULE 145 PROMULGATED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), APPLIES AND MAY BE SOLD OR
OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE LIMITATIONS OF SUCH RULE 145,
OR UPON RECEIPT BY MATRIDIGM CORPORATION OF AN OPINION OF COUNSEL ACCEPTABLE TO
IT THAT SOME OTHER EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE, OR
PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACT.
Holdco agrees to remove such legend to the extent that such shares evidenced by
such certificates may properly be sold by me pursuant to this Agreement.
I also understand that unless a sale or transfer is made in conformity with the
provisions of Rule 145, or pursuant to a registration statement, Holdco
reserves the right to put the following legend on the certificates issued to my
transferee:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933, APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE HOLDER
NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF
WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AND MAY NOT BE SOLD, PLEDGED
OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933.
I.I hereby agree that, for a period of one (1) year following the Effective
Time (as defined in the Merger Agreement) of the Mergers, I will obtain an
agreement similar to this Agreement from each transferee of the shares of
Holdco Common Stock sold or otherwise transferred by me, but only if such sale
or transfer is effected other than in a transaction involving a registered
public offering or as a sale pursuant to Rule 145.
It is understood and agreed that this Agreement will terminate and be of no
further force and effect and the legends set forth in Paragraph H above will be
removed by delivery of substitute certificates without such legends, and the
related transfer restrictions shall be lifted forthwith, when: (i) my shares of
Holdco Common Stock shall have been registered under the Securities Act for
sale, transfer, or other disposition by me or on my behalf, (ii) I am not at
the time an "affiliate" of Parent
F-1-3
and have held the shares of Holdco Common Stock for at least one (1) year (or
such other period as may be prescribed by the Securities Act and the rules and
regulations promulgated thereunder) and Holdco has filed with the SEC all of
the reports it is required to file under the Securities Exchange Act of 1934,
as amended, during the period from the Effective Time (as defined in the Merger
Agreement) of the Mergers to the date of termination of this Agreement, or
(iii) the Company shall have received a letter from the staff of the SEC, or an
opinion of counsel acceptable to the Company, to the effect that the stock
transfer restrictions and the legend are not required.
This Agreement may be executed in several counterparts, each of which shall
constitute one in the same instrument.
This Agreement shall be binding on my heirs, legal representatives, and
successors.
Very truly yours,
- -------------------------------------
Name***:
Title:
Accepted this 5th day of October, 1998
MATRIDIGM CORPORATION
By:
----------------------------------
Name:
Title:
- --------
*** In the event this undertaking covers shares held jointly or held
individually by related parties who will sign this together, each joint or
related party shall sign.
F-1-4
ANNEX F-2
Zitel Corporation
47211 Bayside Parkway
Fremont, California 94538
October 5, 1998
Ladies and Gentlemen:
I/1/ am a holder of shares of common stock, no par value ("Company Common
Stock"), of MatriDigm Corporation, a California corporation (the "Company"). I
am aware that pursuant to the terms of the Agreement and Plan of Reorganization
and Merger, dated as of October 5, 1998 (the "Merger Agreement") by and among
the Company, Zitel Corporation, a California corporation ("Parent"), Millennium
Holding Corp., a Delaware corporation and a direct wholly-owned subsidiary of
Parent ("Holdco"), Zenith Acquisition Corp., a Delaware corporation and a
direct wholly-owned subsidiary of Holdco ("Zenith Acquisition"), and Millennium
Acquisition I Corp., a Delaware corporation and a direct wholly-owned
subsidiary of Holdco ("Millennium Acquisition"), pursuant to which Millennium
Acquisition will merge with and into the Company, with the Company continuing
as the surviving corporation (the "Millennium Merger"), and Zenith Acquisition
will merge with and into Parent, with Parent continuing as the surviving
corporation (the "Zenith Merger", and together with the Millennium Merger, the
"Mergers"), and each of the shares of Company Common Stock owned by me as of
the Effective Time (as defined in the Merger Agreement) of the Mergers shall be
converted into shares of common stock, par value $0.01 per share ("Holdco
Common Stock"), of Holdco.
I have been advised that as of the date hereof, I may be deemed an "affiliate"
of the Company for purposes of Rule 145 ("Rule 145") promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), although nothing
contained herein should be construed as an admission of such fact.
If, in fact, I am deemed an "affiliate" under the Securities Act, my ability to
sell, assign or transfer Holdco Common Stock received by me in exchange for any
shares of Company Common Stock pursuant to the Millennium Merger may be
restricted unless such transaction is registered under the Securities Act or an
exemption from such registration is available. I understand that such
exemptions are limited and I have obtained advice of counsel as to the
provisions of this letter agreement as well as the nature and conditions of
such exemptions, including information with respect to the applicability to the
sale of such securities of Rule 145(d) promulgated under the Securities Act, to
the extent applicable.
I have been informed and understand that the accuracy of my representations and
warranties and my compliance with the covenants set forth herein will be relied
upon by the Company, Parent, Holdco, their respective counsel, and shareholders
of the Company, Parent and Holdco.
- --------
/1/ To be conformed for institutional holders.
F-2-1
In connection with the above transactions, I represent and warrant to Parent
and agree that:
A.I have full power and authority to execute this Agreement, to make the
representations, warranties and covenants herein contained and to perform my
obligations hereunder.
B.I have been advised that the issuance of Holdco Common Stock to me pursuant
to the Millennium Merger will be registered with the SEC under the Securities
Act on a Registration Statement on Form S-4. I have also been advised, however,
that because I may be deemed to have been an "affiliate" of the Company at the
time the Consent Solicitation (as defined in the Merger Agreement) with respect
to the Millennium Merger was initiated, and because any distribution by me of
Holdco Common Stock has not been registered under the Securities Act, I may not
sell, transfer, exchange, pledge, or otherwise dispose of, or make any offer or
agreement relating to any of the foregoing with respect to, any Restricted
Securities, or any option, right or other interest with respect to any
Restricted Securities, unless (i) such transaction is permitted pursuant to
Rules 145(c) and 145(d) under the Securities Act, (ii) counsel reasonably
satisfactory to Parent shall have advised Parent in a written opinion letter
satisfactory to Parent and Parent's legal counsel, and upon which Parent and
its legal counsel may rely, that no registration under the Securities Act would
be required in connection with the proposed sale, transfer or other
disposition, (iii) a registration statement under the Securities Act covering
the Restricted Securities proposed to be sold, transferred or otherwise
disposed of, describing the manner and terms of the proposed sale, transfer or
other disposition, and containing a current prospectus, shall have been file
with the SEC and made effective under the Securities Act, or (iv) an authorized
representative of the SEC shall have rendered written advice to me (sought by
me or counsel representing me, with a copy thereof and all other related
communications delivered to Parent) to the effect that the SEC would take no
action, or that the Staff of the SEC would not recommend that the SEC take
action, with respect to the proposed disposition if consummated.
C.I have no present plan or intent to dispose of the Holdco Common Stock
acquired by me pursuant to the Millennium Merger, or any securities that may be
paid as a dividend or otherwise distributed thereon or with respect thereto or
issued or delivered in exchange or substitution therefor (all such shares and
other securities of Holdco being herein sometimes collectively referred to as
"Restricted Securities") and I shall not formulate prior to the Effective Time
(as defined in the Merger Agreement) of the Millennium Merger any such plan or
intent to dispose of such Restricted Securities.
D.I will not make any sale, transfer or other disposition of Restricted
Securities in violation of the Securities Act or the rules and regulations
promulgated thereunder.
E.I understand that Holdco is under no obligation to register the sale,
transfer or other disposition of Restricted Securities by me or on my behalf
under the Securities Act or to take any other action necessary in order to make
compliance with an exemption from such registration available.
F.From and after the Effective Time (as defined in the Merger Agreement) of the
Mergers and for so long as is necessary in order to permit me to sell the
Restricted Securities held by and pursuant to Rule 145 and, to the extent
applicable, Rule 144 under the Securities Act, Holdco will use its best efforts
to file on a timely basis all reports required to be filed by it pursuant to
Section 13 of the
F-2-2
Securities Exchange Act of 1934, as amended, referred to in paragraph (c)(1) of
Rule 144 under the Securities Act. Holdco is under no obligation to register
the sale, transfer or other disposition of any Restricted Securities by me or
on my behalf.
G.I understand that, in addition to the restrictions imposed under this
Agreement, the provisions of Rule 145 limit any public resale by me of
Restricted Securities and that the restrictive legends described below will be
placed upon the Restricted Securities.
H.I understand that stop transfer instructions will be given to the registrar
of the certificates for the shares of Holdco Common Stock and that there will
be placed on the certificates for the shares of Holdco Common Stock, or any
substitutions therefor, a legend stating in substance:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION (THE
ACQUISITION OF MATRIDIGM CORPORATION) PURSUANT TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), APPLIES AND MAY BE
SOLD OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE LIMITATIONS OF SUCH
RULE 145, OR UPON RECEIPT BY ZITEL CORPORATION OF AN OPINION OF COUNSEL
ACCEPTABLE TO IT THAT SOME OTHER EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE, OR PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACT.
Holdco agrees to remove such legend to the extent that such shares evidenced by
such certificates may properly be sold by me pursuant to this Agreement.
I also understand that unless a sale or transfer is made in conformity with the
provisions of Rule 145, or pursuant to a registration statement, Holdco
reserves the right to put the following legend on the certificates issued to my
transferee:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933, APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE HOLDER
NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF
WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AND MAY NOT BE SOLD, PLEDGED
OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933.
I.I hereby agree that, for a period of one (1) year following the Effective
Time (as defined in the Merger Agreement) of the Mergers, I will obtain an
agreement similar to this Agreement from each transferee of the shares of
Holdco Common Stock sold or otherwise transferred by me, but only if such sale
or transfer is effected other than in a transaction involving a registered
public offering or as a sale pursuant to Rule 145.
It is understood and agreed that this Agreement will terminate and be of no
further force and effect and the legends set forth in Paragraph H above will be
removed by delivery of substitute certificates without such legends, and the
related transfer restrictions shall be lifted forthwith, when: (i) my shares of
Holdco Common Stock shall have been registered under the Securities Act for
sale,
F-2-3
transfer, or other disposition by me or on my behalf, (ii) I am not at the time
an "affiliate" of the Company and have held the shares of Holdco Common Stock
for at least one (1) year (or such other period as may be prescribed by the
Securities Act and the rules and regulations promulgated thereunder) and Holdco
has filed with the SEC all of the reports it is required to file under the
Securities Exchange Act of 1934, as amended, during the period from the
Effective Time (as defined in the Merger Agreement) of the Mergers to the date
of termination of this Agreement, or (iii) Parent shall have received a letter
from the staff of the SEC, or an opinion of counsel acceptable to Parent, to
the effect that the stock transfer restrictions and the legend are not
required.
This Agreement may be executed in several counterparts, each of which shall
constitute one in the same instrument.
This Agreement shall be binding on my heirs, legal representatives, and
successors.
Very truly yours,
- -------------------------------------
Name***:
Title:
Accepted this 5th day of October, 1998
ZITEL CORPORATION
By:
----------------------------------
Name:
Title:
- --------
*** In the event this undertaking covers shares held jointly or held
individually by related parties who will sign this together, each joint or
related party shall sign.
F-2-4
ANNEX G
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
(S) 1300. RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a corporation is
required for a reorganization under subdivisions (a) and (b) or subdivision (e)
or (f) of Section 1201, each shareholder of the corporation entitled to vote on
the transaction and each shareholder of a subsidiary corporation in a short-
form merger may, by complying with this chapter, require the corporation in
which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as
defined in subdivision (b). The fair market value shall be determined as of the
day before the first announcement of the terms of the proposed reorganization
or short-form merger, excluding any appreciation or depreciation in consequence
of the proposed action, but adjusted for any stock split, reverse stock split,
or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come within
all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder of
dissenting shares and includes a transferee of record.
G-1
(S) 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation have
a right under Section 1300, subject to compliance with paragraphs (3) and (4)
of subdivision (b) thereof, to require the corporation to purchase their shares
for cash, such corporation shall mail to each such shareholder a notice of the
approval of the reorganization by its outstanding shares (Section 152) within
10 days after the date of such approval, accompanied by a copy of Sections
1300, 1302, 1303, 1304 and this section, a statement of the price determined by
the corporation to represent the fair market value of the dissenting shares,
and a brief description of the procedure to be followed if the shareholder
desires to exercise the shareholder's right under such sections. The statement
of price constitutes an offer by the corporation to purchase at the price
stated any dissenting shares as defined in subdivision (b) of Section 1300,
unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase the
shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record by
the shareholder which the shareholder demands that the corporation purchase and
shall contain a statement of what such shareholder claims to be the fair market
value of those shares as of the day before the announcement of the proposed
reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
(S) 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
G-2
(S) 1303. AGREED PRICE--TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are dissenting
shares and agree upon the price of the shares, the dissenting shareholder is
entitled to the agreed price with interest thereon at the legal rate on
judgments from the date of the agreement. Any agreements fixing the fair market
value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market value
of dissenting shares shall be made within 30 days after the amount thereof has
been agreed or within 30 days after any statutory or contractual conditions to
the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
(S) 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined as
defendants in any such action and two or more such actions may be consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(S) 1305. APPRAISERS' REPORT--PAYMENT--COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which
any dissenting shareholder who is a party, or who has intervened, is entitled
to require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
G-3
(d) Any such judgment shall be payable forthwith with respect to uncertificated
securities and, with respect to certificated securities, only upon the
endorsement and delivery to the corporation of the certificates for the shares
described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of
Section 1301).
(S) 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(S) 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting shares
after the date of approval of the reorganization by the outstanding shares
(Section 152) and prior to payment for the shares by the corporation shall be
credited against the total amount to be paid by the corporation therefor.
(S) 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
(S) 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares
of another class in accordance with the articles.
G-4
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice
of the approval by the outstanding shares or notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
(S) 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the votes
of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
(S) 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
(S) 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is directly
or indirectly controlled by, or under common control with, another party to the
reorganization or short-form merger, subdivision (a) shall not apply to any
shareholder of such party who has not demanded payment of cash for such
shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days' prior notice to the corporation and upon a determination
by the court that clearly no other remedy will adequately protect the
complaining shareholder or the class of shareholders of which such shareholder
is a member.
G-5
(c) If one of the parties to a reorganization or short-form merger is directly
or indirectly controlled by, or under common control with, another party to the
reorganization or short-form merger, in any action to attack the validity of
the reorganization or short-form merger or to have the reorganization or short-
form merger set aside or rescinded, (1) a party to a reorganization or short-
form merger which controls another party to the reorganization or short-form
merger shall have the burden of proving that the transaction is just and
reasonable as to the shareholders of the controlled party, and (2) a person who
controls two or more parties to a reorganization shall have the burden of
proving that the transaction is just and reasonable as to the shareholders of
any party so controlled.
G-6
ANNEX H
[LETTERHEAD OF SALOMON SMITH BARNEY INC.]
October 5, 1998
The Board of Directors
Zitel Corporation
47211 Bayside Parkway
Fremont, California 94538
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of Zitel Corporation ("Zitel") of the
consideration to be received by such holders pursuant to the terms and subject
to the conditions set forth in the Agreement and Plan of Reorganization and
Merger, dated as of October 5, 1998 (the "Agreement"), by and among Zitel,
Millenium Holding Corp., a wholly owned subsidiary of Zitel ("Holdco"), Zenith
Acquisition Corp., a wholly owned subsidiary of Holdco ("Zitel Acquisition"),
Millenium Acquisition I Corp., a wholly owned subsidiary of Holdco ("MatriDigm
Acquisition"), and MatriDigm Corporation ("MatriDigm"). As more fully
described in the Agreement, Zitel Acquisition will be merged with and into
Zitel (the "Zitel Merger") and MatriDigm Acquisition will be merged with and
into MatriDigm (the "MatriDigm Merger" and, together with the Zitel Merger,
the "Mergers") and (i) each outstanding share of the common stock, par value
$0.01 per share, of Zitel (the "Zitel Common Stock") will be converted into
the right to receive one share (the "Zitel Exchange Ratio") of the common
stock, par value $0.01 per share, of Holdco (the "Holdco Common Stock") and
(ii) each outstanding share of the common stock, no par value, of MatriDigm
(the "MatriDigm Common Stock") will be converted into the right to receive
0.6504 of a share of Holdco Common Stock, subject to adjustment as specified
in the Agreement.
In arriving at our opinion, we reviewed the Agreement and held discussions
with certain senior officers, directors and other representatives and advisors
of Zitel and certain senior officers and other representatives and advisors of
MatriDigm concerning the businesses, operations and prospects of Zitel and
MatriDigm. We examined certain publicly available business and financial
information relating to Zitel and certain available business and financial
information relating to MatriDigm as well as certain financial forecasts and
other information and data for Zitel and MatriDigm which were provided to or
otherwise discussed with us by the respective managements of Zitel and
MatriDigm, including information relating to certain strategic implications
and operational benefits anticipated to result from the Merger. We reviewed
the financial terms of the Mergers as set forth in the Agreement in relation
to, among other things: current and historical market prices and trading
volumes of Zitel Common Stock; the historical and projected earnings and other
operating data of Zitel and MatriDigm; and the capitalization and financial
condition of Zitel and MatriDigm. We considered, to the extent publicly
available, the financial terms of certain other transactions recently effected
which we considered relevant in evaluating the Mergers and analyzed certain
financial, stock market and other publicly available information relating to
the businesses of other companies whose
H-1
The Board of Directors
Zitel Corporation
October 5, 1998
Page 2
operations we considered relevant in evaluating those of Zitel and MatriDigm.
We also evaluated the potential pro forma financial impact of the Mergers on
Holdco. In addition to the foregoing, we conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed
by or discussed with us. With respect to financial forecasts and other
information and data provided to or otherwise reviewed by or discussed with us,
we have been advised by the managements of Zitel and MatriDigm that such
forecasts and other information and data were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of Zitel and MatriDigm as to the future financial performance of
Zitel and MatriDigm and the strategic implications and operational benefits
anticipated to result from the Merger. We have assumed, with your consent, that
the Mergers will be treated as non-recognition transfers for federal income tax
purposes. Our opinion, as set forth herein, relates to the relative values of
Zitel and MatriDigm. We are not expressing any opinion as to what the value of
the Holdco Common Stock actually will be when issued pursuant to the Mergers or
the price at which the Holdco Common Stock will trade or otherwise be
transferable subsequent to the Mergers. We have not made or been provided with
an independent evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of Zitel or MatriDigm nor have we made any physical inspection of
the properties or assets of Zitel or MatriDigm. In connection with our
engagement, we were not requested to, and we did not, solicit third party
indications of interest in the possible acquisition of Zitel, nor were we asked
to consider, and our opinion does not address, the relative benefits of the
Mergers as compared to any alternative business strategies that might exist for
Zitel or the effect of any other transaction in which Zitel might engage. Our
opinion is necessarily based upon information available to us, and financial,
stock market and other conditions and circumstances existing and disclosed to
us, as of the date hereof.
Salomon Smith Barney has acted as financial advisor to Zitel in connection with
the proposed Mergers and will receive a fee for such services, a significant
portion of which is contingent upon the consummation of the Mergers, a portion
of which will be payable in securities of Holdco. We also will receive a fee
upon the delivery of this opinion. In the ordinary course of our business, we
and our affiliates may actively trade or hold the securities of Zitel for our
own account or for the account of our customers and, accordingly, may at any
time hold a long or short position in such securities. In addition, we and our
affiliates (including Travelers Group Inc. and its affiliates) may maintain
relationships with Zitel, MatriDigm and their respective affiliates.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Zitel in its evaluation of the
proposed Mergers, and our opinion is not intended to be and does not constitute
a recommendation to any stockholder as to how such stockholder should vote
H-2
The Board of Directors
Zitel Corporation
October 5, 1998
Page 3
on any matter relating to the proposed Mergers. Our opinion may not be
published or otherwise used or referred to, nor shall any public reference to
Salomon Smith Barney be made, without our prior written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Zitel Exchange Ratio is fair, from a
financial point of view, to the holders of Zitel Common Stock.
Very truly yours,
SALOMON SMITH BARNEY INC.
H-3
ANNEX I
[LETTERHEAD OF ROBERT E. LABLANC ASSOCIATES, INC.]
October 5, 1998
The Board of Directors
MatriDigm Corporation
4777 Hellyer Avenue
San Jose, California 95138
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of common stock and preferred stock of MatriDigm
Corporation ("MatriDigm") of the consideration to be received by such holders
pursuant to the terms and subject to the conditions set forth in the Agreement
and Plan of Reorganization and Merger, dated as of October 5, 1998 (the
"Agreement"), by and among MatriDigm, Millenium Holding Corp., a wholly owned
subsidiary of Zitel Corporation ("Holdco"), Millennium Acquisition I Corp., a
wholly owned subsidiary of Holdco ("MatriDigm Acquisition"), Zenith Acquisition
Corp., a wholly owned subsidiary of Holdco ("Zitel Acquisition"), and Zitel
Corporation ("Zitel"). As more fully described in the Agreement, MatriDigm
Acquisition will be merged with and into MatriDigm (the "MatriDigm Merger") and
Zitel Acquisition will be merged with and into Zitel (the "Zitel Merger" and,
together with the MatriDigm Merger, the "Mergers"). Under the Merger Agreement,
all shares of preferred stock of MatriDigm will be converted to shares of
common stock of MatriDigm immediately prior to the Effective Time of the
Mergers, and (i) each outstanding share of the common stock, no par value, of
MatriDigm (the "MatriDigm Common Stock") will be converted into the right to
receive 0.6504 of a share (the "MatriDigm Exchange Ratio") of the common stock,
par value $0.01 per share, of Holdco (the "Holdco Common Stock") and (ii) each
outstanding share of the common stock, par value $0.01 per share, of Zitel (the
"Zitel Common Stock") will be converted into the right to receive one share of
Holdco Common Stock, subject to adjustment as specified in the Agreement.
In arriving at our opinion, we reviewed the Agreement and held discussions with
certain senior officers, directors and advisors of MatriDigm concerning the
businesses, operations and prospects of MatriDigm. We examined certain publicly
available business and financial information relating to MatriDigm and certain
available business and financial information relating to Zitel as well as
certain financial forecasts and other information and data for MatriDigm which
were provided to or otherwise discussed with us by the management of MatriDigm,
including information relating to certain strategic implications and
operational benefits anticipated to result from the Mergers. We reviewed the
financial terms of the Mergers as set forth in the Agreement in relation to,
among other things: current and historical market prices and trading volumes of
Zitel Common Stock; the historical and projected earnings and other operating
data of MatriDigm and publicly available projections and operating data of
Zitel; and the capitalization and financial condition of MatriDigm and Zitel.
We considered, to the extent publicly available, the financial terms of certain
other transactions which we considered relevant in evaluating the Mergers and
analyzed certain financial,
stock market and other publicly available information relating to the
businesses of other companies whose operations we considered relevant in
evaluating those of MatriDigm and Zitel. We also evaluated the potential pro
forma financial impact of the Mergers on Holdco. In addition to the foregoing,
we conducted such other analyses and examinations and considered such other
financial, economic and market criteria as we deemed appropriate in arriving at
our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed
by or discussed with us. With respect to financial forecasts and other
information and data provided to or otherwise reviewed by or discussed with us,
we have been advised by the managements of MatriDigm that such forecasts and
other information and data were reasonably prepared on bases reflecting the
best currently available estimates and judgments of the managements of
MatriDigm and Zitel as to the future financial performance of MatriDigm and
Zitel and the strategic implications and operational benefits anticipated to
result from the Merger. We have assumed, with your consent, that the Mergers
will be treated as non-recognition transfers for federal income tax purposes.
Our opinion, as set forth herein, relates to the relative values of MatriDigm
and Zitel. We are not expressing any opinion as to what the value of the Holdco
Common Stock actually will be when issued pursuant to the Mergers or the price
at which the Holdco Common Stock will trade or otherwise be transferable
subsequent to the Mergers. We have not made or been provided with an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of MatriDigm or Zitel nor have we made any physical inspection of
the properties or assets of Zitel. In connection with our engagement, we were
not requested to, and we did not, solicit third party indications of interest
in the possible acquisition of MatriDigm, nor were we asked to consider, and
our opinion does not address, the relative benefits of the Mergers as compared
to any alternative business strategies that might exist for MatriDigm or the
effect of any other transaction in which MatriDigm might engage. Our opinion is
necessarily based upon information available to us, and financial, stock market
and other conditions and circumstances existing and disclosed to us, as of the
date hereof.
Robert E. LaBlanc Associates, Inc. has acted as financial advisor to MatriDigm
in connection with the proposed Mergers and will receive a fee for such
services.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of MatriDigm in its evaluation of the
proposed Mergers, and our opinion is not intended to be and does not constitute
a recommendation to any stockholder as to how such stockholder should vote on
any matter relating to the proposed Mergers. Our opinion may not be published
or otherwise used or referred to, nor shall any public reference to Robert E.
LaBlanc Associates, Inc. be made, without our prior written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the MatriDigm Exchange Ratio is fair, from
a financial point of view, to the holders of MatriDigm Common Stock and
MatriDigm Preferred Stock.
Very truly yours,
ROBERT E. LABLANC ASSOCIATES, INC.
I-2
ANNEX J-1
MILLENIUM HOLDING CORP.
1990 STOCK OPTION PLAN
(FORMERLY THE ZITEL CORPORATION 1990 STOCK OPTION PLAN)
Adopted by the Board of Directors September 27, 1990
Effective October 1, 1990
Approved by the Shareholders January 25, 1991
Amended by the Board of Directors October 31, 1991
Approved by the Shareholders January 30, 1992
Amended by the Board of Directors September 21, 1994
Approved by the Shareholders January , 1995
Amended by the Board of Directors October , 1998
1. PURPOSE.
(a)The purpose of the Plan is to provide a means by which selected key
employees, including directors of, sales representatives for, and consultants
to Millenium Holding Corp., a Delaware corporation (the "Company"), and its
Affiliates, as defined in subparagraph 1(b), may be given an opportunity to
purchase stock of the Company.
(b)The word "Affiliate" as used in the Plan means any parent corporation or
subsidiary corporation of the Company, as those terms are defined in Sections
425(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
from time to time (the "Code").
(c)The Company, by means of the Plan, seeks to retain the services of persons
now employed by or having key relationships with the Company, to secure and
retain the services of persons capable of filling such positions, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
(d)The Company intends that the options issued under the Plan shall, in the
discretion of the Board of Directors of the Company (the "Board") or any
committee to which responsibility for administration of the Plan has been
delegated pursuant to subparagraph 2(c), be either incentive stock options as
that term is used in Section 422A of the Code ("Incentive Stock Options"), or
options which do not qualify as incentive stock options ("Supplemental Stock
Options"). All options shall be separately designated Incentive Stock Options
or Supplemental Stock Options at the time of grant, and in such form as issued
pursuant to paragraph 5, and a separate certificate or certificates shall be
issued for shares purchased on exercise of each type of option. An option
designated as a Supplemental Stock Option shall not be treated as an Incentive
Stock Option.
2. ADMINISTRATION.
(a)The Plan shall be administered by the Board unless and until the Board
delegates administration to a committee, as provided in subparagraph 2(c);
provided, however, that if and to the extent required in order to comply with
the disinterested administration requirements of Rule 16b-3, as amended from
time to time, promulgated under the Securities Exchange Act of 1934, as amended
J-1-1
(the "Exchange Act") or any successor rule ("Rule 16b-3"), or to preserve the
deductibility under Section 162(m) of the Code ("Section 162(m)") of
compensation arising with respect to options, the Plan shall be administered by
a committee as provided in subparagraph 2(c). Such requirements of Rule 16b-3
are hereinafter referred to as the "Disinterested Administration Requirements."
Except to the extent precluded by the Disinterested Administration
Requirements, whether or not the Board has delegated administration, the Board
shall have the final power to determine all questions of policy and expediency
that may arise in the administration of the Plan.
(b)The Board (or the Committee, as defined below) shall have the power, subject
to, and within the limitations of, the express provisions of the Plan:
(i)To determine from time to time which of the persons eligible under the
Plan shall be granted options; when and how the option shall be granted;
whether the option will be an Incentive Stock Option or a Supplemental
Stock Option; the provisions of each option granted (which need not be
identical), including the time or times during the term of each option
within which all or portions of such option may be exercised; and the
number of shares for which an option shall be granted to each such person.
(ii)To construe and interpret the Plan and options granted under it, and to
establish, amend and revoke rules and regulations for its administration
and otherwise to make decisions concerning the Plan. The Board, in the
exercise of this power, may correct any defect, omission or inconsistency
in the Plan or in any option agreement, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.
(iii)To amend the Plan as provided in paragraph 10.
(iv)Generally, to exercise such powers and to perform such acts as the
Board (or the Committee, as defined below) deems necessary or expedient to
promote the best interests of the Company.
(c)The Board may, and under the circumstances set forth in subparagraph 2(a)
shall, delegate administration of the Plan to a committee composed of not fewer
than three (3) members or such greater or lesser number as may be required to
comply with the Disinterested Administration Requirements (the "Committee"). To
the extent required to comply with the Disinterested Administration
Requirements, the members of such Committee shall also be members of the Board
and shall be disinterested persons, as defined by the provisions of
subparagraph 2(d). If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board, subject, however, to such resolutions, not
inconsistent with the provisions of the Plan and the Disinterested
Administration Requirements, as may be adopted from time to time by the Board.
Unless precluded by the Disinterested Administration Requirements, the Board
may (i) abolish the Committee at any time and revest in the Board the
administration of the Plan, or (ii) expressly determine that the requirement
that the Committee be composed of three (3) members be waived and may delegate
administration of the Plan to any person or persons and the term "Committee"
shall apply to any person or persons to whom such authority has been delegated.
(d)The term "disinterested person," as used in this Plan, shall mean an
administrator of the Plan, whether a member of the Board or of any Committee to
which responsibility for administration of
J-1-2
the Plan has been delegated pursuant to subparagraph 2(c), who is a
"nonemployee director" within the meaning of Rule 16b-3 or otherwise in
accordance with the rules, regulations or interpretations of the Securities and
Exchange Commission and an "outside director" within the meaning of
Section 162(m).
3. SHARES SUBJECT TO THE PLAN.
(a)Subject to the provisions of paragraph 9 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to options granted under
the Plan shall not exceed in the aggregate three million five hundred twenty
five thousand (3,525,000) shares of the Company's common stock; provided,
however, that such aggregate number of shares shall be reduced to reflect the
number of shares of the Company's common stock which has been sold under, or
may be sold pursuant to options granted under, the Company's 1982 Incentive
Stock Option Plan or the Company's 1984 Supplemental Stock Option Plan to the
same extent as if such sales had been made or options granted pursuant to this
Plan. If any option granted under the Plan shall for any reason expire or
otherwise terminate or be cancelled without having been exercised in full, the
stock not purchased under such option shall again become available for the
Plan.
(b)The stock subject to the Plan may be unissued shares or reacquired shares,
bought on the market or otherwise.
(c)An Incentive Stock Option may be granted to an eligible person under the
Plan only if the aggregate fair market value (determined at the time the option
is granted) of the stock with respect to which incentive stock options (as
defined in the Code) granted after 1986 are exercisable for the first time by
such optionee during any calendar year under all incentive stock option plans
of the Company and its Affiliates does not exceed one hundred thousand dollars
($100,000). Should it be determined that an option granted under the Plan
exceeds such maximum for any reason other than the failure of a good faith
attempt to value the stock subject to the option, such option shall be
considered a Supplemental Stock Option to the extent, but only to the extent,
of such excess; provided, however, that should it be determined that an entire
option or any portion thereof does not qualify for treatment as an incentive
stock option by reason of exceeding such maximum, such option or the applicable
portion shall be considered a Supplemental Stock Option.
(d)In no event shall an employee be granted during any calendar year an option
or options to acquire more than 1,000,000 shares of stock.
4. ELIGIBILITY.
(a)Incentive Stock Options may be granted only to employees (including
officers) of the Company or its Affiliates. A director of the Company shall not
be eligible to receive Incentive Stock Options unless such director is also an
employee (including an officer) of the Company or any Affiliate. Supplemental
Stock Options may be granted only to key employees (including officers) of,
directors of, sales representatives for, or consultants to the Company or its
Affiliates. A director of the Company shall not be eligible for a Supplemental
Stock Option unless such director is also an employee (including an officer)
of, sales representative for, or consultant to the Company or any Affiliate.
J-1-3
(b)A director shall in no event be eligible for the benefits of the Plan unless
and until such director is expressly declared eligible to participate in the
Plan by action of the Board or the Committee, and only if, at any time
discretion is exercised by the Board in the selection of a director as a person
to whom options may be granted, or in the determination of the number of shares
which may be covered by options granted to a director, the Disinterested
Administration Requirements are satisfied and the Plan otherwise complies with
the requirements of Rule 16b-3. The Board shall otherwise comply with the
requirements of Rule 16b-3.
(c)No person shall be eligible for the grant of an Incentive Stock Option under
the Plan if, at the time of grant, such person owns (or is deemed to own
pursuant to Section 425(d) of the Code) stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or of any of its Affiliates unless the exercise price of such option is at
least one hundred ten percent (110%) of the fair market value of such stock at
the date of grant and the term of the option does not exceed five (5) years
from the date of grant.
5. OPTION PROVISIONS.
Each option shall be in such form and shall contain such terms and conditions
as the Board or the Committee shall deem appropriate; provided, however, that
the terms of any outstanding option assumed in connection with a corporate
merger or similar transaction shall, unless otherwise specified in the document
evidencing such transaction, continue unchanged. The provisions of separate
options need not be identical, but each option shall include (through
incorporation of provisions hereof by reference in the option or otherwise) the
substance of each of the following provisions:
(a)The term of any option shall not be greater than ten (10) years from the
date it was granted.
(b)The exercise price of each Incentive Stock Option shall be not less than one
hundred percent (100%) of the fair market value of the stock subject to the
option on the date the option is granted. The exercise price of each
Supplemental Stock Option shall be not less than eighty-five percent (85%) of
the fair market value of the stock subject to the option on the date the option
is granted.
(c)The purchase price of stock acquired pursuant to an option shall be paid, to
the extent permitted by applicable statutes and regulations, either (i) in cash
at the time the option is exercised, or (ii) at the discretion of the Board or
the Committee, either at the time of the grant or exercise of the option, (A)
by delivery to the Company of other common stock of the Company, (B) according
to a deferred payment or other arrangement (which may include, without limiting
the generality of the foregoing, the use of other common stock of the Company)
with the person to whom the option is granted or to whom the option is
transferred pursuant to subparagraph 5(d), or (C) in any other form of legal
consideration that may be acceptable to the Board or the Committee.
In the case of any deferred payment arrangement, interest shall be payable at
least annually and shall be charged at the minimum rate of interest necessary
to avoid the treatment as interest, under any applicable provisions of the
Code, of any amounts other than amounts stated to be interest under the
deferred payment arrangement.
(d)An option shall not be transferable except by will or by the laws of descent
and distribution, and shall be exercisable during the lifetime of the person to
whom the option is granted only by such person.
J-1-4
(e)The total number of shares of stock subject to an option may, but need not,
be allotted in periodic installments (which may, but need not, be equal). From
time to time during each of such installment periods, the option may become
exercisable ("vest") with respect to some or all of the shares allotted to that
period, and may be exercised with respect to some or all of the shares allotted
to such period and/or any prior period as to which the option was not fully
exercised. During the remainder of the term of the option (if its term extends
beyond the end of the installment periods), the option may be exercised from
time to time with respect to any shares then remaining subject to the option.
The provisions of this subparagraph 5(e) are subject to any option provisions
governing the minimum number of shares as to which an option may be exercised.
(f)The Company may require any optionee, or any person to whom an option is
transferred under subparagraph 5(d), as a condition of exercising any such
option, (1) to give written assurances satisfactory to the Company as to the
optionee's knowledge and experience in financial and business matters and/or to
employ a purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters, and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the option; and (2) to give
written assurances satisfactory to the Company stating that such person is
acquiring the stock subject to the option for such person's own account and not
with any present intention of selling or otherwise distributing the stock.
These requirements, and any assurances given pursuant to such requirements,
shall be inoperative if (i) the issuance of the shares upon the exercise of the
option has been registered under a then currently effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
or (ii) as to any particular requirement, a determination is made by counsel
for the Company that such requirement need not be met in the circumstances
under the then applicable securities laws.
(g)An option shall terminate three (3) months after termination of the
optionee's employment or relationship as a consultant, sales representative or
director with the Company or an Affiliate, unless (i) such termination is due
to such person's permanent and total disability, within the meaning of Section
422A(c)(7) of the Code, in which case the option may, but need not, provide
that it may be exercised at any time within one (1) year following such
termination of employment or relationship as a consultant, sales representative
or director; or (ii) the optionee dies while in the employ of or while serving
as a consultant, sales representative or director to the Company or an
Affiliate, or within not more than three (3) months after termination of such
relationship, in which case the option may, but need not, provide that it may
be exercised at any time within eighteen (18) months following the death of the
optionee by the person or persons to whom the optionee's rights under such
option pass by will or by the laws of descent and distribution; or (iii) the
option by its terms specifies either (a) that it shall terminate sooner than
three (3) months after termination of the optionee's employment or relationship
as a consultant, sales representative or director, or (b) that it may be
exercised more than three (3) months after termination of such relationship
with the Company or an Affiliate. This subparagraph 5(g) shall not be construed
to extend the term of any option or to permit anyone to exercise the option
after expiration of its term, nor shall it be construed to increase the number
of shares as to which any option is exercisable from the amount exercisable on
the date of termination of the optionee's employment or relationship as a
consultant, sales representative or director.
J-1-5
(h)The option may, but need not, include a provision whereby the optionee may
elect at any time during the term of his or her employment or relationship as a
consultant, sales representative or director with the Company or any Affiliate
to exercise the option as to any part or all of the shares subject to the
option prior to the stated vesting date of the option or of any installment or
installments specified in the option. Any shares so purchased from any unvested
installment or option may be subject to a repurchase right in favor of the
Company or to any other restriction the Board or the Committee determines to be
appropriate.
(i)To the extent provided by the terms of an option, the optionee may satisfy
any federal, state or local tax withholding obligation relating to the exercise
of such option by any of the following means or by a combination of such means:
(1) tendering a cash payment; (2) authorizing the Company to withhold from the
shares of the common stock otherwise issuable to the participant as a result of
the exercise of the stock option a number of shares having a fair market value
less than or equal to the amount of the withholding tax obligation; or (3)
delivering to the Company owned and unencumbered shares of the common stock
having a fair market value less than or equal to the amount of the withholding
tax obligation.
6. COVENANTS OF THE COMPANY.
(a)During the terms of the options granted under the Plan, the Company shall
keep available at all times the number of shares of stock required to satisfy
such options.
(b)The Company shall seek to obtain from each regulatory commission or agency
having jurisdiction over the Plan such authority as may be required to issue
and sell shares of stock upon exercise of the options granted under the Plan;
provided, however, that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any option granted under the
Plan or any stock issued or issuable pursuant to any such option.
If, after reasonable efforts, the Company is unable to obtain from any such
regulatory commission or agency the authority which counsel for the Company
deems necessary for the lawful issuance and sale of stock under the Plan, the
Company shall be relieved from any liability for failure to issue and sell
stock upon exercise of such options unless and until such authority is
obtained.
7. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the Plan
shall constitute general funds of the Company.
8. MISCELLANEOUS.
(a)The Board or the Committee shall have the power to accelerate the time at
which an option may first be exercised or the time during which an option or
any part thereof will vest pursuant to subparagraph 5(e), notwithstanding the
provisions in the option stating the time at which it may first be exercised or
the time during which it will vest; provided that no acceleration of options
held by officers or directors of the Company and granted less than six months
prior to the date of acceleration shall be permitted if such acceleration would
cause the Plan to fail to qualify for the exemption provided by Rule 16b-3.
J-1-6
(b)Neither an optionee nor any person to whom an option is transferred under
subparagraph 5(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares subject to such options unless
and until such person has satisfied all requirements for exercise of the option
pursuant to its terms.
(c)Throughout the term of any option granted pursuant to the Plan, the Company
shall make available to the holder of such option, not later than one hundred
twenty (120) days after the close of each of the Company's fiscal years during
the option term, upon request, such financial and other information regarding
the Company as comprises the annual report to the shareholders of the Company
provided for in the bylaws of the Company.
(d)Nothing in the Plan or any instrument executed or option granted pursuant
thereto shall confer upon any eligible employee or optionee any right to
continue in the employ of the Company or any Affiliate (or to continue acting
as a consultant, sales representative or director) or shall affect the right of
the Company or any Affiliates to terminate the employment or consulting or
sales representative relationship or directorship of any eligible employee or
optionee with or without cause. In the event that an optionee is permitted or
otherwise entitled to take a leave of absence, the Company shall have the
unilateral right to (i) determine whether such leave of absence will be treated
as a termination of employment for purposes of paragraph 5(g) hereof and
corresponding provisions of any outstanding options, and (ii) suspend or
otherwise delay the time or times at which the shares subject to the option
would otherwise vest.
9. ADJUSTMENTS UPON CHANGES IN STOCK.
(a)If any change is made in the stock subject to the Plan, or subject to any
option granted under the Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or otherwise), the Plan and outstanding options will be
appropriately adjusted in the class(es) and maximum number of shares subject to
the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding options.
(b)In the event of: (1) a dissolution or liquidation of the Company; (2) a
merger or consolidation in which the Company is not the surviving corporation;
or (3) a reverse merger in which the Company is the surviving corporation but
the shares of the Company's common stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in
the form of securities, cash or otherwise then to the extent permitted by
applicable law, either (i) any surviving corporation shall assume any options
outstanding under the Plan or shall substitute similar options for those
outstanding under the Plan, or (ii) at the discretion of the Board or the
Committee, (A) such options shall continue in full force and effect, or (B) the
time during which such options may be exercised shall be accelerated and the
options terminated if not exercised prior to such event.
(c)Neither an optionee nor any person to whom an option is transferred under
subparagraph 5(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares subject to such option unless
and until such person has satisfied all requirements for exercise of the option
pursuant to its terms.
J-1-7
(d)Throughout the term of any option granted pursuant to the Plan, the Company
shall make available to the holder of such option, not later than one hundred
twenty (120) days after the close of each of the Company's fiscal years during
the option term, upon request, such financial and other information regarding
the Company as comprises the annual report to the shareholders of the Company
provided for in the bylaws of the Company.
(e)Nothing in the Plan or any instrument executed or option granted pursuant
thereto shall confer upon any eligible employee or optionee any right to
continue in the employ of the Company or any Affiliate (or to continue acting
as a consultant, sales representative or director) or shall affect the right of
the Company or any Affiliate to terminate the employment or consulting or sales
representative relationship or directorship of any eligible employee or
optionee with or without cause. In the event that an optionee is permitted or
otherwise entitled to take a leave of absence, the Company shall have the
unilateral right to (i) determine whether such leave of absence will be treated
as a termination of employment for purposes of paragraph 5(g) hereof and
corresponding provisions of any outstanding options, and (ii) suspend or
otherwise delay the time or times at which the shares subject to the option
would otherwise vest.
10. AMENDMENT OF THE PLAN.
(a)The Board at any time, and from time to time, may amend the Plan. However,
except as provided in paragraph 9 relating to adjustments upon changes in
stock, no amendment shall be effective unless approved by the shareholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(i)Increase the number of shares reserved for options under the Plan;
(ii)Modify the requirements as to eligibility for participation in the Plan
(to the extent such modification requires shareholder approval in order for
the Plan to satisfy the requirements of Section 422A(b) of the Code or to
comply with the requirements of Sections 162(m) or any stock exchange
listing requirements or other applicable law; or
(iii)Modify the Plan in any other way if such modification requires
shareholder approval in order for the Plan to satisfy the requirements of
Section 422A(b) of the Code or to comply with the requirements of Sections
162(m) or any stock exchange listing requirements or other applicable law.
(b)It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide optionees with the
maximum benefits provided or to be provided under the provisions of the Code
and the regulations promulgated thereunder relating to employee incentive stock
options and/or to bring the Plan and/or incentive stock options granted under
it into compliance therewith.
(c)Rights and obligations under any option granted before amendment of the Plan
shall not be altered or impaired by any amendment of the Plan unless (i) the
Company requests the consent of the person to whom the option was granted, and
(ii) such person consents in writing.
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11. TERMINATION OR SUSPENSION OF THE PLAN.
(a)The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate ten (10) years from the date the Plan is
adopted by the Board or approved by the shareholders of the Company, whichever
is earlier. No options may be granted under the Plan while the Plan is
suspended or after it is terminated.
(b)Rights and obligations under any option granted while the Plan is in effect
shall not be altered or impaired by suspension or termination of the Plan,
except with the consent of the person to whom the option was granted.
12. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no options
granted under the Plan shall be exercised unless and until the Plan has been
approved by the shareholders of the Company, and, if required, an appropriate
permit has been issued by the Commissioner of Corporations of the State of
California.
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ANNEX J-2
MILLENIUM HOLDING CORP.
EMPLOYEE STOCK PURCHASE PLAN
(FORMERLY THE ZITEL CORPORATION EMPLOYEE STOCK PURCHASE PLAN)
Adopted January 18, 1984
Approved by Shareholders February 17, 1984
Amended by Board of Directors November 18, 1987
Approved by Shareholders January 28, 1988
Amended by Board of Directors September 26, 1989
Approved by Shareholders January 25, 1990
Amended by Board of Directors October 31, 1991
Approved by Shareholders January 30, 1992
Amended by Board of Directors October 29, 1993
Amended by the Board of Directors on September 21, 1994
Approved by Shareholders January , 1995
Amended by the Board of Directors on , 1998
1. PURPOSE.
(a)The purpose of the Plan is to provide a means by which employees of
Millenium Holding Corp., a Delaware corporation (the "Company"), Zitel
Corporation, MatriDigm Corporation and any other Affiliates, as defined in
subparagraph 1(b), which are designated as provided in subparagraph 2(b), may
be given an opportunity to purchase stock of the Company.
(b)The word "Affiliate" as used in the Plan means any parent corporation or
subsidiary corporation of the Company, as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
(the "Code").
(c)The Company, by means of the Plan, seeks to retain the services of its
employees, to secure and retain the services of new employees, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company by providing eligible employees with an opportunity to participate as
shareholders in the Company's future growth.
(d)The Company intends that the rights to purchase stock of the Company granted
under the Plan be considered options issued under an "employee stock purchase
plan" as that term is defined in Section 423(b) of the Code.
2. ADMINISTRATION.
(a)The Plan shall be administered by the Board of Directors (the "Board") of
the Company unless and until the Board delegates administration to a committee,
as provided in subparagraph 2(c). Whether or not the Board has delegated
administration, the Board shall have the final power to determine all questions
of policy and expediency that may arise in the administration of the Plan.
J-2-1
(b)The Board shall have the power, subject to, and within the limitations of,
the express provisions of the Plan:
(i)To determine how rights to purchase stock of the Company shall be
granted and the provisions of each offering of such rights (which need not
be identical) consistent with the provisions of this Plan.
(ii)To designate from time to time which Affiliates of the Company shall be
eligible to participate in the Plan.
(iii)To construe and interpret the Plan and rights granted under it, and to
establish, amend and revoke rules and regulations for its administration.
The Board, in the exercise of this power, may correct any defect, omission
or inconsistency in the Plan, in a manner and to the extent it shall deem
necessary or expedient to make the Plan fully effective.
(iv)To amend the Plan as provided in paragraph 13.
(v)Generally, to exercise such powers and to perform such acts as the Board
deems necessary or expedient to promote the best interests of the Company.
(c)The Board may delegate administration of the Plan to a committee (the
"Committee") composed of not fewer than three (3) members of the Board, all of
the members of which Committee shall be "nonemployee directors" within the
meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended, as from time to time in effect. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board, subject, however, to
such resolutions, not inconsistent with the provisions of the Plan, as may be
adopted from time to time by the Board. The Board shall otherwise comply with
the requirements of Rule 16b-3 promulgated under the Exchange Act, as from time
to time in effect. The Board may abolish the Committee at any time and revest
in the Board the administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a)Subject to the provisions of paragraph 12 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to rights granted under
the Plan shall not exceed in the aggregate [ ] ([ ]) shares of the Company's
common stock (the "Common Stock"). If any right granted under the Plan shall
for any reason terminate without having been exercised, the Common Stock not
purchased under such right shall again become available for the Plan.
(b)The Common Stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
(a)The Board or the Committee may from time to time grant or provide for the
grant of rights to purchase stock of the Company under the Plan to eligible
employees (the "Offering(s)") on a date or dates (the "Offering Date(s)")
selected by the Board or the Committee. Each Offering shall be in such form and
shall contain such terms and conditions as the Board or the Committee shall
deem appropriate. If an employee has more than one right outstanding under the
Plan, unless he otherwise indicates in agreements or notices delivered
hereunder: (1) each agreement or notice delivered by that
J-2-2
employee will be deemed to apply to all of his rights under the Plan, and (2) a
right with a lower exercise price (or an earlier-granted right, if two rights
have identical exercise prices), will be exercised to the fullest possible
extent before a right with a higher exercise price (or a later-granted right)
will be exercised. The provisions of separate Offerings need not be identical,
but each Offering shall include (through incorporation of the provisions of
this Plan by reference in the Offering or otherwise) the substance of the
provisions contained in paragraphs 5 through 8, inclusive.
5. ELIGIBILITY.
(a)Rights may be granted only to employees of the Company or, as the Board or
the Committee may designate as provided in subparagraph 2(b), to employees of
any Affiliate of the Company. Except as provided in subparagraph 5(b), an
employee of the Company or any Affiliate shall not be eligible to be granted
rights under the Plan, unless, on the Offering Date, such employee has been in
the employ of the Company or any Affiliate for such continuous period preceding
such grant as the Board or the Committee may require, but in no event shall the
required period of continuous employment be greater than two (2) years less one
day. In addition, unless otherwise determined by the Board or the Committee, no
employee of the Company or any Affiliate shall be eligible to be granted rights
under the Plan, unless, on the Offering Date, such employee's customary
employment with the Company or such Affiliate is at least twenty (20) hours per
week and at least five (5) months per calendar year.
(b)Unless otherwise determined by the Board or the Committee, each person who,
during the course of an Offering, first becomes an eligible employee of the
Company or designated Affiliate will, on the first Exercise Date (as defined in
the Offering) which coincides with the day on which such person becomes an
eligible employee or occurs thereafter, receive a right under that Offering,
which right shall thereafter be deemed to be a part of that Offering. Such
right shall have the same characteristics as any rights originally granted
under that Offering, as described herein, except that:
(i)the date on which such right is granted shall be the "Offering Date" of
such right for all purposes, including determination of the exercise price
of such right;
(ii)the Purchase Period (as defined below) for such right shall begin on
its Offering Date and end coincident with the end of such Offering; and
(iii)the Board or the Committee may provide that if such person first
becomes an eligible employee within a specified period of time before the
end of the Purchase Period (as defined below) for such Offering, he or she
will not receive any right under that Offering.
(c)A director shall in no event be eligible for the benefits of the Plan unless
and until such director is expressly declared eligible to participate in the
Plan by action of the Board or the Committee, and only if, at any time
discretion is exercised by the Board in the selection of a director as a person
to whom options may be granted, or in the determination of the number of shares
which may be covered by options granted to a director, a majority of the Board
and a majority of the directors acting in such matter are disinterested
persons, as defined in subparagraph 2(d). The Board shall otherwise comply with
the requirements of Rule 16b-3 promulgated under the Exchange Act, as from time
to time in effect.
J-2-3
(d)No employee shall be eligible for the grant of any rights under the Plan if,
immediately after any such rights are granted, such employee owns stock
possessing five percent (5%) or more of the total combined voting power or
value of all classes of stock of the Company or of any Affiliate. For purposes
of this subparagraph 5(d), the rules of Section 424(d) of the Code shall apply
in determining the stock ownership of any employee, and stock which such
employee may purchase under all outstanding rights and options shall be treated
as stock owned by such employee.
(e)An eligible employee may be granted rights under the Plan only if such
rights, together with any other rights granted under "employee stock purchase
plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of
the Code, do not permit such employee's rights to purchase stock of the Company
or any affiliate to accrue at a rate which exceeds twenty-five thousand dollars
($25,000) of fair market value of such stock (determined at the time such
rights are granted) for each calendar year in which such rights are outstanding
at any time.
6. RIGHTS; PURCHASE PRICE.
(a)On each Offering Date, each eligible employee, pursuant to an Offering made
under the Plan, shall be granted the right to purchase the number of shares of
Common Stock of the Company purchasable with up to ten percent (10%) of such
employee's Compensation (as defined in subparagraph 7(a)) for the period which
begins on the Offering Date and ends on the date specified in the Offering,
which date shall be no more than twenty-seven (27) months after the Offering
Date (the "Purchase Period"). In connection with each Offering made under this
Plan, the Board or the Committee shall specify a maximum number of shares which
any employee may be granted the right to purchase pursuant to such Offering. In
addition, in connection with each such Offering, the Board or the Committee may
specify a maximum aggregate number of shares which may be purchased by all
eligible employees pursuant to such Offering or on any given Exercise Date
under the Offering. If the aggregate purchase of shares upon exercise of rights
granted under the Offering would exceed such maximum aggregate number, the
Board or the Committee shall make a pro rata allocation of the shares available
in as nearly a uniform manner as shall be practicable and as it shall deem to
be equitable.
(b)The purchase price of Common Stock acquired pursuant to rights granted under
the Plan shall be not less than the lesser of an amount equal to eighty-five
percent (85%) of the fair market value of the Common Stock on:
(i)the relevant Offering Date, as specified in subparagraph 4(b); or
(ii)the Exercise Date, as defined in subparagraph 8(a).
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a)An eligible employee may become a participant in an Offering by delivering
an agreement to the Company before the Offering Date, in such form as the
Company provides. Each such agreement shall authorize payroll deductions of up
to ten percent (10%) of such employee's total compensation ("Compensation")
during the Purchase Period and shall remain effective under subsequent
Offerings unless and until such employee terminates his or her payroll
deductions. At any time a participant may reduce or terminate his or her
payroll deductions by delivering a written notice or agreement to the Company
on such form as the Company provides. A participant may not increase or an
employee
J-2-4
may not begin such payroll deductions effective for a given Offering after the
beginning of the Purchase Period for that Offering. Unless otherwise provided
at time of offering, payroll deductions may be elected in whole percentages
only. The payroll deductions made for each participant shall be credited to an
account maintained for such participant under the Plan, but all funds shall be
retained with the general funds of the Company. A participant may not make any
additional payments to his or her account.
(b)If a participant terminates his or her payroll deductions, such participant
may withdraw from the Offering by delivering to the Company a notice of
withdrawal in such form as the Company provides. Such withdrawal may be elected
at any time prior to the end of the Purchase Period for which it is to be
effective. Upon such withdrawal from the Offering by a participant, the Company
shall distribute as soon as practical to such participant an amount equal to
all of his or her accumulated payroll deductions (reduced to the extent such
deductions have been used to acquire stock for the participant) under the
Offering without interest, and such participant's interest in that Offering
shall be automatically terminated. A participant's withdrawal from an Offering
will have no effect upon such participant's eligibility to participate in any
other Offerings under the Plan, but such participant will be required to
deliver a new participation agreement in order to participate in other
Offerings under the Plan.
(c)Rights granted pursuant to any Offering under the Plan shall terminate
immediately upon cessation of any participating employee's employment with the
Company or an Affiliate, for any reason other than death, and the Company shall
distribute as soon as practical to such employee an amount equal to all of his
or her accumulated payroll deductions, without interest.
(d)In the event of the death of a participant during the Purchase Period, if
death occurs less than six (6) months prior to an Exercise Date (as defined in
subparagraph 8(a)) the participant's transferee pursuant to subparagraph 7(e)
shall have the option of withdrawing from the ongoing Offering as provided in
subparagraph 7(b) or taking no action and thereby continuing participation in
the ongoing Offering. If such death occurs six (6) months or more prior to the
next Exercise Date (as defined in subparagraph 8(a)) all rights granted
pursuant to the Offering shall terminate immediately and as soon as practical
the Company shall distribute to such participant's transferee pursuant to
subparagraph 7(e) an amount equal to all of his or her accumulated payroll
deductions (reduced to the extent such deductions have been used to acquire
stock for the participant) without interest.
(e)Rights granted under the Plan shall not be transferable, other than by will
or the laws of descent and distribution, and shall be exercisable during the
lifetime of the person to whom such rights are granted only by such person.
8. EXERCISE.
(a)On each exercise date as defined in the Offering (an "Exercise Date"), which
date shall be no more than twenty-seven (27) months from the Offering Date,
each participant's accumulated payroll deductions will be applied to the
purchase of whole shares of Common Stock of the Company, up to the maximum
number of shares permitted pursuant to subparagraph 6(a), at the purchase price
specified in the Offering, and the certificates representing the shares so
purchased shall be issued as soon as practicable. No fractional shares shall be
issued upon the exercise of rights granted under the
J-2-5
Plan. The amount, if any, of accumulated payroll deductions remaining in any
participant's account at the end of the Purchase Period (after the purchase of
shares) which is equal to the amount required to purchase whole shares of
Common Stock on the final Exercise Date shall be distributed in full to such
participant as soon as practical after the Purchase Period, without interest.
Any remaining amount of accumulated payroll deductions in each participant's
account at the end of the Purchase Period (after the purchase of shares) which
is less than the amount required to purchase one share of Common Stock on the
final Exercise Date shall be held in each such participant's account for the
purchase of shares under the next Offering under the Plan, unless such
participant withdraws from such next Offering, as provided in subparagraph
7(b), or is no longer eligible to be granted rights under the Plan, as provided
in paragraph 5, in which case such amount shall be distributed to such
participant as soon as practical after the Purchase Period, without interest.
(b)No rights granted under the Plan may be exercised to any extent unless the
Plan (including rights granted thereunder) is covered by an effective
registration statement pursuant to the Securities Act of 1933, as amended (the
"Securities Act"). If, on an Exercise Date of any Offering hereunder, the Plan
is not so registered, no rights granted under the Plan or any Offering shall be
exercised and all payroll deductions accumulated during the Purchase Period
shall be distributed to the participants, without interest.
9. COVENANTS OF THE COMPANY.
(a)During the terms of the rights granted under the Plan, the Company shall
keep available at all times the number of shares of Common Stock required to
satisfy such rights.
(b)The Company shall seek to obtain from each regulatory commission or agency
having jurisdiction over the Plan such authority as may be required to issue
and sell shares of Common Stock upon exercise of the rights granted under the
Plan. If the Company is unable to obtain from any such regulatory commission or
agency the authority which counsel for the Company deems necessary for the
lawful issuance and sale of Common Stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell Common Stock upon
exercise of such rights unless and until such authority is obtained.
10. USE OF PROCEEDS.
Proceeds from the sale of Common Stock pursuant to rights granted under the
Plan shall constitute general funds of the Company.
11. RIGHTS AS A SHAREHOLDER.
A participant shall not be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares subject to rights granted under
the Plan unless and until certificates representing such shares shall have been
issued.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a)If any change is made in the Common Stock subject to the Plan, or subject to
any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend,
J-2-6
dividend in property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate structure or
otherwise), the Board shall make appropriate adjustments in the maximum number
of shares subject to the Plan and the number of shares and price per share
subject to outstanding rights.
(b)In the event of: (1) a dissolution or liquidation of the Company; (2) a
merger or consolidation in which the Company is not the surviving corporation;
(3) a reverse merger in which the Company is the surviving corporation but the
shares of the Company's common stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in
the form of securities, cash or otherwise; or (4) any other capital
reorganization in which more than 50% of the shares of the Company entitled to
vote are exchanged, then the surviving corporation shall either assume any
options outstanding under the Plan or shall substitute similar options for
those outstanding under the Plan, as permitted by law, or the time at which the
options shall be exercised shall be accelerated to a date prior to such event.
13. AMENDMENT OF THE PLAN.
(a)The Board at any time, and from time to time, may amend the Plan. However,
except as provided in paragraph 12 relating to adjustments upon changes in
Common Stock, no amendment shall be effective unless approved by the vote of a
majority of the outstanding shares of the Company entitled to vote or by the
unanimous written consent of the holders of all outstanding shares of the
Company entitled to vote, within twelve (12) months before or after the
adoption of the amendment, where the amendment will:
(i)Increase the number of shares reserved for rights under the Plan;
(ii)Materially modify the requirements as to eligibility for participation
in the Plan; or
(iii)Materially increase the benefits accruing to persons eligible to
participate under the Plan.
It is expressly contemplated that the Board may amend the Plan in any respect
the Board deems necessary or advisable to provide eligible employees with the
maximum benefits intended to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to employee stock purchase
plans and/or to bring the Plan and/or rights granted under it into compliance
therewith.
(b)Rights and obligations under any rights granted before amendment of the Plan
shall not be altered or impaired by any amendment of the Plan, except with the
consent of the person to whom such rights were granted.
14. TERMINATION OR SUSPENSION OF THE PLAN.
(a)The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on December 31, 2003. No rights may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b)Rights and obligations under any rights granted while the Plan is in effect
shall not be altered or impaired by suspension or termination of the Plan,
except with the consent of the person to whom such rights were granted.
J-2-7
15. TERMINATION DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no rights
granted under the Plan shall be exercised unless and until the Plan has been
approved by the vote of the holders of a majority of the outstanding shares of
the Company entitled to vote or by the unanimous written consent of the holders
of all outstanding shares of the Company entitled to vote, and, if required, an
appropriate permit has been issued by the Commissioner of Corporations of the
State of California.
J-2-8
ANNEX K
CERTIFICATE OF INCORPORATION
OF
MILLENNIUM HOLDING CORP.
The undersigned, a natural person (the "Sole Incorporator"), for the purpose
of organizing a corporation to conduct the business and promote the purposes
hereinafter stated, under the provisions and subject to the requirements of
the laws of the State of Delaware hereby certifies that:
I.
The name of this corporation is Millennium Holding Corp. (the "Corporation").
II.
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, 19801. The name of the registered agent of
the corporation in the State of Delaware at such address is The Corporation
Trust Company.
III.
The purpose of this Corporation is to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of the
State of Delaware.
IV.
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is sixty-five
million (65,000,000) shares. Sixty million (60,000,000) shares shall be Common
Stock, each having a par value of one-tenth of one cent ($.001). Five million
(5,000,000) shares shall be Preferred Stock, each having a par value of one-
tenth of one cent ($.001).
B. PREFERRED STOCK
(1) The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation
Law, to classify and reclassify any unissued shares of the Preferred Stock
from time to time by setting or changing in any one or more respects the
powers, designations, preferences and relative, participating, optional and
other rights, if any, and the qualifications, limitations and restrictions of
the Preferred Stock. Subject to the foregoing, the power of the Board of
Directors to classify and reclassify any of the shares of Preferred Stock
shall include, without limitation, subject to the provisions of this
Certificate of Incorporation, authority to classify or reclassify any unissued
shares of such stock into one or more series of Preferred Stock, and to
K-1
divide and classify shares of any series into one or more series of Preferred
Stock by determining, fixing or altering one or more of the following:
(a) The distinctive designation of such series and the number of shares to
constitute such series; provided that, unless otherwise prohibited by the
terms of such or any other series, the number of shares of any series may
be decreased by the Board of Directors in connection with any
classification or reclassification of unissued shares and the number of
shares of such series may be increased by the Board of Directors in
connection with any such classification or reclassification, and any shares
of any series which have been redeemed, purchased, otherwise acquired or
converted into shares of Common Stock or any other series shall remain part
of the authorized Preferred Stock and be subject to classification and
reclassification as provided in this Section.
(b) Whether or not and, if so, the rates, amounts and times at which, and
the conditions under which, dividends shall be payable on shares of such
series, whether any such dividends shall rank senior or junior to or on a
parity with the dividends payable on any other series of Preferred Stock,
and the status of any such dividends as cumulative, cumulative to a limited
extent or non-cumulative and as participating of non-participating.
(c) Whether or not shares of such series shall have voting rights, in
addition to any voting rights provided by law and, if so, the terms of such
voting rights.
(d) Whether or not shares of such series shall have conversion or exchange
privileges and, if so, the terms and conditions thereof, including
provision for adjustment of the conversion or exchange rate in such events
or at such times as the Board of Directors shall determine.
(e) Whether or not shares of such series shall be subject to redemption
and, if so, the terms and conditions of such redemption, including the date
or dates upon or after which they shall be redeemable and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates; and whether or not there
shall be any sinking fund or purchase account in respect thereof, and if
so, the terms thereof.
(f) The rights of the holders of shares of such series upon the
liquidation, dissolution, or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary
depending upon whether such liquidation, dissolution or winding up is
voluntary or involuntary and, if voluntary, may vary at different dates,
and whether such rights shall rank senior or junior to or on a parity with
such rights of any other series of Preferred Stock.
(g) Whether or not there shall be any limitations applicable, while shares
of such series are outstanding, upon the payment of dividends or making of
distributions on, or the acquisition of, or the use of monies for purchase
or redemption of, any stock of the Corporation, or upon any other action of
the Corporation, including action under this Section, and, if so, the terms
and conditions thereof.
(h) Any other powers, designations, preferences and relative,
participating, optional and other rights, if any, and any other
qualifications, limitations and restrictions, on the shares of such series,
not inconsistent with law and this Certificate of Incorporation.
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(2) For the purposes hereof and of any certification providing for the
classification or reclassification of any shares of Preferred Stock or of any
other charter document of the Corporation (unless otherwise provided in any
such certificate or document), any class or series of stock of the Corporation
shall be deemed to rank:
(a) Prior to a particular class or series of stock if the holders of such
class or classes or series shall be entitled to the receipt of dividends or
of amounts distributable in the event of any liquidation, dissolution or
winding up, as the case may be, in preference to or with priority over the
holder of such particular class or series of stock;
(b) On a parity with a particular class or series of stock, whether or not
the dividend rates, dividend payment dates, voting rights or redemption or
liquidation prices per share thereof, be different from those of such
particular class or series of stock, if the rights of holder of such class
or classes or series to the receipt of dividends or of amounts
distributable in event of any liquidation, dissolution or winding up of the
Corporation, as the case may be, and shall be neither (i) in preference to,
or with priority over, nor (ii) subject or subordinate to, the rights of
holders of such particular class or series of stock in respect of the
receipt of dividends or of amounts distributable in the event of any
liquidation, dissolution or winding up of the Corporation, as the case may
be; and
(c) Junior to a particular class or series of stock if the rights of the
holders of such class or classes or series shall be subject or subordinate
to the rights of the holders of such particular class or series of stock in
respect of the receipt of dividends or of amounts distributable in the
event of any liquidation, dissolution or winding up, as the case may be.
V.
For the management of the business and for the conduct of the affairs of the
Corporation, and in further definition, limitation and regulation of the powers
of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A.
(1) The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be
fixed exclusively by one or more resolutions adopted by the Board of
Directors.
(2) Subject to the rights of the holders of any series of Preferred Stock
to elect additional directors under specified circumstances, directors
shall be elected at each annual meeting of stockholders for a term of one
year. Each director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal. No decrease in the
number of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
(3) Subject to the rights of the holders of any series of Preferred Stock,
the Board of Directors or any individual director may be removed from
office at any time with or without cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding
shares of voting stock of the corporation, entitled to vote at an election
of directors.
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(4) Subject to the rights of the holders of any series of Preferred Stock,
any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors,
shall, unless the Board of Directors determines by resolution that any such
vacancies or newly created directorships shall be filled by the
stockholders, except as otherwise provided by law, be filled only by the
affirmative vote of a majority of the directors then in office, even though
less than a quorum of the Board of Directors, and not by the stockholders.
Any director elected in accordance with the preceding sentence shall hold
office for the remainder of the full term of the director for which the
vacancy was created or occurred and until such director's successor shall
have been elected and qualified.
B.
(1) Subject to paragraph (g) of Section 43 of the Bylaws, the Bylaws may be
altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two-thirds percent (66-2/3%) of the voting power of all
of the then-outstanding shares of stock entitled to vote thereon. The Board
of Directors shall also have the power to adopt, amend, or repeal Bylaws.
(2) The directors of the Corporation need not be elected by written ballot
unless the Bylaws so provide.
(3) Action shall be taken by stockholders of the Corporation only at annual
or special meetings of stockholders and stockholders may act in lieu of a
meeting only by unanimous written consent.
(4) Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. Special meetings of the stockholders
of the Corporation may be called, for any purpose or purposes, by (i) the
Chairman of the Board of Directors, (ii) the Chief Executive Officer, or
(iii) the Board of Directors pursuant to a resolution adopted by a majority
of the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any such
resolution is presented to the Board of Directors for adoption). The books
of the Corporation may be kept (subject to any provision contained in the
statutes) outside of the State of Delaware at such place or places as may
be designated from time to time by the Board of Directors or in the Bylaws
of the Corporation.
(5) Advance notice of stockholder nominations for the election of directors
and of business to be brought by stockholders before any meeting of the
stockholders of the corporation shall be given in the manner provided in
the Bylaws of the Corporation.
VI.
A. A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from
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which the director derived an improper personal benefit. If the Delaware
General Corporation Law is amended after approval by the stockholders of this
Article to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director shall be
eliminated or limited to the fullest extent permitted by the Delaware General
corporation Law, as so amended.
B. Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
VII.
A. The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, except as provided in paragraph B. of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of Incorporation or
any provision of law which might otherwise permit a lesser vote or no vote, but
in addition to any affirmative vote of the holders of any particular class or
series of the Voting Stock required by law, this Certificate of Incorporation
or any Preferred Stock Designation, the affirmative vote of the holders of at
least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of
the then-outstanding shares of the Voting Stock, voting together as a single
class, shall be required to alter, amend or repeal Articles V and VII hereof.
VIII.
The name and the mailing address of the Sole Incorporator is as follows:
NAME Lynn Buckley
MAILING ADDRESS P.O. Box 636
Wilmington, DE 19899
I, THE UNDERSIGNED, being the Sole Incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this Certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 1st day of October, 1998.
-------------------------------------
Lynn Buckley
Sole Incorporator
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ANNEX L
BYLAWS
OF
MILLENNIUM HOLDING CORP.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office of the corporation in the
State of Delaware shall be in the City of Wilmington, County of New Castle.
The name of the registered agent of the Corporation at such location is The
Corporation Trust Company.
Section 2. OTHER OFFICES. The Corporation shall also have and maintain an
office or principal place of business at such place as may be fixed by the
Board of Directors, and may also have offices at such other places, both
within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the Corporation may require.
ARTICLE II
CORPORATE SEAL
Section 3. CORPORATE SEAL. The corporate seal shall consist of a die bearing
the name of the corporation and the inscription, "Corporate Seal-Delaware."
Said seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
ARTICLE III
MEETINGS OF STOCKHOLDERS
Section 4. PLACE OF MEETINGS. Meetings of the stockholders of the Corporation
shall be held at such place, either within or without the State of Delaware,
as may be designated from time to time by the Board of Directors, or, if not
so designated, then at the office of the corporation required to be maintained
pursuant to Section 2 hereof.
Section 5. ANNUAL MEETING.
(a)The annual meeting of the stockholders of the Corporation, for the purpose
of election of directors and for such other business as may lawfully come
before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors and stated in the notice of the
Meeting.
(b)At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly brought before the meeting
by or at the
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direction of the Board of Directors, or (C) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close of business on
the ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or, in the event
public announcement of the date of such annual meeting is first made by the
Corporation fewer than seventy (70) days prior to the date of such annual
meeting, the close of business on the tenth (10th) day following the day on
which public announcement of the date of such meeting is first made by the
corporation. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the Corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares of the
Corporation which are beneficially owned by the stockholder, (iv) any material
interest of the stockholder in such business and (v) any other information that
is required to be provided by the stockholder pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his
capacity as a proponent to a stockholder proposal. Notwithstanding the
foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholder's meeting,
stockholders must provide notice as required by the regulations promulgated
under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary,
no business shall be conducted at any annual meeting except in accordance with
the procedures set forth in this paragraph (b). The chairman of the annual
meeting shall, if the facts warrant, determine and declare at the meeting that
business was not properly brought before the meeting and in accordance with the
provisions of this paragraph (b), and, if he should so determine, he shall so
declare at the meeting that any such business not properly brought before the
meeting shall not be transacted.
(c)Only persons who are nominated in accordance with the procedures set forth
in this paragraph (c) shall be eligible for election as directors. Nominations
of persons for election to the Board of Directors of the Corporation may be
made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the Corporation entitled to vote in the
election of directors at the meeting who complies with the notice procedures
set forth in this paragraph (c). Such nominations, other than those made by or
at the direction of the Board of Directors, shall be made pursuant to timely
notice in writing to the Secretary of the Corporation in accordance with the
provisions of paragraph (b) of this Section 5. Such stockholder's notice shall
set forth (i) as to each person, if any, whom the stockholder proposes to
nominate for election or re-election as a director: (A) the name, age, business
address and residence address of such person, (B) the principal occupation or
employment of such person, (C) the class and number of shares of the
Corporation which are beneficially owned by such person, (D) a description of
all arrangements or understandings
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between the stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nominations are to be
made by the stockholder, and (E) any other information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the 1934 Act (including without limitation such person's written consent
to being named in the proxy statement, if any, as a nominee and to serving as a
director if elected); and (ii) as to such stockholder giving notice, the
information required to be provided pursuant to paragraph (b) of this Section
5. At the request of the Board of Directors, any person nominated by a
stockholder for election as a director shall furnish to the Secretary of the
corporation that information required to be set forth in the stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the corporation unless nominated in accordance
with the procedures set forth in this paragraph (c). The chairman of the
meeting shall, if the facts warrant, determine and declare at the meeting that
a nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if he should so determine, he shall so declare at the meeting, and
the defective nomination shall be disregarded.
(d)For purposes of this Section 5, "public announcement" shall mean disclosure
in a press release reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
Section 6. SPECIAL MEETINGS.
(a)Special meetings of the stockholders of the Corporation may be called, for
any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii)
the Chief Executive Officer, or (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption).
(b)If a special meeting is called by any person or persons other than the Board
of Directors, the request shall be in writing, specifying the general nature of
the business proposed to be transacted, and shall be delivered personally or
sent by registered mail or by telegraphic or other facsimile transmission to
the Chairman of the Board of Directors, the Chief Executive Officer, or the
Secretary of the Corporation. No business may be transacted at such special
meeting otherwise than specified in such notice. The Board of Directors shall
determine the time and place of such special meeting, which shall be held not
less than thirty-five (35) nor more than one hundred twenty (120) days after
the date of the receipt of the request. Upon determination of the time and
place of the meeting, the officer receiving the request shall cause notice to
be given to the stockholders entitled to vote, in accordance with the
provisions of Section 7 of these Bylaws. If the notice is not given within
sixty (60) days after the receipt of the request, the person or persons
requesting the meeting may set the time and place of the meeting and give the
notice. Nothing contained in this paragraph (b) shall be construed as limiting,
fixing, or affecting the time when a meeting of stockholders called by action
of the Board of Directors may be held.
Section 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the
Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor
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more than sixty (60) days before the date of the meeting to each stockholder
entitled to vote at such meeting, such notice to specify the place, date and
hour and purpose or purposes of the meeting. Notice of the time, place and
purpose of any meeting of stockholders may be waived in writing, signed by the
person entitled to notice thereof, either before or after such meeting, and
will be waived by any stockholder by his attendance thereat in person or by
proxy, except when the stockholder attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Any stockholder so
waiving notice of such meeting shall be bound by the proceedings of any such
meeting in all respects as if due notice thereof had been given.
Section 8. QUORUM. At all meetings of stockholders, except where otherwise
provided by statute or by the Certificate of Incorporation, or by these Bylaws,
the presence, in person or by proxy duly authorized, of the holders of a
majority of the outstanding shares of stock entitled to vote shall constitute a
quorum for the transaction of business. In the absence of a quorum, any meeting
of stockholders may be adjourned, from time to time, either by the chairman of
the meeting or by vote of the holders of a majority of the shares represented
thereat, but no other business shall be transacted at such meeting. The
stockholders present at a duly called or convened meeting, at which a quorum is
present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws,
all action taken by the holders of a majority of the vote cast, excluding
abstentions, at any meeting at which a quorum is present shall be valid and
binding upon the Corporation; provided, however, that directors shall be
elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors. Where a separate vote by a class or classes or series is required,
except where otherwise provided by the statute or by the Certificate of
Incorporation or these Bylaws, a majority of the outstanding shares of such
class or classes or series, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and, except where otherwise provided by the statute or by the
Certificate of Incorporation or these Bylaws, the affirmative vote of the
majority (plurality, in the case of the election of directors) of the votes
cast, including abstentions, by the holders of shares of such class or classes
or series shall be the act of such class or classes or series.
Section 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the
shares casting votes, excluding abstentions. When a meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the Corporation may transact any business
which might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
Section 10. VOTING RIGHTS. For the purpose of determining those stockholders
entitled to vote at any meeting of the stockholders, except as otherwise
provided by law, only persons in whose names shares stand on the stock records
of the Corporation on the record date, as provided in Section 12 of
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these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote shall have the right to do so either in person or by an
agent or agents authorized by a proxy granted in accordance with Delaware law.
An agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a
longer period.
Section 11. JOINT OWNERS OF STOCK. If shares or other securities having voting
power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety, or otherwise, or if two (2) or more persons have the
same fiduciary relationship respecting the same shares, unless the Secretary is
given written notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting shall have the following effect:
(a) if only one (1) votes, his act binds all; (b) if more than one (1) votes,
the act of the majority so voting binds all; (c) if more than one (1) votes,
but the vote is evenly split on any particular matter, each faction may vote
the securities in question proportionally, or may apply to the Delaware Court
of Chancery for relief as provided in the General Corporation Law of Delaware,
Section 217(b). If the instrument filed with the Secretary shows that any such
tenancy is held in unequal interests, a majority or even-split for the purpose
of subsection (c) shall be a majority or even-split in interest.
Section 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at
least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time
thereof and may be inspected by any stockholder who is present.
Section 13. ACTION WITHOUT MEETING.
(a)No action shall be taken by the stockholders except at an annual or special
meeting of stockholders called in accordance with these Bylaws, and
stockholders may act in lieu of a meeting only by unanimous written consent.
Section 14. ORGANIZATION.
At every meeting of stockholders, the Chairman of the Board of Directors, or,
if a Chairman has not been appointed or is absent, the President, or, if the
President is absent, a chairman of the meeting chosen by a majority in interest
of the stockholders entitled to vote, present in person or by proxy, shall act
as chairman. The Secretary, or, in his absence, an Assistant Secretary directed
to do so by the President, shall act as secretary of the meeting.
(a)The Board of Directors of the Corporation shall be entitled to make such
rules or regulations for the conduct of meetings of stockholders as it shall
deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting
shall have the right and authority to prescribe such rules, regulations and
procedures and to do all
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such acts as, in the judgment of such chairman, are necessary, appropriate or
convenient for the proper conduct of the meeting, including, without
limitation, establishing an agenda or order of business for the meeting, rules
and procedures for maintaining order at the meeting and the safety of those
present, limitations on participation in such meeting to stockholders of record
of the Corporation and their duly authorized and constituted proxies and such
other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
Section 15. NUMBER AND TERM OF OFFICE. The authorized number of directors of
the Corporation shall be fixed in accordance with the Certificate of
Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
Section 16. POWERS. The powers of the Corporation shall be exercised, its
business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
Section 17. CLASSES OF DIRECTORS. Subject to the rights of the holders of any
series of Preferred Stock to elect additional directors under specified
circumstances, directors shall be elected at each annual meeting of
stockholders for a term of one year. Each director shall serve until his
successor is duly elected and qualified or until his death, resignation or
removal. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Section 18. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A
vacancy in the Board of Directors shall be deemed to exist under this Bylaw in
the case of the death, removal or resignation of any director.
Section 19. RESIGNATION. Any director may resign at any time by delivering his
written resignation to the Secretary, such resignation to specify whether it
will be effective at a particular time, upon receipt by the Secretary or at the
pleasure of the Board of Directors. If no such specification is made, it shall
be deemed effective at the pleasure of the Board of Directors. When one or more
directors
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shall resign from the Board of Directors, effective at a future date, a
majority of the directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
Director so chosen shall hold office for the unexpired portion of the term of
the Director whose place shall be vacated and until his successor shall have
been duly elected and qualified.
Section 20. REMOVAL. Subject to the rights of the holders of any series of
Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time with or without cause by the affirmative vote
of the holders of a majority of the voting power of all the then-outstanding
shares of voting stock of the Corporation, entitled to vote at an election of
directors (the "Voting Stock").
Section 21. MEETINGS.
(a)ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be held
immediately before or after the annual meeting of stockholders and at the place
where such meeting is held. No notice of an annual meeting of the Board of
Directors shall be necessary and such meeting shall be held for the purpose of
electing officers and transacting such other business as may lawfully come
before it.
(b)REGULAR MEETINGS. Except as hereinafter otherwise provided, regular meetings
of the Board of Directors shall be held in the office of the Corporation
required to be maintained pursuant to Section 2 hereof. Unless otherwise
restricted by the Certificate of Incorporation, regular meetings of the Board
of Directors may also be held at any place within or without the State of
Delaware which has been designated by resolution of the Board of Directors or
the written consent of all directors.
(c)SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of
Incorporation, special meetings of the Board of Directors may be held at any
time and place within or without the State of Delaware whenever called by the
Chairman of the Board, the President or any two of the directors.
(d)TELEPHONE MEETINGS. Any member of the Board of Directors, or of any
committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a
meeting by such means shall constitute presence in person at such meeting.
(e)NOTICE OF MEETINGS. Notice of the time and place of all special meetings of
the Board of Directors shall be orally or in writing, by telephone, facsimile,
telegraph or telex, during normal business hours, at least twenty-four (24)
hours before the date and time of the meeting, or sent in writing to each
director by first class mail, charges prepaid, at least three (3) days before
the date of the meeting. Notice of any meeting may be waived in writing at any
time before or after the meeting and will be waived by any director by
attendance thereat, except when the director attends the meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(f)WAIVER OF NOTICE. The transaction of all business at any meeting of the
Board of Directors, or any committee thereof, however called or noticed, or
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or
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after the meeting, each of the directors not present shall sign a written
waiver of notice. All such waivers shall be filed with the corporate records or
made a part of the minutes of the meeting.
Section 22. QUORUM AND VOTING.
(a)Unless the Certificate of Incorporation requires a greater number and except
with respect to indemnification questions arising under Section 43 of these
Bylaws, for which a quorum shall be one-third of the exact number of directors
fixed from time to time in accordance with the Certificate of Incorporation, a
quorum of the Board of Directors shall consist of a majority of the exact
number of directors fixed from time to time by the Board of Directors in
accordance with the Certificate of Incorporation; provided, however, at any
meeting whether a quorum be present or otherwise, a majority of the directors
present may adjourn from time to time until the time fixed for the next regular
meeting of the Board of Directors, without notice other than by announcement at
the meeting.
(b)At each meeting of the Board of Directors at which a quorum is present, all
questions and business shall be determined by the affirmative vote of a
majority of the directors present, unless a different vote be required by law,
the Certificate of Incorporation or these Bylaws.
Section 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting, if all members of the Board of
Directors or committee, as the case may be, consent thereto in writing, and
such writing or writings are filed with the minutes of proceedings of the Board
of Directors or committee.
Section 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the
Board of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
Section 25. COMMITTEES.
(a)EXECUTIVE COMMITTEE. The Board of Directors may by resolution passed by a
majority of the whole Board of Directors appoint an Executive Committee to
consist of one (1) or more members of the Board of Directors. The Executive
Committee, to the extent permitted by law and provided in the resolution of the
Board of Directors shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
Corporation, including without limitation the power or authority to declare a
dividend, to authorize the issuance of stock and to adopt a certificate of
ownership and merger, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to amending the Certificate of
Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the Corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
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series of the same or any other class or classes of stock of the Corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or amending the bylaws of the Corporation.
(b)OTHER COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board of Directors, from time to time appoint such other
committees as may be permitted by law. Such other committees appointed by the
Board of Directors shall consist of one (1) or more members of the Board of
Directors and shall have such powers and perform such duties as may be
prescribed by the resolution or resolutions creating such committees, but in no
event shall such committee have the powers denied to the Executive Committee in
these Bylaws.
(c)TERM. Each member of a committee of the Board of Directors shall serve a
term on the committee coexistent with such member's term on the Board of
Directors. The Board of Directors, subject to the provisions of subsections (a)
or (b) of this Bylaw may at any time increase or decrease the number of members
of a committee or terminate the existence of a committee. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation from the committee or from the Board of Directors. The Board of
Directors may at any time for any reason remove any individual committee member
and the Board of Directors may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
(d)MEETINGS. Unless the Board of Directors shall otherwise provide, regular
meetings of the Executive Committee or any other committee appointed pursuant
to this Section 25 shall be held at such times and places as are determined by
the Board of Directors, or by any such committee, and when notice thereof has
been given to each member of such committee, no further notice of such regular
meetings need be given thereafter. Special meetings of any such committee may
be held at any place which has been determined from time to time by such
committee, and may be called by any director who is a member of such committee,
upon written notice to the members of such committee of the time and place of
such special meeting given in the manner provided for the giving of written
notice to members of the Board of Directors of the time and place of special
meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. A majority of the authorized number
of members of any such committee shall constitute a quorum for the transaction
of business, and the act of a majority of those present at any meeting at which
a quorum is present shall be the act of such committee.
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Section 26. ORGANIZATION. At every meeting of the directors, the Chairman of
the Board of Directors, or, if a Chairman has not been appointed or is absent,
the President, or if the President is absent, the most senior Vice President,
or, in the absence of any such officer, a chairman of the meeting chosen by a
majority of the directors present, shall preside over the meeting. The
Secretary, or in his absence, an Assistant Secretary directed to do so by the
President, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
Section 27. OFFICERS DESIGNATED. The officers of the Corporation shall include,
if and when designated by the Board of Directors, the Chairman of the Board of
Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer, the
Controller, all of whom shall be elected at the annual organizational meeting
of the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the Corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the
officers of the Corporation shall be fixed by or in the manner designated by
the Board of Directors.
Section 28. TENURE AND DUTIES OF OFFICERS.
(a)GENERAL. All officers shall hold office at the pleasure of the Board of
Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.
(b)DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of
Directors, when present, shall preside at all meetings of the stockholders and
the Board of Directors. The Chairman of the Board of Directors shall perform
other duties commonly incident to his office and shall also perform such other
duties and have such other powers as the Board of Directors shall designate
from time to time. If there is no President, then the Chairman of the Board of
Directors shall also serve as the Chief Executive Officer of the corporation
and shall have the powers and duties prescribed in paragraph (c) of this
Section 28.
(c)DUTIES OF PRESIDENT. The President shall preside at all meetings of the
stockholders and at all meetings of the Board of Directors, unless the Chairman
of the Board of Directors has been appointed and is present. Unless some other
officer has been elected Chief Executive Officer of the Corporation, the
President shall be the chief executive officer of the Corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and officers of the Corporation. The
President shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time.
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(d)DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and perform the
duties of the President in the absence or disability of the President or
whenever the office of President is vacant. The Vice Presidents shall perform
other duties commonly incident to their office and shall also perform such
other duties and have such other powers as the Board of Directors or the
President shall designate from time to time.
(e)DUTIES OF SECRETARY. The Secretary shall attend all meetings of the
stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the Corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time.
(f)DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep or
cause to be kept the books of account of the Corporation in a thorough and
proper manner and shall render statements of the financial affairs of the
Corporation in such form and as often as required by the Board of Directors or
the President. The Chief Financial Officer, subject to the order of the Board
of Directors, shall have the custody of all funds and securities of the
corporation. The Chief Financial Officer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time. The President may direct the Treasurer or any Assistant
Treasurer, or the Controller or any Assistant Controller to assume and perform
the duties of the Chief Financial Officer in the absence or disability of the
Chief Financial Officer, and each Treasurer and Assistant Treasurer and each
Controller and Assistant Controller shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time.
Section 29. DELEGATION OF AUTHORITY. The Board of Directors may from time to
time delegate the powers or duties of any officer to any other officer or
agent, notwithstanding any provision hereof.
Section 30. RESIGNATIONS. Any officer may resign at any time by giving written
notice to the Board of Directors or to the President or to the Secretary. Any
such resignation shall be effective when received by the person or persons to
whom such notice is given, unless a later time is specified therein, in which
event the resignation shall become effective at such later time. Unless
otherwise specified in such notice, the acceptance of any such resignation
shall not be necessary to make it effective. Any resignation shall be without
prejudice to the rights, if any, of the corporation under any contract with the
resigning officer.
Section 31. REMOVAL. Any officer may be removed from office at any time, either
with or without cause, by the affirmative vote of a majority of the directors
in office at the time, or by the unanimous
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written consent of the directors in office at the time, or by any committee or
superior officers upon whom such power of removal may have been conferred by
the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND
VOTING OF SECURITIES OWNED BY THE CORPORATION
Section 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in
its discretion, determine the method and designate the signatory officer or
officers, or other person or persons, to execute on behalf of the Corporation
any corporate instrument or document, or to sign on behalf of the Corporation
the corporate name without limitation, or to enter into contracts on behalf of
the Corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the Corporation.
Unless otherwise specifically determined by the Board of Directors or otherwise
required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the Corporation, and other corporate instruments
or documents requiring the corporate seal, and certificates of shares of stock
owned by the Corporation, shall be executed, signed or endorsed by the Chairman
of the Board of Directors, or the President or any Vice President, and by the
Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All
other instruments and documents requiring the corporate signature, but not
requiring the corporate seal, may be executed as aforesaid or in such other
manner as may be directed by the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the Corporation or in special accounts of the Corporation shall be
signed by such person or persons as the Board of Directors shall authorize so
to do. Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
Section 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other
securities of other corporations owned or held by the Corporation for itself,
or for other parties in any capacity, shall be voted, and all proxies with
respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
Section 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of
stock of the Corporation shall be in such form as is consistent with the
Certificate of Incorporation and applicable law. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by or in the name of
the Corporation by the Chairman of the Board of Directors, or the President or
any Vice President and by the Treasurer or Assistant Treasurer or the Secretary
or Assistant Secretary, certifying the number of shares owned by him in the
Corporation. Any or all of the signatures on the
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certificate may be facsimiles. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued with the same effect as if
he were such officer, transfer agent, or registrar at the date of issue. Each
certificate shall state upon the face or back thereof, in full or in summary,
all of the powers, designations, preferences, and rights, and the limitations
or restrictions of the shares authorized to be issued or shall, except as
otherwise required by law, set forth on the face or back a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative, participating, optional, or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Within a reasonable time after the issuance or transfer of uncertificated
stock, the corporation shall send to the registered owner thereof a written
notice containing the information required to be set forth or stated on
certificates pursuant to this section or otherwise required by law or with
respect to this section a statement that the Corporation will furnish without
charge to each stockholder who so requests the powers, designations,
preferences and relative participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Except as otherwise expressly
provided by law, the rights and obligations of the holders of certificates
representing stock of the same class and series shall be identical.
Section 35. LOST CERTIFICATES. A new certificate or certificates shall be
issued in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The Corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the Corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.
Section 36. TRANSFERS.
(a)Transfers of record of shares of stock of the Corporation shall be made only
upon its books by the holders thereof, in person or by attorney duly
authorized, and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.
(b)The Corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
Corporation to restrict the transfer of shares of stock of the Corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
Section 37. FIXING RECORD DATES.
(a)In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
the Board of Directors may fix, in advance, a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors, and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of such meeting. If no
record date is fixed by the
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Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
(b)In order that the Corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which record
date shall not precede the date upon which the resolution fixing the record
date is adopted, and which record date shall be not more than sixty (60) days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
Section 38. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
Section 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other
corporate securities of the Corporation, other than stock certificates (covered
in Section 34), may be signed by the Chairman of the Board of Directors, the
President or any Vice President, or such other person as may be authorized by
the Board of Directors, and the corporate seal impressed thereon or a facsimile
of such seal imprinted thereon and attested by the signature of the Secretary
or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an
Assistant Treasurer; provided, however, that where any such bond, debenture or
other corporate security shall be authenticated by the manual signature, or
where permissible facsimile signature, of a trustee under an indenture pursuant
to which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such
bond, debenture or other corporate security may be the imprinted facsimile of
the signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the corporation
or such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before the bond,
debenture or other corporate security so signed or attested shall have been
delivered, such bond, debenture or other corporate security nevertheless may be
adopted by the corporation and issued and delivered as though the person who
signed the same or whose facsimile signature shall have been used thereon had
not ceased to be such officer of the corporation.
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ARTICLE IX
DIVIDENDS
Section 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors pursuant to law at any regular
or special meeting. Dividends may be paid in cash, in property, or in shares of
the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 41. DIVIDEND RESERVE. Before payment of any dividend, there may be set
aside out of any funds of the corporation available for dividends such sum or
sums as the Board of Directors from time to time, in their absolute discretion,
think proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the Board of Directors shall think conducive to the
interests of the Corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
Section 42. FISCAL YEAR. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
Section 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER OFFICERS,
EMPLOYEES AND OTHER AGENTS.
(a)DIRECTORS AND OFFICERS. The Corporation shall indemnify its directors and
officers to the fullest extent not prohibited by the Delaware General
Corporation Law; provided, however, that the Corporation may modify the extent
of such indemnification by individual contracts with its directors and
officers; and, provided, further, that the Corporation shall not be required to
indemnify any director or officer in connection with any proceeding (or part
thereof) initiated by such person unless (i) such indemnification is expressly
required to be made by law, (ii) the proceeding was authorized by the Board of
Directors of the corporation, (iii) such indemnification is provided by the
Corporation, in its sole discretion, pursuant to the powers vested in the
Corporation under the Delaware General Corporation Law or (iv) such
indemnification is required to be made under subsection (c).
(b)EXPENSES. The Corporation shall advance to any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or officer,
of the Corporation, or is or was serving at the request of the Corporation as a
director or officer of another corporation, partnership, joint venture, trust
or other enterprise, prior to the final disposition of the proceeding, promptly
following request therefor, all expenses incurred by any director or
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officer in connection with such proceeding upon receipt of an undertaking by or
on behalf of such person to repay said amounts if it should be determined
ultimately that such person is not entitled to be indemnified under this Bylaw
or otherwise. Notwithstanding the foregoing, unless otherwise determined
pursuant to paragraph (d) of this Bylaw, no advance shall be made by the
Corporation to an officer of the Corporation (except by reason of the fact that
such officer is or was a director of the Corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such person acted in bad faith
or in a manner that such person did not believe to be in or not opposed to the
best interests of the Corporation.
(c)ENFORCEMENT. Without the necessity of entering into an express contract, all
rights to indemnification and advances to directors and officers under this
Bylaw shall be deemed to be contractual rights and be effective to the same
extent and as if provided for in a contract between the Corporation and the
director or officer. Any right to indemnification or advances granted by this
Bylaw to a director or officer shall be enforceable by or on behalf of the
person holding such right in any court of competent jurisdiction if (i) the
claim for indemnification or advances is denied, in whole or in part, or (ii)
no disposition of such claim is made within ninety (90) days of request
therefor. The claimant in such enforcement action, if successful in whole or in
part, shall be entitled to be paid also the expense of prosecuting his claim.
In connection with any claim for indemnification, the Corporation shall be
entitled to raise as a defense to any such action that the claimant has not met
the standards of conduct that make it permissible under the Delaware General
Corporation Law for the Corporation to indemnify the claimant for the amount
claimed. In connection with any claim by an officer of the Corporation (except
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such officer is or was a director of
the Corporation) for advances, the Corporation shall be entitled to raise a
defense as to any such action clear and convincing evidence that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the Corporation, or with respect to any
criminal action or proceeding that such person acted without reasonable cause
to believe that his conduct was lawful. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the Delaware
General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct. In any suit brought by a
director or officer to enforce a right to indemnification or to an advancement
of expenses hereunder, the burden of proving that the director or officer is
not entitled to be indemnified, or to such advancement of expenses, under this
Article XI or otherwise shall be on the Corporation.
(d)NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Bylaw
shall not be exclusive of any other right which such person may have or
hereafter acquire under any statute,
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provision of the Certificate of Incorporation, Bylaws, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding office.
The Corporation is specifically authorized to enter into individual contracts
with any or all of its directors, officers, employees or agents respecting
indemnification and advances, to the fullest extent not prohibited by the
Delaware General Corporation Law.
(e)SURVIVAL OF RIGHTS. The rights conferred on any person by this Bylaw shall
continue as to a person who has ceased to be a director, officer, employee or
other agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(f)INSURANCE. To the fullest extent permitted by the Delaware General
Corporation Law, the Corporation, upon approval by the Board of Directors, may
purchase insurance on behalf of any person required or permitted to be
indemnified pursuant to this Bylaw.
(g)AMENDMENTS. Any repeal or modification of this Bylaw shall only be
prospective and shall not affect the rights under this Bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the Corporation.
(h)SAVING CLAUSE. If this Bylaw or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the Corporation shall
nevertheless indemnify each director and officer to the full extent not
prohibited by any applicable portion of this Bylaw that shall not have been
invalidated, or by any other applicable law.
(i)CERTAIN DEFINITIONS. For the purposes of this Bylaw, the following
definitions shall apply:
(1)The term "proceeding" shall be broadly construed and shall include, without
limitation, the investigation, preparation, prosecution, defense, settlement,
arbitration and appeal of, and the giving of testimony in, any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative.
(2)The term "expenses" shall be broadly construed and shall include, without
limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in
settlement or judgment and any other costs and expenses of any nature or kind
incurred in connection with any proceeding.
(3)The term the "corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was
a director, officer, employee or agent of such constituent corporation, or is
or was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the
provisions of this Bylaw with respect to the resulting or surviving corporation
as he would have with respect to such constituent corporation if its separate
existence had continued.
(4)References to a "director," "officer," "employee," or "agent" of the
Corporation shall include, without limitation, situations where such person is
serving at the request of the Corporation
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as, respectively, a director, officer, employee, trustee or agent of another
corporation, partnership, joint venture, trust or other enterprise.
(5)References to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a director, officer, employee
or agent of the corporation which imposes duties on, or involves services by,
such director, officer, employee, or agent with respect to an employee benefit
plan, its participants, or beneficiaries; and a person who acted in good faith
and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the corporation"
as referred to in this Bylaw.
ARTICLE XII
NOTICES
Section 44. NOTICES.
(a)NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these Bylaws,
notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to his last known post office address as shown by the stock
record of the Corporation or its transfer agent.
(b)NOTICE TO DIRECTORS. Any notice required to be given to any director may be
given by the method stated in subsection (a), or by facsimile, telex or
telegram, except that such notice other than one which is delivered personally
shall be sent to such address as such director shall have filed in writing with
the Secretary, or, in the absence of such filing, to the last known post office
address of such director.
(c)AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly authorized
and competent employee of the Corporation or its transfer agent appointed with
respect to the class of stock affected, specifying the name and address or the
names and addresses of the stockholder or stockholders, or director or
directors, to whom any such notice or notices was or were given, and the time
and method of giving the same, shall in the absence of fraud, be prima facie
evidence of the facts therein contained.
(d)TIME NOTICES DEEMED GIVEN. All notices given by mail, as above provided,
shall be deemed to have been given as at the time of mailing, and all notices
given by facsimile, telex or telegram shall be deemed to have been given as of
the sending time recorded at time of transmission.
(e)METHODS OF NOTICE. It shall not be necessary that the same method of giving
notice be employed in respect of all directors, but one permissible method may
be employed in respect of any one or more, and any other permissible method or
methods may be employed in respect of any other or others.
(f)FAILURE TO RECEIVE NOTICE. The period or limitation of time within which any
stockholder may exercise any option or right, or enjoy any privilege or
benefit, or be required to act, or within which any director may exercise any
power or right, or enjoy any privilege, pursuant to any notice
L-18
sent him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.
(g)NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice is
required to be given, under any provision of law or of the Certificate of
Incorporation or Bylaws of the Corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not
be required and there shall be no duty to apply to any governmental authority
or agency for a license or permit to give such notice to such person. Any
action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by
the Corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
(h)NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is required to
be given, under any provision of law or the Certificate of Incorporation or
Bylaws of the Corporation, to any stockholder to whom (i) notice of two
consecutive annual meetings, and all notices of meetings or of the taking of
action by written consent without a meeting to such person during the period
between such two consecutive annual meetings, or (ii) all, and at least two,
payments (if sent by first class mail) of dividends or interest on securities
during a twelve-month period, have been mailed addressed to such person at his
address as shown on the records of the Corporation and have been returned
undeliverable, the giving of such notice to such person shall not be required.
Any action or meeting which shall be taken or held without notice to such
person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the Corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to
be given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
Section 45. AMENDMENTS.
Subject to paragraph (g) of Section 43 of the Bylaws, the Bylaws may be altered
or amended or new Bylaws adopted by the affirmative vote of at least sixty-six
and two-thirds percent (66-2/3%) of the voting power of all of the then-
outstanding shares of the Voting Stock. The Board of Directors shall also have
the power to adopt, amend, or repeal Bylaws.
L-19
ARTICLE XIV
LOANS TO OFFICERS
Section 46. LOANS TO OFFICERS. The Corporation may lend money to, or guarantee
any obligation of, or otherwise assist any officer or other employee of the
Corporation or of its subsidiaries, including any officer or employee who is a
Director of the Corporation or its subsidiaries, whenever, in the judgment of
the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a
pledge of shares of stock of the corporation. Nothing in these Bylaws shall be
deemed to deny, limit or restrict the powers of guaranty or warranty of the
Corporation at common law or under any statute.
ARTICLE XV
MISCELLANEOUS
Section 47. ANNUAL STATEMENT TO STOCKHOLDERS.
The board of directors shall present at each annual meeting, a full and clear
statement of the business and condition of the Corporation.
L-20
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") permits a
Delaware corporation to indemnify officers, directors, employees and agents for
actions taken in good faith and in a manner they reasonably believed to be in,
or not opposed to, the best interests of the corporation, and with respect to
any criminal action, which they had no reasonable cause to believe was
unlawful. The DGCL provides that a corporation may pay expenses (including
attorneys' fees) incurred by an officer or director in defending any civil,
criminal, administrative or investigative action (upon receipt of a written
undertaking to reimburse the corporation if indemnification is not
appropriate), and must reimburse a successful defendant for expenses, including
attorney's fees, actually and reasonably incurred, and permits a corporation to
purchase and maintain liability insurance for its directors and officers. The
DGCL provides that indemnification may be made for any claim, issue or matter
as to which a person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable to the corporation,
unless and only to the extent a court determines that the person is entitled to
indemnity for such expenses as the court deems proper.
The Holdco Certificate of Incorporation and Bylaws provide, among other things,
that, to the fullest extent authorized by the DGCL, Holdco shall indemnify each
person who is or has served as a director or officer of Holdco or any
predecessor of Holdco, or any other enterprise at the request of Holdco or of
any predecessor of Holdco, against expenses (including attorneys' fees),
judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding, arising by reason of the fact that
such person is or was an agent of Holdco. Holdco may also indemnify each of its
employees and agents against expenses (including attorneys' fees), judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with any proceeding arising by reason of the fact that such person
is or was an agent of Holdco.
The DGCL permits a Delaware corporation to include a provision in its
certificate of incorporation eliminating or limiting the personal liability of
any director to the corporation or its stockholders for monetary damages for a
breach of the director's fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, which concerns unlawful payments of dividends, stock purchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. The Holdco Certificate contains provisions limiting
the liability of its directors, to the fullest extent currently permitted by
the DGCL for monetary damages for breach of their fiduciary duty as directors.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
II-1
ITEM 21. EXHIBITS
(a) The following is a list of Exhibits included as part of this Registration
Statement. Holdco agrees to furnish supplementally a copy of any omitted
schedule to the Commission upon request. Items marked with an asterisk are
filed herewith.
2.1* Agreement and Plan of Reorganization and Merger, dated as of October 5,
1998, by and among Zitel Corporation, Millennium Holding Corp., Zenith
Acquisition Corp., Millennium Acquisition I Corp., and MatriDigm
Corporation (included as Annex A to the Proxy
Statement/Prospectus/Consent Solicitation).
2.2* Form of Shareholder Agreement, dated as of October 5, 1998 (included as
Annex D to the Proxy Statement/Prospectus/Consent Solicitation).
2.3* Form of Lock-Up Letter, dated as of October 5, 1998 (included as Annex E
to the Proxy Statement/Prospectus/Consent Solicitation).
2.4* Form of MatriDigm Affiliates Agreement, dated as of October 5, 1998
(included as Annex F-1 to the Proxy Statement/Prospectus/Consent
Solicitation).
2.5* Form of Zitel Affiliates Agreement, dated as of October 5, 1998
(included as Annex F-2 to the Proxy Statement/Prospectus/Consent
Solicitation).
4.1* Form of Specimen Stock Certificate.
5.1+ Opinion of Skadden, Arps, Slate, Meagher & Flom LLP to Zitel
Corporation, regarding the legality of the securities being registered.
8.1+ Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, as to certain
United States federal income tax consequences of the Zitel Merger.
8.2+ Opinion of Arter & Hadden LLP as to certain United States federal income
tax consequences of the MatriDigm Merger.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Consent of PricewaterhouseCoopers LLP.
23.3+ Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in its
opinion filed as Exhibits 5.1 and 8.1 hereto).
23.4+ Consent of Arter & Hadden LLP (included in its opinion filed as Exhibit
8.2 hereto).
24.1* Power of Attorney (see Page II-6).
99.1* Form of Proxy Card to be mailed to holders of Zitel Corporation.
99.2* Form of Written Consent to be mailed to holders of MatriDigm
Corporation.
99.3* Letter to Shareholders of Zitel Corporation.
99.4* Notice of Special Meeting of Zitel Corporation Shareholders.
99.5* Letter to Shareholders of MatriDigm Corporation.
- --------
* Filed herewith.
+ To be filed by amendment.
II-2
(b) Financial Statement Schedules.
MARTRIDIGM CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
BALANCE AT BEGINNING CHARGED TO COSTS BALANCE AT END
DESCRIPTION OF PERIOD AND EXPENSES DEDUCTIONS OF PERIOD
----------- -------------------- ---------------- ---------- --------------
Period ended September
30, 1998
Deducted from asset
accounts:
Property and
equipment............ -- $ 49,680 -- $ 49,680
Technology rights..... -- 73,100 -- 73,100
Other assets.......... -- 12,000 -- 12,000
-------- -------- -------- ----------
Total............... -- $134,780 -- $ 134,780
======== ======== ======== ==========
Year ended September 30,
1997
Deducted from asset
accounts:
Property and
equipment............ $ 49,680 $885,483 $(76,157)(1) $ 859,006
Technology rights..... 73,100 87,721 -- 160,821
Other assets.......... 12,000 14,400 -- 26,400
-------- -------- -------- ----------
Total............... $134,780 $987,604 $(76,157) $1,046,227
======== ======== ======== ==========
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(1) Disposals
ITEM 22. UNDERTAKING
(a) The undersigned Registrant hereby undertakes: (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registrant statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar amount of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than a 20 percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
II-3
(b) The undersigned Registrant hereby undertakes that, for purposes of any
liability under the Securities Act, each filing of the Registrant's annual
report pursuant to section 13(a) or section 15(d) of the Exchange Act (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(c) (1) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registration in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form S-4, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Fremont,
State of California on November 5, 1998.
MILLENNIUM HOLDING CORP.
/s/ Jack H. King
By: _________________________________
JACK H. KING
CHIEF EXECUTIVE OFFICER
II-5
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jack H. King and Henry C. Harris and
each of them, jointly and severally, as his true and lawful attorneys-in-fact
and agents, each with full power of substitution for him and in his name, place
and stead in any and all capacities, to sign any and all amendments to this
Registration Statement, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-of-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each said
attorneys-in-fact and agent or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON NOVEMBER 5, 1998.
SIGNATURE TITLE
--------- -----
/s/ JACK H. KING Director and Chief
______________________________________ Executive Officer
JACK H. KING
/s/ CATHERINE P. LEGO Director
______________________________________
CATHERINE P. LEGO
/s/ HENRY C. HARRIS Director
______________________________________
HENRY C. HARRIS
II-6
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
2.1* Agreement and Plan of Reorganization and Merger, dated
as of October 5, 1998, by and among Zitel Corporation,
Millennium Holding Corp., Zenith Acquisition Corp.,
Millennium Acquisition I Corp., and MatriDigm
Corporation (included as Annex A to the Proxy
Statement/Prospectus/Consent Solicitation).
2.2* Form of Shareholder Agreement, dated as of October 5,
1998 (included as Annex D to the Proxy
Statement/Prospectus/Consent Solicitation).
2.3* Form of Lock-Up Letter, dated as of October 5, 1998
(included as Annex E to the Proxy
Statement/Prospectus/Consent Solicitation).
2.4* Form of MatriDigm Affiliates Agreement, dated as of
October 5, 1998 (included as Annex F-1 to the Proxy
Statement/Prospectus/Consent Solicitation).
2.5* Form of Zitel Affiliates Agreement, dated as of October
5, 1998 (included as Annex F-2 to the Proxy
Statement/Prospectus/Consent Solicitation).
4.1* Form of Specimen Stock Certificate.
5.1+ Opinion of Skadden, Arps, Slate, Meagher & Flom LLP to
Zitel Corporation, regarding the legality of the
securities being registered.
8.1+ Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, as
to certain United States federal income tax
consequences of the Zitel Merger.
8.2+ Opinion of Arter & Hadden LLP as to certain United
States federal income tax consequences of the MatriDigm
Merger.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Consent of PricewaterhouseCoopers LLP.
23.3+ Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in its opinion filed as Exhibits 5.1 and 8.1
hereto).
23.4+ Consent of Arter & Hadden LLP (included in its opinion
filed as Exhibit 8.2 hereto).
24.1* Power of Attorney (see Page II-6).
99.1* Form of Proxy Card to be mailed to holders of Zitel
Corporation.
99.2* Form of Written Consent to be mailed to holders of
MatriDigm Corporation.
99.3* Letter to Shareholders of Zitel Corporation.
99.4* Notice of Special Meeting of Zitel Corporation
Shareholders.
99.5* Letter to Shareholders of MatriDigm Corporation.
- --------
* Filed herewith.
+ To be filed by amendment.