EXHIBIT 4.1
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR OFFERED FOR
SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
NO. ____ $___________
ZITEL CORPORATION
3% CONVERTIBLE SUBORDINATED DEBENTURE DUE FEBRUARY 1, 2000
THIS DEBENTURE ("Debenture") is one of a duly authorized issue of
Debentures of ZITEL CORPORATION, a corporation duly organized and existing
under the laws of the State of California (the "Company"), designated as the
Company's 3% Convertible Subordinated Debentures Due February 1, 2000, in an
aggregate principal amount not exceeding FIVE MILLION U.S. DOLLARS
(U.S.$5,000,000) (the "Debenture").
FOR VALUE RECEIVED, the Company promises to pay to ____________________,
the initial holder hereof, or its order (including successors-in-interest,
the "Holder"), the principal sum of ____________________________________
____________ U.S. DOLLARS (U.S. $___________) on February 1, 2000 (the
"Maturity Date") in the manner and amount and subject to the terms and
conditions of Section 6 hereof and to pay interest on the principal sum
outstanding under this Debenture ("Outstanding Principal Amount"), at the
rate of 3% per annum due and payable quarterly in arrears on the first day of
September, December, March and June of each year (each an "Interest Payment
Date"), with the first such payment due on March 1, 1999. Interest shall
accrue daily and compound quarterly commencing on the date hereof and shall
continue until payment in full of all amounts due under this Debenture. The
interest so payable will be paid to the person in whose name this Debenture
is registered on the records of the Company regarding registration and
transfers of the Debenture (the "Debenture Register"). Capitalized terms used
herein and not otherwise defined shall have the meanings set forth in the
Convertible Subordinated Debenture Purchase Agreement dated as of February 2,
1999 between the Company and the Holder and the other parties thereto (the
"Purchase Agreement") or the Registration Rights Agreement dated as of
February 2, 1999 between the Company and the Holder and the other parties
thereto (the "Registration Rights Agreement").
The principal of, and default payments (referred to below) in respect of,
this Debenture are payable in such coin or currency of the United States as of
the time of payment is legal tender for payment of public and private debts, at
the address last appearing on the Debenture Register of the Company as
designated in writing by the Holder hereof from time to time. The interest on
this Debenture is payable in registered Common Stock of the Company, with the
number of shares of Common Stock determined by dividing (x) the amount of
interest due for such payment period by (y) the Conversion Price determined as
if the Interest Payment Date were a Holder Conversion Date ("Common Stock
Interest"); PROVIDED, HOWEVER, that if such stock is not subject
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to Effective Registration, such interest shall be payable in such coin or
currency of the United States as of the time of payment is legal tender for
payment of public and private debts. If neither the Common Stock Interest
due hereunder is delivered, nor the cash interest paid, to the Holder as
provided above, the Holder may choose to add such amounts to the Outstanding
Principal Amount. Any Common Stock Interest or cash interest when so added
to the Outstanding Principal Amount due under this Debenture shall, for all
purposes of this Debenture, be deemed to have been part of the principal
indebtedness originally evidenced by this Debenture including, without
limitation, for purposes of determining interest payable hereunder after the
applicable Interest Payment Date for which such Common Stock Interest was not
delivered, or cash interest was not paid, by the Company and amounts
convertible into Common Shares hereunder after such applicable Interest
Payment Date.
The Company will pay any principal due and all accrued and unpaid
interest due upon this Debenture to the person that is the Holder of this
Debenture on the records of the Company as of the applicable Interest Payment
Date and addressed to such Holder at the last address appearing on the
Debenture Register.
The Outstanding Principal Amount and interest due hereunder shall bear
interest, from and after the 31st day following the occurrence and during the
continuance of an Event of Default hereunder, at the rate equal to the lower
of the Citibank Prime Rate per annum plus 7% or the highest rate permitted by
law.
Additional cash payments (referred to as "default payments") may be
required pursuant to the Registration Rights Agreement if there occurs an
"Interfering Event" (as defined therein). Such default payments, if not paid
in cash when due, may be treated by the Holder in its sole discretion as
being added to the Outstanding Principal Amount due under this Debenture.
Subject to applicable law, any interest otherwise payable that is not
paid for any applicable period because it would exceed the highest rate
permitted by law shall become payable whenever the payment thereof, together
with other interest due for any such subsequent period would not exceed such
highest legal rate.
The Holder of this Debenture is entitled to certain rights and remedies
pursuant to the Purchase Agreement and Registration Rights Agreement,
including without limitation provisions requiring mandatory redemption of the
Debenture. This Debenture does not provide voting rights to the Holder.
This Debenture is subject to the following additional provisions:
1. DENOMINATION. The Debentures are exchangeable for an equal
aggregate principal amount of Debentures of different denominations, as
requested by the Holder surrendering the same. No service charge will be
made for such registration or transfer or exchange.
2. TRANSFERS. This Debenture may be transferred or exchanged in the
United States only in compliance with the Securities Act of 1933, as amended
(the "Act") and applicable state securities laws, or applicable exemptions
therefrom. Prior to due presentment for transfer of this Debenture, the Company
may treat the person in whose name this Debenture is duly registered
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on the Company's Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided, whether or not this Debenture is
overdue.
3. DEFINITIONS. For purposes hereof the following definitions shall
apply:
"CHANGE IN CONTROL TRANSACTION" shall mean the occurrence of (x)
any consolidation or merger of the Company with or into any other corporation
or other entity or person (whether or not the Company is the surviving
corporation), or any other corporate reorganization or transaction or series
of related transactions in which in excess of 50% of the Company's voting
power is transferred through a merger, consolidation, tender offer or similar
transaction, or (y) any person (as defined in Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), together with its
affiliates and associates (as such terms are defined in Rule 405 under the
Securities Act of 1933, as amended (the "Act")), beneficially owns or is
deemed to beneficially own (as described in Rule 13d-3 under the Exchange Act
without regard to the 60-day exercise period) in excess of 50% of the
Company's voting power.
"CLOSING BID PRICE" shall mean the last closing bid price on the
principal Approved Market (as defined in the Purchase Agreement) as reported
by Bloomberg Financial Market or an equivalent reliable reporting service
selected by the Holder and the Company.
"CLOSING DATE" shall mean the date of original issuance of this
Debenture.
"COMMON STOCK" shall mean the common stock, no par value, of the
Company.
"CONVERSION NOTICE" shall have the meaning set forth in Paragraph
5(g).
"CONVERSION PRICE" shall have the meaning set forth in Paragraph
5(c).
"CONVERSION RATE" shall have the meaning set forth in Paragraph
5(b).
"FORCED CONVERSION DATE" shall mean the Maturity Date, without
taking into consideration any acceleration thereof by reason of default,
required redemption, or otherwise. The Forced Conversion Date shall be
subject to deferral as provided for herein and in the Registration Rights
Agreement.
"HOLDER CONVERSION DATE" shall have the meaning set forth in
Paragraph 5(g).
"MARKET PRICE FOR SHARES OF COMMON STOCK" shall mean the price of
one share of Common Stock determined as follows:
(i) If the Common Stock is listed on an Approved Market, the
Closing Bid Price;
(ii) If (i) does not apply but the Common Stock is quoted in
the over-the-counter market, another recognized exchange, on the pink sheets
or bulletin board, the lesser of (A) the lowest sales price or (B) the mean
between the last reported "bid" and "asked" prices thereof on the date of
valuation; and
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(iii) If neither clause (i) nor (ii) above applies, the market
value as determined by a nationally recognized investment banking firm or
other nationally recognized financial advisor retained by the Company for
such purpose, taking into consideration, among other factors, the earnings
history, book value and prospects for the Company, and the prices at which
shares of Common Stock recently have been traded. Such determination shall
be conclusive and binding on all persons.
"MATRIDIGM TRANSACTION" shall mean any transaction or series of
transactions whereby the Company acquires debt or equity securities of
Matridigm Corporation, a California corporation, or the business of the
Company and Matridigm are combined, and shall include, without limitation,
the issuance for cash of shares of the Common Stock of the Company with a
fair market value not to exceed $2,000,000, as determined as of the purchase
date and pursuant to one-time reset provisions agreed to between the Company
and the purchasers, with the proceeds used to procure the release of
obligations of the purchasers to guarantee obligations of Matridigm.
"TRADING DAY" shall mean a day on which the Common Stock is traded
on the NASDAQ or principal exchange on which the Common Stock has been listed
(or any similar organization or agency succeeding such market or exchange's
functions of reporting prices).
4. CHANGE IN CONTROL, ETC. If a Change in Control Transaction occurs
before 30 days have elapsed after the date that the Registrable Securities
(as defined in the Registration Rights Agreement) have been registered as
contemplated therein (the "Effectiveness Date") (such 30 days to be extended
one (1) day for each day after such date on which there is a lack of
Effective Registration), or if the provisions of Section 7 have not been
complied with, then the Holder shall be entitled to have the Company redeem
this Debenture in whole or in part at a redemption price equal to 120% of the
Outstanding Principal Amount of this Debenture plus all accrued but unpaid
interest and penalties on this Debenture. Such Holder shall be entitled to
make such election at any time after commencement and up to 10 days after the
effective date of the Change in Control Transaction. For purposes of this
Paragraph 4, the commencement date shall be the day upon which the Change in
Control Transaction was publicly announced.
5. CONVERSION AT THE OPTION OF THE HOLDER. The Holder of this
Debenture shall have the following conversion rights.
(a) HOLDER'S RIGHT TO CONVERT. This Debenture shall be
convertible at any time, in whole or in part, at the option of the Holder
hereof, into fully paid, validly issued and nonassessable shares of Common
Stock. If this Debenture is converted in part, the remaining portion of this
Debenture not so converted shall remain entitled to the conversion rights
provided herein.
(b) CONVERSION PRICE FOR HOLDER CONVERTED SHARES. The Outstanding
Principal Amount of this Debenture that is converted into shares of Common
Stock at the option of the Holder shall be convertible into the number of
shares of Common Stock which results from application of the following
formula:
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P + I + D
---------
Conversion Price
P = Outstanding Principal Amount of this Debenture submitted for
conversion
I = accrued but unpaid interest (not previously added to principal)
on P as of the Holder Conversion Date
D = default payments (not previously added to principal) as of the
Holder Conversion Date
The number of shares of Common Stock into which each $1,000 principal
amount of this Debenture hereto may be converted pursuant to this paragraph
hereof is hereafter referred to as the "Conversion Rate."
(c) INITIAL CONVERSION PRICE. Subject to adjustments pursuant to
Sections 5 and 7, this Debenture will have a conversion price (the
"Conversion Price") equal to 90.0% of the average of the Closing Bid Price
for each of the ten (10) Trading Days immediately following, but not
including, the Closing Date (such ten (10) Trading Day average being referred
to as the "Closing Price"). The Holder shall deliver a notice to the Company
on the eleventh Trading Day immediately following the Closing Date setting
forth the calculation of the Conversion Price, which calculation shall be
binding upon the Company absent manifest error in such calculation.
(d) PERIODIC ADJUSTMENTS TO THE CONVERSION PRICE. If, at any time
prior to the later of (x) the Registration Statement being declared effective
by the SEC or (y) the 45 day anniversary of the Closing Date, the Closing Bid
Price is for five (5) consecutive Trading Days (the fifth of such five (5)
consecutive Trading Days being the "Periodic Reset Date") less than 50% of
the Closing Price (such Closing Bid Price, multiplied by 90%, being known as
the "Periodic Reset Price"), THEN the Company will deliver into the Holder's
possession within three (3) Trading Days ("T+3") of the Periodic Reset Date,
such number of additional shares of Common Stock as, together with such other
shares of Common Stock as the Holder previously acquired as a result of the
conversion of this Debenture, would result in such Holder having acquired in
the aggregate a number of shares of Common Stock equal to the number that
would have been acquired if all prior conversions had been at the Periodic
Reset Price as the Conversion Price. Adjustments pursuant to this Section
5(d) may occur multiple times. If at the Interim Reset Date (defined below)
the Interim Reset Price is greater than the Periodic Reset Price pursuant to
which shares of Common Stock were delivered to the Holder under this
paragraph (d), then the Holder will be required to return a portion of the
shares previously delivered, so that the number of shares delivered pursuant
to paragraphs (d) and (e) would be as determined at the Interim Reset Price.
(e) ADJUSTMENTS TO THE CONVERSION PRICE. If the lesser of (i) the
average of the Closing Bid Prices of the Common Stock for the twenty (20)
consecutive Trading Days prior to but excluding the forty-five (45) calendar
day anniversary of the day on which the Registration Statement is declared
effective by the SEC (such 45 calendar day anniversary to be extended one day
for each day during that period in which there is not Effective Registration)
and (ii) the average of the Closing Bid Prices of the Common Stock for the
twenty (20) consecutive Trading Days prior to but excluding the 60 calendar
day anniversary of the Closing
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Date (such lesser price, multiplied by 90%, being known as the "Final Reset
Price" and the date from which the Final Reset Price is calculated being
known as the "Final Reset Date"), is less than the Closing Price, THEN if and
only if such Final Reset Price is lower than the Conversion Price, (x) such
Final Reset Price will automatically become the Conversion Price (subject to
further adjustment) for all purposes of this Debenture, and (y) with respect
to any shares issued to the Holder pursuant to Conversion Notices (as defined
below) submitted after the day on which the Registration Statement is
declared effective by the SEC and still held by such Holder on the Final
Reset Date, the Company will deliver into the Holder's possession within T+3
of the Final Reset Date, such number of additional shares of Common Stock (if
any) as, together with such other shares of Common Stock as the Holder
acquired pursuant to Conversion Notices (as defined below) submitted after
the day on which the Registration Statement is declared effective by the SEC
as a result of the conversion of this Debenture and which such Holder still
holds on the Final Reset Date, would result in such Holder having acquired in
the aggregate a number of shares of Common Stock equal to the number that
would have been acquired if all such prior conversions had been at the Final
Reset Price as the Conversion Price. An interim adjustment pursuant to this
Section 5(e) shall be made on the earlier of the dates specified in clauses
(i) and (ii) above (the "Interim Reset Date"), which price shall be the
average specified in such clause (the "Interim Reset Price") and shall be
effective until the Final Reset Date.
(f) ADJUSTMENTS TO CLOSING PRICE. In the event that subsequent to
the Closing Date and prior to or during any period of consecutive trading
days provided for above, the Company shall pay any dividend on the Common
Stock payable in Common Stock or in rights to acquire Common Stock, or shall
effect a stock split or reverse stock split, then the Closing Price shall be
proportionately decreased or increased, as appropriate, to give effect to
such event.
(g) MECHANICS OF CONVERSION. In order to convert this Debenture
(in whole or in part) into full shares of Common Stock, the Holder shall
surrender this Debenture, duly endorsed, by either overnight courier or 2-day
courier, to the principal office of the Company, and shall give written
notice in the form of EXHIBIT 1 hereto (the "Conversion Notice") by facsimile
(with the original of such notice forwarded with the foregoing courier) to
the Company at such office that the Holder elects to convert the principal
amount (plus accrued but unpaid interest and default payments) specified
therein, which such notice and election shall be revocable by the Holder at
any time prior to its receipt of the Common Stock upon conversion; PROVIDED,
HOWEVER, that the Company shall not be obligated to issue certificates
evidencing the shares of the Common Stock issuable upon such conversion
unless either the Debenture evidencing the principal amount is delivered to
the Company as provided above, or the Holder notifies the Company that such
Debenture(s) have been lost, stolen or destroyed and promptly executes an
agreement reasonably satisfactory to the Company to indemnify the Company
from any loss incurred by it in connection with such lost, stolen or
destroyed Debentures.
The Company shall issue and deliver within T+3 after delivery to the
Company of such Conversion Notice, to such Holder of Debenture(s) at the
address of the Holder, or to its designee, a certificate or certificates for
the number of shares of Common Stock to which the Holder shall be entitled as
aforesaid, together with a calculation of the Conversion Rate and a Debenture
or Debentures for the principal amount of Debentures not submitted for
conversion. The date on which the Conversion Notice is given (the "Holder
Conversion Date") shall be
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deemed to be the date the Company received by facsimile the Conversion
Notice, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
In lieu of delivering physical certificates representing the Common
Shares issuable upon conversion of Debentures or the Warrant Shares (as
defined in the Purchase Agreement) deliverable upon exercise of Warrants (as
defined in the Purchase Agreement), provided the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer ("FAST") program, upon request of the holder, the Company
shall use its best efforts to cause its transfer agent to electronically
transmit the Common Shares and Warrant Shares issuable upon conversion or
exercise to the Holder, by crediting the account of Holder's prime broker
with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system.
The time periods for delivery described above shall apply to the electronic
transmittals through the DWAC system. The parties agree to coordinate with
DTC to accomplish this objective. The conversions pursuant to Sections 5 and
6 shall be deemed to have been made immediately prior to the close of
business on the Holder Conversion Date. The person or persons entitled to
receive the Common Shares issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such Common Shares at the
close of business on the Holder Conversion Date.
6. CONVERSION UPON MATURITY.
(a) At the Forced Conversion Date, all Debentures outstanding at
such time shall be automatically converted into Common Stock of the Company
in accordance with the terms of this Debenture, the Purchase Agreement and
the Registration Rights Agreement, without notice; PROVIDED, HOWEVER, that
such conversion will be subject to the limitations on a Holder's right to
convert as set forth in paragraph 12 below, and, PROVIDED FURTHER that the
Forced Conversion Date shall be deferred for such number of days as is equal
to 1.5 times the number of days (A) there is not Effective Registration but
not including the first 90 days after the Closing; (B) there is not a
sufficient amount of Common Shares available for conversion of all
outstanding Debentures; or (C) for any other reason there is a default in, or
failure of performance of, the obligations of the Company under this
Debenture, the Purchase Agreement or the Registration Rights Agreement which
interferes with the ability of the Holder to convert this Debenture or to
freely sell without restriction the shares of Common Stock available upon
conversion thereof. The portion of the Outstanding Principal Amount of the
Debenture that may not be converted by reason of such paragraph 12 limitation
will be paid to the Holder by the Company in cash in an amount equal to 110%
of the sum of (i) the Outstanding Principal Amount and (ii) accrued but
unpaid interest and default payments ("Cash Payment").
The Company shall issue and deliver within T+3 after delivery to the
Company of this Debenture, or after receipt of the agreement and
indemnification described in paragraph 5(c) above, to the Holder of the
Debenture at the address of the Holder, or to its designee, a certificate or
certificates for the number of shares of Common Stock to which the Holder
shall be entitled hereunder, together with the Cash Payment and a calculation
of the Conversion Rate. The person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock
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on the Forced Conversion Date. The Forced Conversion Date shall be a "Holder
Conversion Date" for purposes of this Debenture.
(b) Notwithstanding the preceding subparagraph (6)(a), no holder
of Debentures shall be obligated to convert any Debentures held by such
Holder on the Forced Conversion Date unless and until each of the following
conditions has been satisfied or exists, each of which shall be a condition
precedent to any such automatic conversion:
(i) no material default or breach exists, and no event shall
have occurred which constitutes (or would constitute with notice or the
passage of time or both) a material default or breach of the Purchase
Agreement, the Registration Rights Agreement, any Warrant or this Debenture
(for purposes of this clause (i), "material" shall mean materially affecting
the business, affairs or prospects of the Company or the market for its
securities, or having a material effect on the rights and benefits sought to
be obtained by the Holders in acquiring the Debentures).
(ii) none of the events described in clauses (i) through (iv)
of Section 2(b) of the Registration Rights Agreement shall have occurred and
be continuing;
(iii) Effective Registration (as defined in the Purchase
Agreement) has occurred and is continuing and has continuously existed for
the prior 60 consecutive trading days;
(iv) the Company and its direct and indirect subsidiaries on
a consolidated basis has assets with a net realizable fair market value
exceeding its liabilities and is able to pay all its debts as they become due
in the ordinary course of business, and the Company is not and has not been
subject to any liquidation, dissolution or winding up of its affairs; and
(v) each Holder of Debentures shall have received a
certificate from an appropriate executive officer of the Company certifying
that each of the foregoing conditions precedent exist or have been satisfied.
The Company shall be given the opportunity after the Forced Conversion
Date to cure the above conditions, and shall after effecting such cure give
each Holder of Debentures ten (10) Trading Days' notice prior to an automatic
conversion of such Holder's Debentures. Such automatic conversion shall be
subject to and governed by all the provisions relating to voluntary
conversion of the Debentures contained herein.
If the Company is not able to cure the above conditions, then (i) the
Company has the right upon 60 days' prior written notice to the Holders,
provided that such notice shall be effective if and only if the Company has
had unrestricted freely trading Common Stock available for conversion by the
Holders for the duration of the 60-day notice period and the Holders shall
have had the opportunity to convert their Debentures during that period, and
(ii) each Holder has the right to cause the Company, to redeem all Debentures
outstanding at such time at a redemption price per Debenture equal to 120% of
the sum of the Outstanding Principal Amount of the Debenture plus accrued but
unpaid interest and default payments on the Debenture.
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(c) The Company has no right to prepay this Debenture in whole or
in part, or to pay this Debenture, except as set forth in this Section 6.
7. STOCK SPLITS; DIVIDENDS; ADJUSTMENTS; REORGANIZATIONS; PAYMENTS IN
LIEU OF CONVERSIONS.
(a) If the Company, at any time while the Debentures are
outstanding, (i) shall pay a stock dividend or otherwise make a distribution
or distributions on any equity securities (including investments or
securities convertible into or exchangeable for such equity securities) in
shares of Common Stock, (ii) issue any securities payable in shares of Common
Stock, (iii) subdivide outstanding Common Shares into a larger number of
shares, (iv) combine outstanding Common Stock into a smaller number of
shares, the Conversion Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding before
such event and of which the denominator shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to
this Section 7(a) shall become effective immediately after the record date
for the determination of shareholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date
in the case of a subdivision or combination.
(b) In the event that the Company issues or sells any Common Stock
or securities which are convertible into or exchangeable for its Common Stock
or any convertible or exchangeable securities, or any warrants or other
rights to subscribe for or to purchase or any options for the purchase of its
Common Stock or any such convertible or exchangeable securities (other than
shares or options issued pursuant to the Company's current employee or
director option plans or stock purchase plans as amended consistent with the
practice in the high-technology sector, at prices consistent with past
practice or shares issued upon exercise of options, warrants or rights
outstanding on the date of the Purchase Agreement and listed in Section
2.1(c) of the Disclosure Schedule or pursuant to a Matridigm Transaction) at
an effective purchase price per share which is less than the greater of the
Conversion Price then in effect or the Market Price for Shares of the Common
Stock on the trading day next preceding such issue or sale, then in each such
case, the Conversion Price in effect immediately prior to such issue or sale
shall be reduced effective concurrently with such issue or sale to an amount
determined by multiplying the Conversion Price then in effect by a fraction,
(x) the numerator of which shall be the sum of (1) the number of shares of
Common Stock outstanding immediately prior to such issue or sale, plus (2)
the number of shares of Common Stock which the aggregate consideration
received by the Company for such additional shares would purchase at such
Market Price for shares of Common Stock or Conversion Price, as the case may
be, then in effect; and (y) the denominator of which shall be the number of
shares of Common Stock of the Company outstanding immediately after such
issue or sale.
For the purposes of the foregoing adjustment, in the case of the
issuance of any convertible or exchangeable securities, warrants, options or
other rights to subscribe for or to purchase or exchange for, shares of
Common Stock ("Exchangeable Securities"), the maximum number of shares of
Common Stock issuable upon exercise, conversion or exchange of such
Exchangeable Securities shall be deemed to be outstanding, provided that no
further adjustment shall be made upon the actual issuance of Common Stock
upon exercise, exchange or conversion of such Exchangeable Securities.
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In the event of any such issuance for a consideration which is less than
such Market Price for Shares of Common Stock and also less than the
Conversion Price then in effect, than there shall be only one such adjustment
by reason of such issuance, such adjustment to be that which results in the
greatest reduction of the Purchase Price computed as aforesaid.
(c) If the Company, at any time while the Debentures are
outstanding, shall distribute to all holders of Common Shares evidences of
its indebtedness or assets or rights or warrants to subscribe for or purchase
any security (excluding those referred to in Section 7(b) above) then in each
such case the Conversion Price at which the Debenture shall thereafter be
convertible shall be determined by multiplying the Conversion Price in effect
immediately prior to the record date fixed for determination of shareholders
entitled to receive such distribution by a fraction of which the denominator
shall be the Market Price for Shares of Common Stock determined as of the
record date mentioned above, and of which the numerator shall be such Market
Price for Shares of Common Stock on such record date less the then fair
market value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding Common Stock as
determined by the Board of Directors in good faith; PROVIDED, HOWEVER that in
the event of a distribution exceeding 25% of the net assets of the Company,
such fair market value shall be determined at the Company's expense by a
nationally recognized or major regional investment banking firm or firm of
independent chartered accountants of recognized standing (which may be the
firm that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the Board of Directors and Holders of
a majority in interest of the Debentures. In either case the adjustments
shall be described in a statement provided to all holders of Debentures of
the portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one Common Share. Such adjustment shall be
made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(d) (i) In the event that at any time or from time to time after
the Closing Date, the Common Stock issuable upon the conversion of the
Debentures is changed into the same or a different number of shares of any
class or classes of stock, whether by merger, consolidation,
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or reorganization provided for
elsewhere in this Paragraph 7), then and as a condition to each such event
provision shall be made so that each Holder of Debentures shall have the
right thereafter to convert such Debenture into the kind of stock receivable
upon such recapitalization, reclassification or other change by holders of
shares of Common Stock, all subject to further adjustment as provided herein;
provided that no further adjustment shall be made in connection with a
Matridigm Transaction. In such event, the formulae set forth herein for
conversion and redemption shall be equitably adjusted to reflect such change
in number of shares or, if shares of a new class of stock are issued, to
reflect the market price of the class or classes of stock (applying the same
factors used in determining the Conversion Price) issued in connection with
the above described transaction.
(ii) If at any time or from time to time after the Closing
Date there is a capital reorganization of the Common Stock, including by way
of a sale of all or substantially all of the assets of the Company (other
than a recapitalization, subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this Paragraph 7), then, as a
part of and a condition to such reorganization, provision shall be made in a
manner reasonably
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acceptable to the Holders of the Debentures so that the Holders of the
Debentures shall thereafter be entitled to receive upon conversion of the
Debentures the number of shares of stock or other securities or property to
which a holder of the number of shares of Common Stock deliverable upon
conversion would have been entitled on such capital reorganization. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Paragraph 7 with respect to the rights of the Holders of
the Debentures after the reorganization to the end that the provisions of
this Paragraph 7 shall be applicable after that event and be as nearly
equivalent as may be practicable, including, by way of illustration and not
limitation, by equitably adjusting the formulae set forth herein for
conversion and redemption to reflect the market price of the securities or
property (applying the same factors used in determining the Market Price for
Shares of Common Stock) issued in connection with the above described
transaction.
(iii) In addition to the foregoing, if the holders of shares
of Common Stock receive any non-publicly traded securities or other property
or cash as part or all of the consideration for a reorganization,
consolidation, merger or sale, then such distribution shall be treated to the
extent thereof as a distribution under Section 7(c) above and such Section
shall also apply to such distribution. To the extent that, pursuant to the
foregoing adjustments, (i) the Debentures become convertible into securities
of an issuer with a greater number of outstanding shares of common stock than
the Company and (ii) on the date of the relevant merger agreement or the date
on which the terms of the restructuring are set, the Market Price is less
than the Conversion Price, then the adjustments set forth in Section 7(b)
herein shall also be applied as if the additional shares were issued after
the effective date of the merger or reorganization.
(e) Whenever the Conversion Price is adjusted pursuant to Section
7(a), (b), (c) or (d), the Company shall promptly mail to each Holder of the
Debentures, a notice setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment.
(f) In the event of any taking by the Company of a record date of
the holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend or other
distribution, any security or right convertible or exchangeable into or
entitling the holder thereof to receive additional Common Shares, or any
right to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other right,
the Company shall deliver to each Holder of Debentures at least 20 days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution,
security or right and the amount and character of such dividend,
distribution, security or right.
(g) In no event shall the Company issue more than the Maximum
Share Amount (as defined below and subject to adjustment as provided herein)
upon conversion of this Debenture, unless the Company shall have obtained
Stockholder Approval (as defined below) or a waiver of such requirement by
NASDAQ. As used herein, Stockholder Approval means approval by the
stockholders of the Company in accordance with Rule 4460(i) of the rules of
NASDAQ. Once the Maximum Share Amount has been issued (the date of which is
hereinafter referred to as the "Maximum Conversion Date"), unless the Company
shall have obtained Stockholder Approval or a waiver of such requirement by
NASDAQ, in lieu of any further right to convert this Debenture, and in full
satisfaction of the Company's obligations under this
11
Debenture, the Company shall pay to the Holder, within three (3) business
days of the Maximum Conversion Date, an amount equal to the greater of (i)
120% TIMES the sum of (a) the then outstanding principal amount of this
Debenture immediately following the Maximum Conversion Date PLUS (b) accrued
and unpaid interest on such principal amount PLUS (c) accrued and unpaid
default payments and interest, if any, PLUS (d) any optional amounts that may
be added thereto at the Maximum Conversion Date by the Holder in accordance
with the terms hereof (the then outstanding principal amount of this
Debenture immediately following the Maximum Conversion Date PLUS the amounts
referred to in clauses (b), (c) and (d) above shall collectively be referred
to as the "Remaining Convertible Amount"), or (ii) the Remaining Convertible
Amount DIVIDED BY the Conversion Price (based on the five (5) consecutive
Trading Days ending on the date which is two (2) trading days prior to the
date of payment) MULTIPLIED BY the Closing Bid Price of the Common Stock on
the Approved Market on the Trading Day immediately preceding the date of
payment. The Maximum Share Amount shall mean an aggregate of 4,284,603
shares of Common Stock (19.9% of the Company's outstanding shares of Common
Stock as of January 15, 1999 minus 75,000 shares reserved for issuance upon
exercise of the Warrants), subject to equitable adjustments from time to time
for stock splits, stock dividends, combinations, capital reorganizations and
similar events relating to the Common Stock occurring after the date hereof.
With respect to each Holder of Debentures, the Maximum Share Amount shall
refer to such Holder's PRO RATA share thereof. In the event that the Company
obtains Stockholder Approval, the approval of NASDAQ or otherwise concludes
that it is able to increase the number of shares to be issued above the
Maximum Share Amount (such increased number being the "New Maximum Share
Amount"), the references to Maximum Share Amount, above, shall be deemed to
be, instead, references to the greater New Maximum Share Amount. In the
event that Stockholder Approval is not obtained or a registration statement
covering the additional shares of Common Stock which constitute the New
Maximum Share Amount is not effective prior to the Maximum Share Amount being
issued (if such registration statement is necessary to allow for the public
resale of such securities), the Maximum Share Amount shall remain unchanged;
PROVIDED, HOWEVER, that the Holder may grant an extension of the effective
date of such registration statement. In the event that (a) the aggregate
number of shares of Common Stock issued pursuant to this Debenture and the
other Debentures issued on the Closing Date represents at least fifty percent
(50%) of the Maximum Share Amount and (b) the sum of (x) the aggregate number
of share of Common Stock issued pursuant to this Debenture and the other
Debentures issued on the Closing Date PLUS (y) the aggregate number of shares
of Common Stock that remain issuable pursuant to this Debenture and the other
Debentures issued on the Closing Date and Warrants issued pursuant to the
Purchase Agreement, represents at least one hundred percent (100%) of the
Maximum Share Amount (the "Triggering Event"), the Company will use its best
efforts to seek and obtain Stockholder Approval (or obtain such other relief
as will allow conversions hereunder in excess of the Maximum Share Amount) as
soon as practicable following the Triggering Event and before the Maximum
Conversion Date.
8. FRACTIONAL SHARES. No fractional shares of Common Stock or scrip
representing fractional shares of Common Stock shall be issuable hereunder.
The number of shares of Common Stock that are issuable upon any conversion
shall be rounded up to the nearest whole share.
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9. RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
(a) RESERVATION REQUIREMENT. So long as any Debentures remain
outstanding the Company agrees to reserve and at all times keep available
solely for purposes of conversion of Debentures such number of authorized but
unissued shares of Common Stock that is set forth in Section 3.10 of the
Purchase Agreement.
(b) DEFICIENCY. If the Company does not have a sufficient number
of shares of Common Stock available to satisfy the Company's obligations to a
Holder of Debentures upon receipt of a Conversion Notice or is otherwise
unable to issue such shares of Common Stock in accordance with the terms of
this Agreement such Holder shall be entitled to the rights and remedies set
forth in the Registration Rights Agreement.
10. NO REISSUANCE OF THE DEBENTURE. No Debentures acquired by the
Company by reason of redemption, purchase, exchange or otherwise shall be
reissued, and all such Debentures shall be retired.
11. NO IMPAIRMENT. The Company shall not intentionally take any action
which would impair the rights and privileges of the Debentures set forth
herein or the Holders thereof.
12. LIMITATIONS ON HOLDER'S RIGHT TO CONVERT.
(a) Notwithstanding anything to the contrary contained herein, no
Debenture may be converted to the extent that, after giving effect to Common
Shares to be issued pursuant to a Conversion Notice, the total number of
shares of Common Stock deemed beneficially owned by such Holder (other than
by virtue of the ownership of Debentures or ownership of other securities
that have limitations on a Holder's rights to exchange, convert or exercise
similar to those limitations set forth herein), together with all shares of
Common Stock deemed beneficially owned by the holder's "affiliates" (as
defined in Rule 144 of the Act) that would be aggregated for purposes of
determining whether a group under Section 13(d) of the Securities Exchange
Act of 1934, as amended, exists, would exceed 4.9% (the "Restricted Ownership
Percentage") of the total issued and outstanding shares of the Company's
Common Stock; PROVIDED that (w) each holder shall have the right at any time
and from time to time to reduce its Restricted Ownership Percentage
immediately upon notice to the Company, (x) each Holder shall have the right
at any time and from time to time, to increase its Restricted Ownership
Percentage and otherwise waive in whole or in part the restrictions of this
Section 12(a) upon 61 days' prior notice to the Company or immediately in the
event of the announcement of a pending or proposed Change in Control
Transaction, (y) each holder can make subsequent adjustments pursuant to (w)
or (x) any number of times from time to time (which adjustment shall be
effective immediately if it results in a decrease in the percentage or shall
be effective upon 61 days' prior written notice or immediately in the event
of the announcement of a pending or proposed Change in Control Transaction if
it results in an increase in the percentage) and (z) each Holder may
eliminate or reinstate this limitation at any time and from time to time
(which elimination will be effective upon 61 days' prior notice and which
reinstatement will be effective immediately). Without limiting the
foregoing, in the event of the announcement of a pending or proposed Change
in Control Transaction, any Holder may reinstate immediately (in whole or in
part) the requirement that any increase in its Restricted Ownership
Percentage be subject to 61 days' prior written
13
notice, notwithstanding such Change in Control Transaction, without imposing
such requirement on, or otherwise changing such Holder's rights with respect
to, any other Change in Control Transaction. For this purpose, any material
modification of the terms of a Change in Control Transaction will be deemed
to result in a new Change in Control Transaction. The term "deemed
beneficially owned" as used in this Debenture shall exclude shares that might
otherwise be deemed beneficially owned by reason of the convertibility of the
Debentures. The Company shall provide all Holders with the earlier of (i) 20
days' prior written notice of any such Change in Control Transaction, to the
extent the Company has prior knowledge of a Change in Control Transaction; or
(ii) notice on the day immediately following the Company's learning of any
such transaction, but only after, in the case of (i) and (ii), such Change in
Control Transaction has been publicly disclosed.
(b) Under certain circumstances specified in Section 3.15 of the
Purchase Agreement, certain Debentures that are the subject of a Conversion
Notice must be converted for cash.
13. SUBORDINATION.
(a) AGREEMENT TO SUBORDINATE. Notwithstanding anything in this
Debenture to the contrary, the Company agrees, and by accepting this
Debenture the Holder agrees, that the indebtedness evidenced by this
Debenture, solely to the extent that same is payable in cash and not in
shares of Common Stock, is subordinate and subject in right of payment, to
the extent and in the manner expressly provided in this Section 13, to the
prior payment in full of all Senior Debt, and that the subordination is for
the benefit of and enforceable by the holders of Senior Debt. This Debenture
shall in all respects rank senior to all other present and future obligations
of the Company (other than trade debt), and only Senior Debt shall rank
senior to this Debenture.
(b) INSOLVENCY, BANKRUPTCY, DISSOLUTION OF COMPANY. Upon any
payment or distribution (whether in cash, securities or other property) to
creditors of the Company upon any Insolvency Event:
(i) all Senior Debt shall first be paid in full before the
Holder shall be entitled to receive any payment or other distribution on or
in respect of this Debenture; and
(ii) until all Senior Debt is paid in full, any payment or
distribution to which the Holder of this Debenture would be entitled but for
this Section 13 shall be made to holders of Senior Debt as their interests
may appear, except that the Holder may receive shares of the Company as
reorganized or readjusted or securities of the Company or any other
corporation if the payment of such securities is subordinate to Senior Debt
to at least the same extent as this Debenture is subordinate to Senior Debt.
(c) DEFAULT ON SENIOR DEBT.
(i) The Company may not pay the principal of, premium, if
any, or interest on, this Debenture or make any deposit in respect of this
Debenture (not including any reservation of Common Stock for purposes of the
conversion of Debentures) and may not repurchase, redeem or otherwise retire
this Debenture (collectively, "pay this Debenture") if (i) the principal of
or interest on any Senior Debt is not paid when due or (ii) any other default
on
14
Senior Debt occurs and (ii) the maturity of such Senior Debt is accelerated
in accordance with its terms unless, in each case, the default has been cured
or waived and any such acceleration has been rescinded or such Senior Debt
has been paid in full. During the continuance of any default (other than a
default described in clause (i) and (ii) of the preceding sentence) with
respect to any Senior Debt pursuant to which the maturity thereof may be
accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable
grace periods, the Company may not pay this Debenture for a period (a
"Payment Blockage Period") commencing upon the receipt by the Company and the
Holder of written notice of such default from a representative of such Senior
Debt specifying an election to effect a Payment Blockage Period (a "Payment
Blockage Notice") and ending 179 days thereafter (or earlier if such Payment
Blockage Period is terminated (i) by written notice to the Company from the
representative which gave such Payment Blockage Notice, (ii) by repayment in
full of such Senior Debt or (iii) because the default specified in such
Payment Blockage Notice is no longer continuing). Notwithstanding the
immediately preceding sentence (but subject to the provisions contained in
the first sentence of this Section), unless the holders of such Senior Debt
or the representative of such holders shall have accelerated the maturity of
such Senior Debt, the Company shall resume payments (including any missed
payments) on this Debenture after the end of such Payment Blockage Period
unless such payment is otherwise prohibited under this Section 13. Multiple
Payment Blockage Periods may be imposed so long as (x) the cumulative period
covered by all such Payment Blockage Periods does not exceed 179 days in any
365 consecutive day period and (y) no more than one Payment Blockage Period
may result from the same default.
(ii) The failure to make a payment or distribution on this
Debenture by reason of this Section 13 shall not be construed or deemed to
prevent the occurrence of an event of default hereunder; PROVIDED that any
acceleration of payment of this Debenture resulting therefrom shall be
rescinded if and when the following conditions shall be simultaneously
satisfied: (x) each payment or distribution which gave rise to such event of
default shall be made and (y) no other such event of default shall have
occurred.
(d) SUBORDINATED ACCELERATION; STANDSTILL. The Holder agrees to
give the Company not less than 5 days' prior written notice of its intention
to accelerate the maturity of this Debenture pursuant to Section 4 hereof.
The Company will promptly notify holders of Senior Debt of any obligation to
make payments to be made under Section 7.
(e) PERMITTED PAYMENTS. So as to eliminate any doubt, except (as
to cash payments) as provided in Sections 13(b) and 13(c), payments under
this Debenture, and payments under the Registration Rights Agreement (whether
in cash or Common Stock (as applicable)) (collectively, "Permitted Payments")
shall be made by the Company on the terms of this Debenture and Registration
Rights Agreement, as the case may be.
(f) TURNOVER. If the Holder receives any cash payment or other
cash distribution on this Debenture (other than pursuant to a conversion) at
a time when such payment or distribution should not have been made to the
Holder by reason of this Section 13, such payment or distribution shall be
deemed to have been received and held in trust for the benefit of the holders
of the Senior Debt, and shall be segregated from other property of the Holder
and be
15
paid and delivered as promptly as practicable to the holders of the Senior
Debt, as their interests may appear, for application to, or collateral for,
the payment or prepayment of the Senior Debt.
(g) RELATIVE RIGHTS. This Section 13 defines the relative rights
of the Holder and the holders of Senior Debt. Nothing herein shall:
(i) impair, as between the Company and the Holder, the
obligation of the Company, which is absolute and unconditional, to pay
principal of, premium, if any, and interest on this Debenture in accordance
with its terms and to fulfill its other obligations hereunder; or
(ii) except as otherwise expressly provided herein, prevent
the Holder from exercising its available remedies upon a default, subject to
the rights of holders of Senior Debt to receive distributions otherwise
payable to the Holder.
(h) AGREEMENT TO COOPERATE. In the event that a payment may not
be made on the Debentures as a result of the provisions of this Section 13,
including without limitation, as a result of an Insolvency Event or a default
on any Senior Debt, the Company shall, if requested by the Holder, reasonably
assist the Holder in attempting to purchase such Senior Debt or otherwise
cure such default so that the payment may be made on the Debenture. Nothing
in this Section 13(h) shall obligate the Holder to purchase such Senior Debt
or to attempt to cure any such default.
(i) CONVERSION. Notwithstanding anything to the contrary
contained in this Section 13, nothing in this Section 13 shall restrict the
rights of the Holder (i) to convert the Debenture in accordance with its
terms, including, without limitation, after an Insolvency Event and during
the pendency of a default on Senior Debt or (ii) to receive shares of Common
Stock on account of interest payments due under this Debenture.
(j) DEFINITIONS.
(i) "Bank Credit Agreement" shall mean that certain credit
agreement by and between the Company and Comerica Bank, as the same may be
amended, supplemented or otherwise modified from time to time, as well as any
future credit agreement that may be executed by the Company and Comerica Bank
or another financial institution that replaces Comerica Bank as the Company's
primary commercial bank or lending institution.
(ii) "Bankruptcy Code" means the Bankruptcy Reform Act of
1978, 11 U.S.C. Section 101 ET SEQ., or any successor statute thereto.
(iii) "Insolvency Event" means (i) any winding-up, insolvency,
bankruptcy, liquidation or reorganization of the Company, whether voluntary
or involuntary, (ii) any proceeding or case for reorganization, liquidation,
bankruptcy, dissolution or other winding-up of the Company or its assets,
whether or not involving insolvency or bankruptcy, (iii) any assignment by
the Company for the benefit of creditors or (iv) any receivership or other
similar proceeding or any marshalling of assets of the Company.
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(iv) "Senior Debt" means all obligations and liabilities of
the Company, whether for or on account of principal, reimbursement
obligations, accrued and unpaid interest (including without limitation all
interest accruing on and after an Insolvency Event), fees, expenses,
indemnities and other amounts payable under or in connection with the Bank
Credit Agreement and all documents or instruments executed in connection
therewith, whether outstanding on the date of issuance of this Debenture or
hereafter created, assumed or incurred, not to exceed $7,500,000 in the
aggregate.
14. WAIVERS OF DEMAND, ETC. The Company hereby expressly and
irrevocably waives demand and presentment for payment, notice of nonpayment,
protest, notice of protest, notice of dishonor, notice of acceleration or
intent to accelerate, bringing of suit and diligence in taking any action to
collect amounts called for hereunder and will be directly and primarily
liable for the payment of all sums owing and to be owing hereon, regardless
of and without any notice, diligence, act or omission as or with respect to
the collection of any amount called for hereunder.
15. REPLACEMENT DEBENTURE. In the event that any Holder notifies the
Company that its Debenture(s) have been lost, stolen or destroyed,
replacement Debenture(s) identical in all respects to the original
Debenture(s) (except for registration number and Outstanding Principal
Amount, if different than that shown on the original Debenture(s)), shall be
issued to the Holder, provided that the Holder executes and delivers to the
Company an agreement reasonably satisfactory to the Company to indemnify the
Company from any loss incurred by it in connection with such Debenture.
16. PAYMENT OF EXPENSES; ISSUE TAXES. The prevailing party in any
litigation with respect to this Debenture shall be reimbursed by the losing
party for all debts and expenses, including attorneys' fees, which may be
incurred by such prevailing party in enforcing the provisions of this
Debenture and/or collecting any amount due under this Debenture, the Purchase
Agreement, any Warrant or the Registration Rights Agreement. The Company
shall pay any and all issue and other taxes (excluding any income, franchise
or similar taxes) that maybe payable in respect of any issue or delivery of
Common Shares on conversion of any Debenture pursuant hereto.
17. DEFAULTS. If one or more of the following described "Events of
Default" shall occur:
(a) The Company shall default in the payment of (i) interest on
this Debenture, and such default shall continue for three (3) business days
after the due date thereof, or (ii) the principal of this Debenture; or
(b) Any of the representations or warranties made by the Company
herein, in the Purchase Agreement, the Registration Rights Agreement, any
Warrant or in any certificate or financial or other statements heretofore or
hereafter furnished by or on behalf of the Company in connection with the
execution and delivery of this Debenture or such other documents shall be
false or misleading in any material respect at the time made and the breach
of which has (or with the passage of time will have) a material adverse
effect on the rights of the Holder with respect to this Debenture, the
Purchase Agreement or the Registration Rights Agreement or such effect
substantially diminishes the value of the Holder's investment in the Company;
or
17
(c) The Company shall fail in any material respect to perform or
observe any covenant or agreement in the Purchase Agreement, or any other
covenant, term, provision, condition, agreement or obligation of the Company
under this Debenture and such failure shall continue uncured for a period of
three (3) business days after notice from the Holder of such failure; or
(d) The Company shall (1) become insolvent; (2) admit in writing
its inability to pay its debts generally as they mature; (3) make an
assignment for the benefit of creditors or commence proceedings for its
dissolution; or (4) apply for or consent to the appointment of a trustee,
liquidator or receiver for it or for a substantial part of its property or
business; or
(e) A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business without its
consent and shall not be discharged within thirty (30) days after such
appointment; or
(f) Any governmental agency or any court of competent jurisdiction
at the instance of any governmental agency shall assume custody or control of
the whole or any substantial portion of the properties or assets of the
Company and shall not be dismissed within thirty (30) days thereafter; or
(g) The Company shall sell or otherwise transfer all or
substantially all of its assets, if such sale or transfer is effected before
thirty (30) days have elapsed after the Effectiveness Date, such 30 days to
be extended one (1) day for each day after such date on which there is not
Effective Registration; or
(h) Bankruptcy, insolvency or liquidation proceedings or other
proceedings, under any bankruptcy law or any law for the relief of debt shall
be instituted by or against the Company and, if instituted against the
Company shall not be dismissed within thirty (30) days after such
institution, or the Company shall by any action or answer approve of, consent
to, or acquiesce in any such proceedings or admit to any material allegations
of, or default in answering a petition filed in any such proceeding; or
(i) The Company shall be in default of any of its indebtedness
that gives the holder thereof the right to accelerate $500,000 or more in
such indebtedness; or
(j) A "going private" transaction under Rule 13e-3 promulgated
pursuant to the Exchange Act shall have been announced; or
(k) A tender offer by the Company under Rule 13e-4 promulgated
pursuant to the Exchange Act shall have been announced;
THEN, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider the
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived, anything herein or
in any other instruments contained to the contrary notwithstanding, and the
Holder may immediately, and without expiration of any period of grace, enforce
any and all of the Holder's
18
rights and remedies provided herein or any other rights or remedies afforded
by law. In such event, the Debenture shall be redeemed at a redemption price
per Debenture equal to 120% of the Outstanding Principal Amount of the
Debenture, plus accrued but unpaid interest and default payments on the
Debenture.
18. SAVINGS CLAUSE. In case any provision of this Debenture is held by
a court of competent jurisdiction to be excessive in scope or otherwise
invalid or unenforceable, such provision shall be adjusted rather than
voided, if possible, so that it is enforceable to the maximum extent
possible, and the validity and enforceability of the remaining provisions of
this Debenture will not in any way be affected or impaired thereby, and such
provision shall remain effective in all other jurisdictions.
19. ENTIRE AGREEMENT. This Debenture and the agreements referred to in
this Debenture constitute the full and entire understanding and agreement
between the Company and the Holder with respect to the subject hereof.
Neither this Debenture nor any term hereof may be amended, waived, discharged
or terminated other than by a written instrument signed by the Company and
the Holder.
20. ASSIGNMENT, ETC. The Holder may transfer or assign this Debenture
or any interest herein and may mortgage, encumber or transfer any of its
rights or interest in and to this Debenture or any part hereof upon the
consent of the Company (such consent not to be unreasonably withheld), and,
without limitation, each assignee, transferee and mortgagee (which may
include any affiliate of the Holder) shall have the right to transfer or
assign its interest. No such consent of the Company will be required for any
transfer or assignment to (i) an affiliate or affiliates of the Holder or
(ii) any person or entity whose investments are managed by an investment
adviser that is the same as, or an affiliate of, the investment manager of
the Holder. Each such assignee, transferee and mortgagee shall have all of
the rights of the Holder under this Debenture. The Company agrees that,
subject to compliance with the Purchase Agreement, after receipt by the
Company of written notice of assignment from the Holder or from the Holder's
assignee, all principal, interest and other amounts which are then and
thereafter become due under this Debenture shall be paid to such assignee at
the place of payment designated in such notice. This Debenture shall be
binding upon the Company and its successors and affiliates and shall inure to
the benefit of the Holder and its successors and assigns.
21. NO WAIVER. No failure on the part of the Holder to exercise, and
no delay in exercising any right, remedy or power hereunder shall operate as
a waiver thereof, nor shall any single or partial exercise by the Holder of
any right, remedy or power hereunder preclude any other or future exercise of
any other right, remedy or power. Each and every right, remedy or power
hereby granted to the Holder or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.
22. CERTIFICATE FOR CONVERSION PRICE ADJUSTMENT. The Company shall,
upon the written request at any time of any Holder of Debentures, furnish or
cause to be furnished to such Holder a certificate prepared by the chief
financial officer of Company setting forth any adjustments or readjustments
of the Conversion Price pursuant to this Debenture.
19
23. NOTICES. The Company shall distribute to the Holders of Debentures
copies of all notices, materials, annual and quarterly reports, proxy
statements, information statements and any other documents distributed
generally to the holders of shares of Common Stock of the Company, at such
times and by such method as such documents are distributed to such holders of
such Common Stock, but shall not directly or indirectly provide material
non-public information to the Holder without such Holder's prior written
consent.
24. SPECIFIC ENFORCEMENT. The Company agrees that irreparable damage
would occur in the event that any of the provisions of this Debenture were
not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the Holders of Debentures shall be
entitled to swift specific performance, injunctive relief or other equitable
remedies to prevent or cure breaches of the provisions of this Debenture and
to enforce specifically the terms and provisions hereof, this being in
addition to any other remedy to which any of them may be entitled under
agreement, at law or in equity.
25. MISCELLANEOUS. Unless otherwise provided herein, any notice or
other communication to a party hereunder shall be sufficiently given if in
writing and personally delivered, facsimiled or mailed to said party by
certified mail, return receipt requested, at its address set forth herein or
such other address as either may designate for itself in such notice to the
other and communications shall be deemed to have been received when delivered
personally or, if sent by mail or facsimile, then when actually received by
the party to whom it is addressed. Whenever the sense of this Debenture
requires, words in the singular shall be deemed to include the plural and
words in the plural shall be deemed to include the singular. Paragraph
headings are for convenience only and shall not affect the meaning of this
document.
26. GOVERNING LAW; CONSENT TO JURISDICTION. THIS DEBENTURE SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK APPLICABLE TO CONTRACTS TO BE EXECUTED AND PERFORMED
ENTIRELY WITHIN SUCH STATE. THE COMPANY (i) HEREBY IRREVOCABLY SUBMITS TO
THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURT LOCATED IN NEW YORK
COUNTY, NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING ARISING
OUT OF OR RELATED TO THIS DEBENTURE AND (ii) HEREBY WAIVES, AND AGREES NOT TO
ASSERT IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT
PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION
OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF THE
SUIT, ACTION OR PROCEEDING IS IMPROPER. THE COMPANY CONSENTS TO PROCESS
BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF
TO SUCH PARTY AS PROVIDED IN AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE
GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING IN THIS
PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW.
20
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated:
------------------------------------
ZITEL CORPORATION
By:
------------------------------------
Name:
Title:
Address: 47211 Bayside Parkway
Fremont, California 94538
[SIGNATURE PAGE TO 3% CONVERTIBLE SUBORDINATED DEBENTURE OF ZITEL CORPORATION]
21
EXHIBIT 1
(To be Executed by Registered Holder
in order to Convert Debenture)
CONVERSION NOTICE
FOR
3% CONVERTIBLE SUBORDINATED DEBENTURE DUE FEBRUARY 1, 2000
The undersigned, as Holder of the 3% Convertible Subordinated
Debenture Due February 1, 2000 of ZITEL CORPORATION (the "Company"), in the
outstanding principal amount of U.S.$_____________ (the "Debenture"), hereby
irrevocably elects to convert that portion of the outstanding principal
amount of the Debenture shown on the next page into shares of Common Stock,
no par value per share (the "Common Stock"), of the Company according to the
conditions of the Debenture, as of the date written below. The undersigned
hereby requests that share certificates for the Common Stock to be issued to
the undersigned pursuant to this Conversion Notice be issued in the name of,
and delivered to, the undersigned or its designee as indicated below. If
shares are to be issued in the name of a person other than the undersigned,
the undersigned will pay all transfer taxes payable with respect thereto. No
fee will be charged to the Holder for any conversion, except for transfer
taxes, if any.
Holder acknowledges and confirms that the Common Stock issued
pursuant to this Notice of Conversion has been or will be sold in accordance
with the prospectus delivery requirements of the Securities Act of 1933, if
applicable, or pursuant to an exemption under such Act.
Conversion Information: NAME OF HOLDER:
----------------------------
By:
----------------------------------------
Print Name:
Print Title:
Print Address of Holder:
-------------------------------------------
-------------------------------------------
Issue Common Stock to:
---------------------
at:
----------------------------------------
Electronically transmit and credit Common
Stock to:
----------------------------------
at:
------ --------------------------------
-------------------------------------------
Date of Conversion
-------------------------------------------
Applicable Conversion Rate
THE COMPUTATION OF THE NUMBER OF COMMON SHARES TO
BE RECEIVED IS SET FORTH ON THE ATTACHED PAGE
Page 2 to Conversion Notice for:
-----------------------------------------------
(Name of Holder)
COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED
A. Outstanding Principal Amount converted: $
B. Accrued, unpaid interest on Outstanding Principal Amount converted: $
C. Default payments due Holder: $
--------
TOTAL DOLLAR AMOUNT CONVERTED (TOTAL OF A + B + C) $
========
CONVERSION PRICE $
NUMBER OF SHARES OF COMMON STOCK = Total dollar amount Converted = $
--------------------------------- --------
Conversion Price
If the conversion is not being settled by DTC, please issue and deliver _____
certificate(s) for shares of Common Stock in the following amount(s):
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Please issue and deliver _____ new Debenture(s) in the following amounts:
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