-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PwHPuJrSiWPI+gybkhJB+imbb7UfwFqmAMjfp5Qv0nGTjL77Wt/MUfaQNrr7Ecwk bbYnFrpwTHmlES6EwaKPBA== 0001047469-99-006161.txt : 19990217 0001047469-99-006161.hdr.sgml : 19990217 ACCESSION NUMBER: 0001047469-99-006161 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990203 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZITEL CORP CENTRAL INDEX KEY: 0000731647 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 942566313 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-12194 FILM NUMBER: 99541904 BUSINESS ADDRESS: STREET 1: 47211 BAYSIDE PARKWAY CITY: FREMONT STATE: CA ZIP: 94538-6517 BUSINESS PHONE: 5104409600 MAIL ADDRESS: STREET 1: 47211 BAYSIDE PARKWAY CITY: FREMONT STATE: CA ZIP: 94538 8-K 1 8-K SECURITIES EXCHANGE AND COMMISSION WASHINGTON, D. C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): February 3, 1999 ZITEL CORPORATION (Exact name of registrant as specified in its charter) CALIFORNIA (State or other jurisdiction of incorporation) 0-12194 94-2566313 (Commission File No.) (IRS Employer Identification No.) 47211 BAYSIDE PARKWAY, FREMONT, CALIFORNIA 94538-6517 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (510) 440-9600 ITEM 5. OTHER EVENTS A. PLACEMENT OF DEBENTURES On February 3, 1999, Zitel Corporation (the "Company") completed the private placement of $5,000,000 in principal amount of 3% Convertible Subordinated Debentures due February 2, 2000 (the "Debentures") and five year Common Stock Purchase Warrants covering 75,000 shares of the Company's Common Stock (the "Common Stock") to a small number of institutional investors in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"). The Debentures are convertible into the number of shares of Common Stock equal to the amount of principal and accrued interest being converted divided by the Conversion Price. The Conversion Price will be equal to 90% of the average closing bid prices of the Common Stock for each of the ten trading days immediately following, but not including the February 3, 1999 closing date of the placement. There may be an adjustment to the Conversion Price in the event that the lesser of 90% of the average of the closing bid prices of the Common Stock for the twenty consecutive trading days preceding but not including: (a) the 60 calendar day anniversary of the closing date; or (b) the 45 calendar day anniversary of the effective date of a registration statement under the Securities Act registering the resale of the shares of Common Stock issuable upon conversion of the Debentures and exercise of the Warrants is less than the Conversion Price, then that lesser price so calculated shall thereafter be the Conversion Price; there may be an interim adjustment of the Conversion Price on the earlier to occur of the dates specified in clauses (a) and (b) above. The Conversion Price and number of shares subject to the Debentures and Warrants are subject to adjustment in the event of certain reorganizations and distributions by the Company and to formula antidilution protection upon certain sales of Common Stock or Common Stock equivalents at prices less than the Conversion Price or then the current market of the Common Stock. The Debentures also provide for certain additional rights in the event that, prior to the later of the 45 day anniversary of the closing date or the effective date of a registration statement, the closing bid price of the Common Stock for five consecutive trading days is less than 50% of 111.11% of the original Conversion Price. The exercise price of the Warrants is equal to 130% of the Conversion Price. All Debentures outstanding on February 2, 2000 will convert automatically, provided certain conditions specified in the Debentures are satisfied. The holders of the Debentures have registration rights with respect to the Common Stock as set forth in a Registration Rights Agreement pursuant to which the Company has agreed to register for resale under the Securities Act the Common Stock issuable upon conversion of the Debentures, on or before March 5, 1999. The foregoing description does not purport to be complete and is qualified by reference to the definitive agreements filed as Exhibits herewith. ITEM 7. EXHIBITS (c) The following exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K:
Exhibit Number Exhibit 2 4.1 Form of Convertible Subordinated Debenture 4.2 Form of Common Stock Purchase Warrant 4.3 Registration Rights Agreement 4.4 Securities Purchase Agreement 4.5 Placement Agency Agreement
The foregoing is a partial summary of certain terms of the Debentures and Warrants and the rights of the holders. Reference is made to the Exhibits filed with this report for the actual terms of the Debentures, Warrants and such rights. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZITEL CORPORATION Dated: February 16, 1999 By: Henry C. Harris ---------------------------------- Henry C. Harris Chief Financial Officer 3 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 4.1 Form of Convertible Subordinated Debenture 4.2 Form of Common Stock Purchase Warrant 4.3 Registration Rights Agreement 4.4 Securities Purchase Agreement 4.5 Placement Agency Agreement
4 EX-4.1 2 EXHIBIT 4.1 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 1 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 2 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 3 (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: 4 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 5 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 6 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 7 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. 8 (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. 9 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 10 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. 12 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. 16 (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): - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Please issue and deliver _____ new Debenture(s) in the following amounts: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EX-4.2 3 EXHIBIT 4.2 EXHIBIT 4.2 CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGREEMENT CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGREEMENT ("Agreement") dated as of February 2, 1999 between ZITEL CORPORATION, a California corporation (the "Company"), and each person or entity listed as an investor on Schedule I attached to this Agreement (each individually an "Investor" and collectively the "Investors"). WITNESSETH WHEREAS, the Company desires to sell and issue to the Investors, and the Investors wish to purchase from the Company, 3% Convertible Subordinated Debentures due February 1, 2000 (the "Debentures"), in the aggregate principal amount of $5,000,000 at an aggregate price of $5,000,000, having the rights and privileges set forth in the Debentures in the form of EXHIBIT 1.1A attached hereto (the "Issuance"), on the terms and conditions set forth herein; and WHEREAS, the Debentures will be convertible into shares ("COMMON SHARES") of common stock, no par value of the Company ("COMMON STOCK"), pursuant to the terms of the Debentures, and the Investors will have registration rights with respect to such Common Shares and the Warrant Shares (as defined herein), pursuant to the terms of that certain Registration Rights Agreement to be entered into between the Company and the Investors substantially in the form of EXHIBIT 4.2(f) hereto ("REGISTRATION RIGHTS AGREEMENT"); and WHEREAS, to induce the Investors to purchase the Debentures, the Company has agreed to issue to the Investors warrants exercisable for 75,000 shares of Common Stock, in the form attached as EXHIBIT 1.1B (the "WARRANTS"); NOW, THEREFORE, in consideration of the foregoing premises and the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 PURCHASE AND SALE OF DEBENTURES AND WARRANTS 1.1 ISSUANCE OF DEBENTURES AND WARRANTS. Upon the following terms and conditions, the Company shall issue and sell to each Investor severally, and each Investor severally shall purchase from the Company, the outstanding principal amount of Debentures indicated next to such Investor's name on Schedule I attached hereto. (a) ISSUANCE. Upon the following terms and conditions, the Company shall issue and sell to each Investor severally, and each Investor severally shall purchase from the 1 Company, the principal amount of Debentures and the number of Warrants indicated next to such Investor's name on SCHEDULE I attached hereto. (b) PURCHASE PRICE. The purchase price for the Debentures to be acquired by each Investor (the "PURCHASE PRICE") shall be the Purchase Price set forth next to such Investor's name on SCHEDULE I. (c) THE CLOSING. (i) The closing of the purchase and sale of the Debentures and the Warrants (the "Closing"), shall take place at 10:00 am., local time on the later of the following: (x) February 2, 1999, (y) the date on which the last to be fulfilled or waived of the conditions set forth in Article IV hereof and applicable to the Closing shall be fulfilled or waived in accordance herewith, or (z) such other time and place and/or on such other date as the Investors and the Company may agree. The date on which the Closing occurs is referred to herein as the "Closing Date". (ii) On the Closing Date, the Company shall deliver to each Investor (x) certificates (with the number of and outstanding principal amount of such certificates requested by such Investor) representing the Debentures purchased hereunder by such Investor at the Closing registered in the name of such Investor or its nominee and (y) the Warrants registered in the name of Investor or its nominee in such denominations as reasonably requested by such Investor, and such Investor shall deliver to the Company the Purchase Price for the Debentures purchased by such Investor hereunder by wire transfer in immediately available funds to an account designated in writing by the Company. The delivery of payment by each Investor of the Purchase Price applicable to it as set forth in this paragraph shall constitute a payment delivered to the Company in satisfaction of such Investor's obligation to pay the Purchase Price hereunder. In addition, each party shall deliver all documents, instruments and writings required to be delivered by such party pursuant to this Agreement at or prior to the applicable Closing. Notwithstanding anything to the contrary herein, the Closing may be conducted through LaSalle National Bank, 135 South LaSalle Street, Chicago, Illinois 60603 (the "Escrow Agent") as set forth in that certain escrow agreement dated as of January 27, 1999 among the Company, the Escrow Agent and Rochon Capital Group, Ltd. ARTICLE 2 REPRESENTATIONS AND WARRANTIES 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby makes the following representations and warranties to each of the Investors as of the date hereof and on each Closing Date: (a) ORGANIZATION AND QUALIFICATION; MATERIAL ADVERSE EFFECT. The Company is a corporation duly incorporated and existing in good standing under the laws of the State of California and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company does not have any direct or indirect subsidiaries other than the subsidiaries listed in Section 2.1(a) of the Company's disclosure 2 schedule delivered to the Investors and attached hereto (the "Disclosure Schedule"). Except where specifically indicated to the contrary, all references in this Agreement to subsidiaries shall be deemed to refer to all direct and indirect subsidiaries of the Company. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary other than those in which the failure so to qualify would not have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any adverse effect on the business, operations, properties, prospects, or financial condition of the entity with respect to which such term is used and which is (either alone or together with all other adverse effects) material to such entity and other entities controlling or controlled by such entity taken as a whole, and any material adverse effect on the transactions contemplated under this Agreement, the Registration Rights Agreement or any other agreement or document contemplated hereby or thereby. (b) AUTHORIZATION; ENFORCEMENT. (i) The Company has all requisite corporate power and authority to enter into and perform this Agreement, the Warrants and the Registration Rights Agreement and to issue the Debentures and Warrants in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Warrants and the Registration Rights Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby, including the issuance of the Debentures, the Common Shares and the Warrant Shares have been duly authorized by all necessary corporate action, and no further consent or authorization of the Company or its Board of Directors (or any committee or subcommittee thereof) or stockholders is required, (iii) this Agreement, the Warrants, the Debentures and the Registration Rights Agreement have been duly executed and delivered by the Company, and (iv) this Agreement, the Warrants, the Debentures and the Registration Rights Agreement constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of creditors' rights and remedies or by other equitable principles of general application. (c) CAPITALIZATION. As of January 15, 1999, the authorized capital stock of the Company consisted of 40,000,000 shares of Common Stock and 1,000,000 shares of preferred stock; there are 21,907,553 shares of Common Stock and no shares of preferred stock issued and outstanding; and 3,402,031 shares of Common Stock and no shares of preferred stock are reserved for issuance to persons other than the Investors. After the Closing, 3,402,031 shares of Common Stock and no shares of preferred stock will be reserved for issuance to persons other than the Investors. All of the outstanding shares of the Company's Common Stock and preferred stock have been validly issued and are fully paid and nonassessable. No shares of capital stock are entitled to preemptive rights; and there are as of the date hereof outstanding options for 1,861,551 shares of Common Stock and 150,000 outstanding warrants for shares of Common Stock (excluding the Warrants). Except as set forth in Section 2.1(c) of the Disclosure Schedule, there are no other scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights exchangeable for or convertible into, any shares of capital stock of the Company, or contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of capital stock of the Company or options, warrants, scrip, rights to subscribe to, or commitments to purchase or acquire, any shares, or securities or rights convertible or exchangeable into shares, of capital stock of the 3 Company. Attached hereto as EXHIBIT 2.1(c)(i) is a true and correct copy of the Company's Articles of Incorporation (the "CHARTER"), as in effect on the date hereof, and attached hereto as EXHIBIT 2.1(c)(ii) is a true and correct copy of the Company's By-Laws, as in effect on the date hereof (the "BY-LAWS"). (d) ISSUANCE OF COMMON SHARES. The Common Shares and the shares of Common Stock issuable upon the exercise of the Warrants (the "WARRANT SHARES") are duly authorized and reserved for issuance and, upon such conversion in accordance with the Debentures and/or exercise in accordance with the Warrants such Common Shares and Warrant Shares will be validly issued, fully paid and non-assessable, free and clear of any and all liens, claims and encumbrances, and entitled to be traded on the Nasdaq National Market System ("NASDAQ NMS") (or the American Stock Exchange or the New York Stock Exchange, collectively with the Nasdaq NMS, the "APPROVED MARKETS"), and the holders of such Common Shares and Warrant Shares shall be entitled to all rights and preferences accorded to a holder of Common Stock. The outstanding shares of Common Stock are currently listed on the Nasdaq NMS. (e) NO CONFLICTS. The execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Warrants by the Company and the consummation by the Company of the transactions contemplated hereby and thereby and the issuance of the Debentures and the Warrants do not and will not (i) result in a violation of the Company's Charter or By-Laws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company or any of its subsidiaries is a party, or (iii) result in a violation of any federal, state, local or foreign law, rule, regulation, order, judgment or decree (including Federal and state securities laws and regulations) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected. The business of the Company and its direct and indirect subsidiaries is being conducted in material compliance with all applicable laws, ordinances or regulations of any governmental entity. The Company is not required under Federal, state, local or foreign law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement, the Registration Rights Agreement, the Debentures and the Warrants or issue and sell the Debentures in accordance with the terms hereof and issue the Common Shares upon conversion thereof and issue the Warrant Shares on exercise of the Warrants and for the registration provisions provided in the Registration Rights Agreement, except as specified herein and in the Registration Rights Agreement and the Warrant. (f) SEC DOCUMENTS; NO NON-PUBLIC INFORMATION; FINANCIAL STATEMENTS. The Common Stock of the Company is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") and the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the Securities and Exchange Commission ("SEC") pursuant to the reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a) or 15(d), in addition to one or more registration statements and amendments thereto heretofore filed by the Company with the SEC 4 (all of the foregoing including filings incorporated by reference therein being referred to herein as the "SEC DOCUMENTS"). The Company has delivered or made available to the Investors true and complete copies of all SEC Documents (including, without limitation, proxy information and solicitation materials and registration statements) filed with the SEC since September 30, 1998, all annual SEC Documents filed with the SEC since September 30, 1997, and all press releases issued by the Company since May 28, 1998 as set forth in Section 2.1(f) of the Disclosure Schedule (the "Press Releases"). The Company has not directly or indirectly provided to the Investor any information that currently constitutes material non-public information or any information which, according to applicable law, rule or regulation, should have been disclosed publicly by the Company but which has not been so disclosed. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder and other federal, state and local laws, rules and regulations applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The SEC Documents and Press Releases contain all material information concerning the Company, and no event or circumstance has occurred which would require the Company to disclose such event or circumstance in order to make the statements in the SEC Documents and the Press Releases not misleading on the date hereof or on the Closing Date but which has not been so disclosed. The financial statements of the Company included in the SEC Documents comply as to form and substance in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with United States generally accepted accounting principles (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). (g) PRINCIPAL EXCHANGE/MARKET. The principal market on which the Common Stock is currently traded is the Nasdaq NMS. (h) NO MATERIAL ADVERSE CHANGE. Since September 30, 1998, no Material Adverse Effect has occurred or exists, and no event or circumstance which has not been disclosed in the SEC Documents and Press Releases has occurred that with notice or the passage of time or both is reasonably likely to result in a Material Adverse Effect with respect to the Company or its subsidiaries. (i) NO UNDISCLOSED LIABILITIES. Except as disclosed in Section 2.1(i) of the Company Disclosure Schedule, the Company and its subsidiaries have no liabilities or obligations not disclosed in the SEC Documents or the Press Releases, other than those liabilities incurred in the ordinary course of the Company's or its subsidiaries' respective businesses since September 30, 1998, which liabilities, individually or in the aggregate, do not or would not have a Material Adverse Effect on the Company or its direct or indirect subsidiaries. 5 (j) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. No event or circumstance has occurred or exists with respect to the Company or its direct or indirect subsidiaries or their respective businesses, properties, prospects, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed. (k) NO GENERAL SOLICITATION. Neither the Company, nor any of its affiliates, or, to its knowledge, any person acting on its or their behalf has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act of 1933, as amended (the "Act")) in connection with the offer or sale of the Debentures or Common Shares. (l) NO INTEGRATED OFFERING. Neither the Company, nor any of its affiliates, nor to its knowledge any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the Debentures, the Warrants or the Common Shares or Warrant Shares under the Act. The issuance of the Debentures, Warrants, Common Shares, or Warrant Shares to the Investors will not be integrated with any other issuance of the Company's securities (past, current or future) which requires stockholder approval under the rules of the Nasdaq NMS. (m) FORM S-3. The Company is eligible to file a Registration Statement (as defined in the Registration Rights Agreement) on Form S-3 under the Act and rules promulgated thereunder for transactions involving secondary offerings, and Form S-3 is permitted to be used for the transactions contemplated by the Registration Rights Agreement involving secondary offerings under the Act and rules promulgated thereunder. (n) INTELLECTUAL PROPERTY. The Company (and/or its wholly-owned subsidiaries) owns or has licenses to use certain patents, copyrights and trademarks ("INTELLECTUAL PROPERTY") associated with its business. The Company and its subsidiaries have all intellectual property rights which are material to the conduct of the business of the Company and its subsidiaries as it is now being conducted or as proposed to be conducted as disclosed in the SEC Documents. The Company and its subsidiaries have no reason to believe that the intellectual property rights which it owns are invalid or unenforceable or that the use of such intellectual property by the Company or its subsidiaries infringes upon or conflicts with any right of any third party, and neither the Company nor any of its subsidiaries has received notice of any such infringement or conflict. The Company and its subsidiaries have no knowledge of any material infringement of its intellectual property by any third party. (o) SHAREHOLDER RIGHTS PLAN. None of the acquisition of Debentures, Warrants, Common Shares or Warrant Shares nor the deemed beneficial ownership of shares of Common Stock prior to, or the acquisition of such shares pursuant to, the conversion of Debentures or the exercise of the Warrants will trigger the poison pill provisions of any stockholders' rights or similar agreements, or a substantially similar occurrence under any successor or similar plan. 6 (p) NO LITIGATION. Except as set forth in Section 2.1(p) of the Disclosure Schedule, no litigation or claim (including those for unpaid taxes) against the Company or any of its subsidiaries is pending or, to the Company's knowledge, threatened, and no other event has occurred, which if determined adversely could reasonably be expected to have a Material Adverse Effect on the Company or could reasonably be expected to materially and adversely effect the transactions contemplated hereby. The legal proceedings described in the Disclosure Schedule will not have an effect on the transactions contemplated hereby, and will not have a Material Adverse Effect on the Company. (q) BROKERS. The Company has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments by the Company or any Investor relating to this Agreement or the transactions contemplated hereby, except for amounts owing to Rochon Capital Group, Ltd. which amounts shall be paid exclusively by the Company, pursuant to a separate agreement. (r) ACKNOWLEDGEMENT OF DILUTION. The number of shares of Common Stock constituting Common Shares or Warrant Shares may increase substantially in certain circumstances, including the circumstance where the trading price of the Common Stock declines. The Company acknowledges that its obligation to issue Common Shares upon conversion of Debentures and Warrant Shares upon exercise of the Warrants is absolute and unconditional (except as limited by NASD Rule 4460(i) and any similar rule of any other Approved Market on which the Common Stock may then be trading, Section 12 of the Debentures and Section 9 of the Warrants), regardless of the dilution that such issuance may have on other shareholders of the Company. (s) OTHER INVESTORS. Except as set forth in Section 2.1(s) of the Disclosure Schedule, there are no outstanding securities issued by the Company that are entitled to registration rights under the Act. Except as set forth in SCHEDULE 2.1(s), there are no outstanding securities issued by the Company that are directly or indirectly convertible into, exercisable into, or exchangeable for, shares of Common Stock of the Company, that have anti-dilution or similar rights that would be affected by the issuance of the Debentures, the Common Shares, the Warrant Shares or the Warrants. (t) CERTAIN TRANSACTIONS. Except as disclosed in the SEC Documents and Section 2.1(t) of the Disclosure Schedule, none of the officers, directors, or employees of the Company is presently a party to any material transaction with the Company or any of its subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. (u) PERMITS; COMPLIANCE. The Company and each of its subsidiaries is in possession of all material franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the 7 "COMPANY PERMITS"), and there is no action pending or, to the knowledge of the Company, threatened regarding suspension or cancellation of any of the Company Permits except for such Company Permits the failure of which to possess, or the cancellation or suspension of which, would not, individually or in the aggregate, have a material effect on the Company. Neither the Company nor any of its subsidiaries is in material conflict with, or in material default or material violation of, any of the Company Permits. Since September 30, 1998, neither the Company nor any of its subsidiaries has received any notification with respect to possible material conflicts, material defaults or material violations of applicable laws. (v) INSURANCE. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its direct and indirect subsidiaries are engaged. Neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost. (w) INTERNAL ACCOUNTING CONTROLS. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient, in the judgment of the Company's board of directors, to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (x) ENVIRONMENTAL MATTERS. Except as otherwise disclosed in the SEC Documents, the Company and each of its subsidiaries is in compliance in all material respects with all applicable state and federal environmental laws and no event or condition has occurred that may interfere with the compliance by the Company or any of its subsidiaries with any environmental law or that may give rise to any liability under any environmental law that, individually or in the aggregate, would have a Material Adverse Effect. (y) SOLVENCY. (i) The Company's fair saleable value of its assets exceeds the amount that will be required to be paid on or in respect of the Company's existing debts and other liabilities (including contingent liabilities) as they mature. (ii) The Company's assets do not constitute unreasonably small capital to carry out its business as now conducted and as proposed to be conducted including the Company's capital needs taking into account the particular capital requirements of the business conducted by the Company, and projected capital requirements and capital availability thereof. 8 (iii) The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). (iv) The Company does not intend, and does not believe, that final judgments against the Company in actions for money damages will be rendered at a time when, or in an amount such that, the Company will be unable to satisfy any such judgments promptly in accordance with their terms (taking into account the maximum reasonable amount of such judgments in any such actions and the earliest reasonable time at which such judgments might be rendered. The Company's cash flow, after taking into account all other anticipated uses of the cash (including the payments on or in respect of debt referred to in paragraph (iii) above), will at all times be sufficient to pay all such judgments promptly in accordance with their terms. Neither the Company nor any of its subsidiaries is subject to any bankruptcy, insolvency or similar proceeding. (z) TAXES. All federal, state, city and other tax returns, reports and declarations required to be filed by or on behalf of the Company have been filed and such returns are complete and accurate and disclose all taxes (whether based upon income, operations, purchases, sales, payroll, licenses, compensation, business, capital, properties or assets or otherwise) required to be paid in the periods covered thereby. All taxes shown on such returns and any deficiency assessments, penalties and interest have been paid. All taxes required to be withheld by or on behalf of the Company in connection with amounts paid or owing to any employees, independent contractor, creditor or other party have been withheld, and such withheld taxes have either been duly and timely paid to the proper governmental authorities or set aside in accounts for such purposes. 2.2 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each of the Investors, severally (as to itself) and not jointly, hereby makes the following representations and warranties to the Company as of the date hereof and on the Closing Date: (a) AUTHORIZATION; ENFORCEMENT. (i) Such Investor has the requisite power and authority to enter into and perform this Agreement and the Registration Rights Agreement and to purchase the Debentures being sold hereunder and to acquire the Warrant, (ii) the execution and delivery of this Agreement and the Registration Rights Agreement by such Investor and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate or partnership action, and (iii) this Agreement and the Registration Rights Agreement constitute valid and binding obligations of such Investor enforceable against such Investor in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of creditors' rights and remedies or by other equitable principles of general application. (b) NO CONFLICTS. The execution, delivery and performance of this Agreement and the Registration Rights Agreement and the performance under the Debentures and Warrants and the consummation by such Investor of the transactions contemplated hereby and thereby do not and will not (i) result in a violation of such Investor's organizational documents, or (ii) 9 conflict with any agreement, indenture or instrument to which such Investor is a party, or (iii) result in a material violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to such Investor. Such Investor is not required to obtain any consent or authorization of any governmental agency in order for it to perform its obligations under this Agreement, the Registration Rights Agreement, the Warrants or the Debentures. (c) INVESTMENT REPRESENTATION. Such Investor is purchasing the Debentures and the Warrants for its own account and not with a view to distribution in violation of any securities laws. Such Investor has no present intention to sell the Debentures, Warrants, Common Shares, or Warrant Shares in violation of Federal or state securities laws and such Investor has no present arrangement (whether or not legally binding) to sell the Debentures, Warrants, Common Shares or Warrant Shares to or through any person or entity; provided, however, that by making the representations herein, such Investor does not agree to hold the Debentures, Warrants, Common Shares or Warrant Shares for any minimum or other specific term and reserves the right to dispose of the Debentures, Warrants, Common Shares or Warrant Shares at any time in accordance with Federal and state securities laws applicable to such disposition. (d) ACCREDITED INVESTOR. Such Investor is an "accredited investor" as defined in Rule 501 promulgated under the Act. The Investor has such knowledge and experience in financial and business matters in general and investments in particular, so that such Investor is able to evaluate the merits and risks of an investment in the Debentures and to protect its own interests in connection with such investment. In addition (but without limiting the effect of the Company's representations and warranties contained herein), such Investor has received such information as it considers necessary or appropriate for deciding whether to purchase the Debentures pursuant hereto. (e) RULE 144. Such Investor understands that there is no public trading market for the Debentures or Warrants, that none is expected to develop, and that the Debentures and Warrants and the Common Shares and Warrant Shares must be held indefinitely unless the Common Shares and Warrant Shares are registered under the Act or an exemption from registration is available. Such Investor has been advised or is aware of the provisions of Rule 144 promulgated under the Act. (f) BROKERS. Such Investor has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments by the Company relating to this Agreement or the transactions contemplated hereby, except for amounts owing to Rochon Capital Group, Ltd., which amounts will be paid exclusively by the Company, pursuant to a separate agreement. (g) RELIANCE BY THE COMPANY. Such Investor understands that the Debentures and Warrant are being offered and sold in reliance on a transactional exemption from the registration requirements of Federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of such Investor set forth herein in order to determine the applicability of such exemptions and the suitability of such Investor to acquire the Debentures and Warrants. 10 ARTICLE 3 COVENANTS 3.1 REGISTRATION AND LISTING; EFFECTIVE REGISTRATION. Until such time as no Debentures or Warrants are outstanding, the Company will cause the Common Stock to continue at all times to be registered under Section 12(g) of the Exchange Act, will comply in all respects with its reporting and filing obligations under the Exchange Act, and will not take any action or file any document (whether or not permitted by the Exchange Act or the rules thereunder) to terminate or suspend such reporting and filing obligations. Until such time as no Debentures or Warrants are outstanding, the Company shall continue the listing or trading of the Common Stock on the Nasdaq NMS or one of the other Approved Markets and comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Approved Market on which the Common Stock is listed. The Company shall cause the Common Shares and the Warrant Shares to be listed on the Nasdaq NMS no later than the registration of the Common Shares or the Warrant Shares under the Act, and at all times shall continue such listing(s) on one of the Approved Markets. As used herein and in the Registration Rights Agreement, the Debenture and the Warrants, the term "EFFECTIVE REGISTRATION" shall mean that all registration obligations of the Company pursuant to the Registration Rights Agreement and this Agreement have been satisfied, all Registrable Securities (as defined in the Registration Rights Agreement) have been registered for resale by the Investors, such registration is not subject to any suspension or stop order, the prospectus for the Common Shares issuable upon conversion of the Debentures and the Warrant Shares issuable upon exercise of the Warrants is current and such Common Shares and Warrant Shares are listed for trading on one of the Approved Markets and such trading has not been suspended for any reason, none of the Company or any direct or indirect subsidiary of the Company is subject to any bankruptcy, insolvency or similar proceeding, and no Interfering Event (as defined in Section 2(b) of the Registration Rights Agreement) exists. 3.2 DEBENTURES ON CONVERSION AND WARRANTS ON EXERCISE. (a) Upon any conversion by an Investor (or then holder of Debentures) of the Debentures pursuant to the terms thereof, the Company shall issue and deliver to such Investor (or holder) within three (3) Trading Days of the Conversion Date (as defined in the Debenture) a new certificate or certificates for the number of Debentures which such Investor (or holder) has not yet elected to convert but which are evidenced in part by the certificate(s) submitted to the Company in connection with such conversion (with the number of and denomination of such new certificate(s) designated by such Investor or holder). (b) Upon any partial exercise by an Investor (or then holder of the Warrants) of the Warrants, the Company shall issue and deliver to such Investor (or holder) within three (3) days of the date on which such Warrants are exercised, a new Warrant or Warrants representing the number of adjusted Warrant Shares, in accordance with the terms of Section 2 of the Warrants. 11 3.3 REPLACEMENT DEBENTURES AND WARRANTS. (a) The certificate(s) representing the Debentures held by any Investor (or then holder) may be exchanged by such Investor (or such holder) at any time and from time to time for certificates with different denominations representing an equal aggregate number of Debentures, as requested by such Investor (or such holder) upon surrendering the same. No service charge will be made for such registration or transfer or exchange. (b) The Warrants will be exchangeable at the option of the Investor (or then holder of the Warrants) at the office of the Company for other Warrants of different denominations entitling the holder thereof to purchase in the aggregate the same number of Warrant Shares as are purchasable under such Warrants. No service charge will be made for such transfer or exchange. 3.4 EXPENSES. The Company shall pay in immediately available funds, at the Closing and promptly upon receipt of any further invoices relating to same, all reasonable due diligence fees and expenses and attorneys' fees and expenses of Kleinberg, Kaplan, Wolff & Cohen, P.C. ("Investors' Counsel"), up to a maximum amount of $30,000, incurred by the Investors in connection with the preparation, negotiation, execution and delivery of this Agreement, the Registration Rights Agreement, the Debentures, the Warrants and the related agreements and documents and the transactions contemplated hereunder and thereunder. At Closing, the Company shall pay the amount due for such fees and expenses (which may include fees and expenses estimated to be incurred for completion of the transaction including post-closing matters). In the event such amount is ultimately less than the actual fees and expenses, the Company shall promptly pay such deficiency upon receipt of an invoice regarding same. 3.5 SECURITIES COMPLIANCE. The Company shall notify the SEC and the Nasdaq NMS, in accordance with their requirements, of the transactions contemplated by this Agreement, the Debenture, the Registration Rights Agreement and the Warrants, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Debentures hereunder, the Common Shares issuable upon conversion thereof, the Warrants and the Warrant Shares issuable upon exercise of the Warrants. 3.6 DIVIDENDS OR DISTRIBUTIONS. So long as any Debentures remain outstanding, the Company agrees that it shall not (a) declare or pay any dividends or make any distributions to any holder or holders of Common Stock, or (b) purchase or otherwise acquire for value, directly or indirectly, any Common Stock or other equity security of the Company. 3.7 NOTICES. The Company agrees to provide all holders of Debentures and Warrants with copies of all notices and information, including without limitation notices and proxy statements in connection with any meetings, that are provided to the holders of shares of Common Stock, contemporaneously with the delivery of such notices or information to such Common Stock holders. 12 3.8 USE OF PROCEEDS. The Company agrees that the proceeds received by the Company from the sale of the Debentures hereunder shall be used for working capital purposes and an investment in Matridigm Corporation. 3.9 RIGHT OF FIRST REFUSAL; ADJUSTMENTS. (a) Until the expiration of twelve (12) months from the Closing Date, the Company shall not (i) sell or otherwise issue or deliver any shares of Common Stock or other equity securities or any securities which are convertible into or exchangeable for shares of its Common Stock or other equity securities or any convertible or exchangeable security, or any warrants or other rights to subscribe for or to purchase or any options for the purchase of shares of Common Stock or other equity securities to any party other than the Investors or their affiliates (a "THIRD PARTY") (other than in a bona-fide public offering conducted on the basis of a firm commitment underwriting with a price to the public of at least $10,000,000 and other than shares or options issued or which may be issued pursuant to the Company's currently existing employee or director option plans and employee stock purchase plans as such plans may be amended from time to time consistent with practices of other companies in the high-technology sector, shares issued upon exercise of options, warrants or rights outstanding on the Closing Date listed in Section 2.1(c) of the Disclosure Schedule or shares issued in a Matridigm Transaction (as defined in Section 7.17), or (ii) obtain any equity or equity related financing from any Third Party, unless such offer, sale, issuance or financing ("FINANCING TRANSACTION") is first offered to the Investors. The Company shall make such offer by providing each Investor with written notice of the Company's intention to enter into the Financing Transaction with such Third Party together with a term sheet identifying all such Third Parties and containing all the economic terms and significant provisions of the Financing Transaction (the "OFFER"). Such Offer shall be given with respect to each Financing Transaction negotiated by the Company with any Third Party. The Investors shall have ten (10) business days from receipt of the Offer to deliver a written notice to the Company that the Investors wish to accept the Offer in whole but not in part (subject to satisfactory due diligence and reasonably acceptable definitive documentation) for the Financing Transaction. If certain Investors choose not to participate, the other Investors may increase their participation on a proportional basis. If the Investors reject the Offer entirely or fail to respond within such ten (10) business day period, then the Company shall be permitted to complete such Financing Transaction with the Third Party within thirty (30) days on terms and conditions identical to those contained in the Offer. If any Financing Transaction is contemplated on terms and conditions not identical to those contained in the Offer or with definitive documentation not identical to that proposed by the Company with respect to the Offer or if such Financing Transaction is not consummated with such Third Party within 30 days, then such Financing Transaction shall be deemed a new Financing Transaction and the Investors shall again be entitled to receive an Offer for such Financing Transaction on such new terms and conditions (and/or with such new definitive documentation if applicable) or upon the same terms if the Third Party fails to consummate the Financing Transaction in the period specified in this sentence. The rights of the Investors under this paragraph 3.9 (a) as to any securities, instruments or rights issued which are exercisable or exchangeable for, or convertible into, shares of Common Stock, where (i) the exercise, exchange or conversion price is at a discount of 10% or greater from the then market price of the Common Stock, or (ii) holders of such securities, instruments or rights may acquire additional shares of Common Stock as a result of a 13 one-time or periodic adjustments to the exercise, exchange or conversion price, shall survive a Change of Control Transaction, as defined in the Debenture. (b) If at any time within twelve (12) months from the Closing Date the Company issues Common Stock (or securities or rights exercisable or exchangeable for, or convertible into, Common Stock) in a private placement at a discount greater than the discount specified in Section 5(c) of the Debentures or at a ceiling, conversion, exercise or exchange price less than the Conversion Price (as defined in the Debentures and as adjusted pursuant to the terms thereof), then the Debentures will automatically (at the Investor's request) be adjusted to provide for such greater discount or lower or more favorable conversion, exercise or exchange price, as applicable. This paragraph 3.9 (b) shall not apply to issuances pursuant to currently existing employee or director option or stock purchase plans as such plans may be amended from time to time consistent with practices of other companies in the high-technology sector, issuances in a Matridigm Transaction or with respect to the items listed in Section 2.1(c) of the Disclosure Schedule. 3.10 RESERVATION OF STOCK ISSUABLE UPON CONVERSION AND UPON EXERCISE OF THE WARRANTS. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Debentures and the exercise of the Warrants, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Debentures and the full exercise of the Warrants and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all the then outstanding Debentures, the full exercise of the Warrants, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including without limitation engaging in best efforts to obtain the requisite shareholder approval. Without in any way limiting the foregoing, the Company agrees to reserve and at all times keep available solely for purposes of conversion of Debentures and the exercise of the Warrants such number of authorized but unissued shares of Common Stock that is at least equal to 200% of the aggregate shares issuable upon conversion of Debentures, and 200% of the aggregate shares issuable on exercise of Warrants, which number may be reduced by the number of Common Shares or Warrant Shares actually delivered pursuant to conversion of Debentures or exercise of the Warrants and shall be appropriately adjusted for any stock split, reverse split, stock dividend or reclassification of the Common Stock. When the adjustments to the Conversion Price (as defined in the Debenture) pursuant to Sections 5(d) and 5(e) of the Debenture have been completed, the percentages set forth in the preceding sentence shall be reduced from "200%" to "103%". If the Company falls below the reserves specified in the immediately preceding sentence and does not cure such non-compliance within 30 days of its start, then the Investors will be entitled to the discount adjustments specified in Section 2(b)(i) of the Registration Rights Agreement. If at any time the number of authorized but unissued shares of Common Stock is not sufficient to effect the conversion of all the then outstanding Debentures or the full exercise of the Warrants, the Investors shall be entitled to, INTER ALIA, the premium price redemption rights provided in the Registration Rights Agreement. The Company shall not be permitted to engage in any transaction if, after giving effect thereto, the Company would not be in compliance with the reservation requirements of this Section 3.10. 14 3.11 BEST EFFORTS. The parties shall use their best efforts to satisfy timely each of the conditions described in Article IV of this Agreement. 3.12 FORM D; BLUE SKY LAWS. The Company agrees to file a Form D with respect to the Debentures, Warrants, Common Shares and Warrant Shares, as required under Regulation D and to provide a copy thereof to each Investor promptly after such filing. The Company shall, on or before each Closing Date, take such action as the Company shall have reasonably determined is necessary to qualify the Debentures, Warrants, Common Shares and Warrant Shares for sale to the Investors at the applicable Closing pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to each Investor on or prior to the Closing Date. 3.13 NO SENIOR INDEBTEDNESS; LIMITATIONS ON ISSUANCE OF EQUITY. (a) So long as any Debentures remain outstanding, the Company agrees that neither the Company nor any direct or indirect subsidiary of the Company shall create, incur, assume, guarantee, secure or in any manner become liable in respect of any indebtedness, except for Senior Debt as defined in the Debenture, debt owed to a financial institution which debt is unsecured other than by accounts receivable or trade payables incurred in the ordinary course of business consistent with past practices or debt pursuant to a Matridigm Transaction, unless junior to the Debentures in all respects. For purposes of this Section 3.13, "financial institution" excludes, without limitation, any investment company, or any entity that would be an investment company, but for the exclusions provided by Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940, as amended. (b) Until the Registration Statement (as defined in the Registration Rights Agreement) has been declared effective by the SEC and the Common Shares are subject to Effective Registration, neither the Company nor any of its subsidiaries will issue any equity securities or instruments or rights convertible into or exchangeable or exercisable for any equity securities, except pursuant to current employee and director option and stock purchase plans in amounts and at prices consistent with past practice, in a Matridigm Transaction and with respect to items listed in Section 2.1(c) of the Disclosure Schedule. ARTICLE 4 CONDITIONS TO CLOSINGS 4.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO SELL THE DEBENTURES. The obligation hereunder of the Company to issue and/or sell the Debentures to the Investors at the Closing (unless otherwise specified) is subject to the satisfaction, at or before the Closing, of each of the applicable conditions set forth below. These conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion. (a) ACCURACY OF THE INVESTORS' REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Investor will be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for 15 representations and warranties as of an earlier date, which shall have been true and correct in all material respects as of such date). (b) PERFORMANCE BY THE INVESTORS. Each Investor shall have performed all agreements and satisfied all conditions required to be performed or satisfied by such Investor at or prior to the Closing. (c) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement or the Registration Rights Agreement or the Debentures or the Warrants. 4.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE INVESTORS TO PURCHASE THE DEBENTURES. The obligation hereunder of each Investor to acquire and pay for the Debentures at the Closing (unless otherwise specified) is subject to the satisfaction, at or before the Closing, of each of the applicable conditions set forth below. These conditions are for each Investor's benefit and may be waived by each Investor at any time in its sole discretion. (a) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties as of an earlier date, which shall have been true and correct in all material respects as of such date). (b) PERFORMANCE BY THE COMPANY. The Company shall have performed all agreements and satisfied all conditions required to be performed or satisfied by the Company at or prior to the Closing. (c) NASDAQ NMS. From the date hereof to the Closing Date, trading in the Company's Common Stock shall not have been suspended by the SEC or the Nasdaq NMS (or other Approved Market), and trading in securities generally as reported by the Nasdaq NMS (or other Approved Market) shall not have been suspended or limited, and the Common Stock shall not have been delisted from the Nasdaq NMS (or any other Approved Market where they are currently listed). (d) NO INJUNCTION. No statute, rule, regulation, executive, judicial or administrative order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement or the Registration Rights Agreement or the Debenture or the Warrants. (e) OPINION OF COUNSEL. At the Closing, the Investors shall have received an opinion of counsel to the Company in the form attached hereto as Exhibit 4.2(e) and such other opinions, certificates and documents as the Investors or their counsel shall reasonably require incident to the Closing. 16 (f) REGISTRATION RIGHTS AGREEMENT. The Company and the Investors shall have executed and delivered the Registration Rights Agreement in the form and substance of Exhibit 4.2(f) attached hereto. (g) ADVERSE CHANGES. Since December 31, 1997, no event which had or is likely to have, in the reasonable judgment of the Investors, a Material Adverse Effect on the Company or any of its direct or indirect subsidiaries shall have occurred. (h) OFFICER'S CERTIFICATE. The Company shall have delivered to the Investors a certificate in form and substance satisfactory to the Investors and the Investors' Counsel, executed by an officer of the Company, certifying as to satisfaction of closing conditions, incumbency of signing officers, and the true, correct and complete nature of the Charter, By-Laws, good standing and authorizing resolutions of the Company. (i) DEBENTURES AND WARRANTS. The Investors shall have received certificates representing the Debentures and Warrants in the form and substance of Exhibit 1.1A and Exhibit 1.1B hereto. (j) DUE DILIGENCE. Each Investor shall have completed its financial, accounting, operational and legal due diligence in a manner satisfactory to such Investor in its sole discretion. ARTICLE 5 LEGEND AND STOCK The Company will issue one or more certificates representing the Debentures and the Warrants in the name of the Investor and in such denominations to be specified by the Investor prior to (or from time to time subsequent to) Closing. Each certificate representing the Debentures and the Warrants and any shares of Common Stock issued upon conversion or exercise thereof initially shall be stamped or otherwise imprinted with a legend substantially in the following form: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. The Company agrees to reissue Debentures and Warrants without the legend set forth above at such time as (i) the holder thereof is permitted to dispose of such Debentures and/or Warrants and Common Stock issuable upon conversion or exercise thereof pursuant to Rule 144(k) under the Act, or (ii) such Debentures and/or Warrants are sold to a purchaser or purchasers who (in the opinion of counsel to the seller or such purchaser(s), in form and substance reasonably satisfactory to the Company and its counsel) are able to dispose of such shares publicly without registration under the Act. 17 Prior to the Registration Statement (as defined in the Registration Rights Agreement) being declared effective, any Common Shares issued pursuant to conversion of Debentures or Warrant Shares issued upon exercise of the Warrants shall bear a legend in the same form as the legend indicated above. Upon such Registration Statement becoming effective, the Company agrees to promptly, but no later than three (3) business days thereafter, issue new certificates representing such Common Shares and Warrant Shares without such legend. Any Common Shares issued pursuant to conversion of Debentures or Warrant Shares issued upon exercise of the Warrants after the Registration Statement has become effective shall be free and clear of any legends, transfer restrictions and stop orders. Notwithstanding the removal of such legend, each Investor agrees to sell the Common Shares and Warrant Shares represented by the new certificates in accordance with the applicable prospectus delivery requirements or in accordance with an exemption from the registration requirements of the Act. Nothing herein shall limit the right of any holder to pledge these securities pursuant to a bona fide margin account or lending arrangement. ARTICLE 6 TERMINATION 6.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated at any time prior to the Closing by the mutual written consent of the Company and each of the Investors. 6.2 OTHER TERMINATION. This Agreement may be terminated by action of the Board of Directors of the Company or by any of the Investors at any time if the Closing shall not have been consummated by the fifth business day following the date of this Agreement; provided, however, that the party (or parties) prepared to close shall retain its (or their) right to sue for any breach by the other party (or parties). ARTICLE 7 MISCELLANEOUS 7.1 STAMP TAXES. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Debentures pursuant hereto, the Common Shares issued upon conversion thereof, and the Warrant Shares issued upon exercise of the Warrants. 7.2 SPECIFIC PERFORMANCE; CONSENT TO JURISDICTION; JURY TRIAL. (a) The Company and the Investors acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. 18 (b) THE COMPANY AND EACH OF THE INVESTORS (I) HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT, THE NEW YORK STATE COURTS AND OTHER COURTS OF THE UNITED STATES SITTING IN NEW YORK COUNTY, NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND (II) HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH SUIT ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER. THE COMPANY AND EACH OF THE INVESTORS CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW. (c) The Company and each Investor hereby waives all rights to a trial by jury. 7.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement, together with the Registration Rights Agreement, the Warrants, the Debenture and the agreements and documents executed in connection herewith and therewith, contains the entire understanding of the parties with respect to the matters covered hereby and thereby and, except as specifically set forth herein or therein, neither the Company nor any Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought. 7.4 NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing by mail, facsimile or personal delivery and shall be effective upon actual receipt of such notice. The addresses for such communications shall be: to the Company: Zitel Corporation 47211 Bayside Parkway Fremont, California 94538 Attention: Chief Financial Officer Facsimile: (510) 440-8526 19 with copies to: Cooley Godward LLP One Maritime Plaza 20th Floor San Francisco, California 94111 Attention: John L. Cardoza, Esq. Facsimile: (415) 951-3699 to the Investors: To each Investor at the address and/or fax number set forth on Schedule I of this Agreement. with copies to: Kleinberg, Kaplan, Wolff & Cohen, P.C. 551 Fifth Avenue, 18th Floor New York, New York 10176 Attention: Stephen M. Schultz, Esq. Facsimile: (212) 986-8866 Any party hereto may from time to time change its address for notices by giving at least 10 days' written notice of such changed address to the other parties hereto. 7.5 INDEMNITY. Each party shall indemnify each other party against any loss, cost or damages (including reasonable attorney's fees but excluding consequential damages) incurred as a result of such parties' breach of any representation, warranty, covenant or agreement in this Agreement. 7.6 WAIVERS. No waiver by any party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 7.7 HEADINGS. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 7.8 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The parties hereto may amend this Agreement without notice to or the consent of any third party. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of all Investors, except that the Company may assign this Agreement in connection with a Change of Control Transaction occurring in excess of forty-five (45) days after the Effectiveness Date (as defined in the Debenture) (such 45 days to be extended one day for every day after that date on which there is not Effective Registration), so long as such assignment places the Investors in a position economically equivalent to that in which they 20 would have been but for such assignment, in accordance with the terms of the Debentures and the Warrants. Any Investor may assign this Agreement (in whole or in part) or any rights or obligations hereunder subject to the consent of the Company (such consent not to be unreasonably withheld) in connection with any sale or transfer of all or any portion of the Debentures or Warrants held by such Investor, provided that no consent of the Company will be required for any transfer or assignment by the Investor to (i) an affiliate or affiliates of the Investor or (ii) any person or entity whose investments are managed by an investment adviser that is the same as, or an affiliate of, the investment manager of the Investor. 7.9 NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. 7.10 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to Agreements executed and to be performed entirely within such State. 7.11 SURVIVAL. The representations and warranties and the agreements and covenants of the Company and each Investor contained herein shall survive the Closing. 7.12 EXECUTION. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement, it being understood that all parties need not sign the same counterpart. 7.13 PUBLICITY. The Company agrees that it will not disclose, and will not include in any public announcement, the name of any Investor without its consent, unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. The Company agrees that a copy of any public announcement regarding the matters covered by this Agreement or any agreement and document executed herewith and any public announcement (other than the filing of this Agreement as an exhibit on Form 8-K), including the name of an Investor will be approved by each Investor in advance of the release of such announcements. The Company agrees that prior to the opening of trading on the day following the Closing Date, the Company shall issue a public announcement regarding the matters covered by this Agreement and related documents, which announcement shall be subject to the prior reasonable approval of the Investors. 7.14 SEVERABILITY. The parties acknowledge and agree that the Investors are not agents, affiliates or partners of each other, that all representations, warranties, covenants and agreements of the Investors hereunder are several and not joint, that no Investor shall have any responsibility or liability for the representations, warrants, agreements, acts or omissions of any other Investor, and that any rights granted to "Investors" hereunder shall be enforceable by each Investor hereunder. 7.15 LIKE TREATMENT OF HOLDERS; REDEMPTION. Neither the Company nor any of its affiliates shall, directly or indirectly, pay or cause to be paid any consideration (immediate or contingent), whether by way of interest, fee, payment for the redemption or conversion of Debentures or exercise of the Warrants, or otherwise, to any holder of Debentures or Warrants, 21 for or as an inducement to, or in connection with the solicitation of, any consent, waiver or amendment of any terms or provisions of the Debenture or this Agreement or the Registration Rights Agreement or the Warrants, unless such consideration is required to be paid to all holders of Debentures and Warrants bound by such consent, waiver or amendment whether or not such holders so consent, waive or agree to amend and whether or not such holders tender their Debentures or Warrants for redemption, conversion or exercise. The Company shall not, directly or indirectly, redeem any Debentures unless such offer of redemption is made pro rata to all holders of Debentures on identical terms. 7.16 NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. 7.17 MATRIDIGM TRANSACTION. As used herein and in the Debentures and the Warrants the term "Matridigm Transaction" shall mean any transaction or series of transactions whereby the Company acquires additional 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. [SIGNATURE PAGES FOLLOW] 22 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. ZITEL CORPORATION By: Anna M. McCann ----------------------------------- Name: Anna M. McCann Title: V.P. Finance & Administration INVESTORS: HALIFAX FUND, L.P. By: Jeffrey E. Devers ----------------------------------- Name: Jeffrey E. Devers Title: President PALLADIN PARTNERS I, L.P. By: PALLADIN GROUP L.P. Attorney-in-Fact By: Jeffrey E. Devers ----------------------------------- Name: Jeffrey E. Devers Title: President PALLADIN OVERSEAS FUND LIMITED By: PALLADIN GROUP L.P. Attorney-in-Fact By: Jeffrey E. Devers ----------------------------------- Name: Jeffrey E. Devers Title: President [SIGNATURE PAGE TO ZITEL CORPORATION CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGREEMENT] 23 THE GLENEAGLES FUND COMPANY By: PALLADIN GROUP L.P. Attorney-in-Fact By: Jeffrey E. Devers ----------------------------------- Name: Jeffrey E. Devers Title: President PALLADIN SECURITIES, LLC By: Jeffrey E. Devers ----------------------------------- Name: Jeffrey E. Devers Title: President COLONIAL PENN LIFE INSURANCE COMPANY By: PALLADIN GROUP L.P. Attorney-in-Fact By: Jeffrey E. Devers ----------------------------------- Name: Jeffrey E. Devers Title: President LANCER SECURITIES LIMITED By: PALLADIN GROUP L.P. Attorney-in-Fact By: Jeffrey E. Devers ----------------------------------- Name: Jeffrey E. Devers Title: President [SIGNATURE PAGE TO ZITEL CORPORATION CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGREEMENT] 24 EX-4.3 4 EXHIBIT 4.3 EXHIBIT 4.3 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of February 2, 1999 between ZITEL CORPORATION, a California corporation with offices at 47211 Bayside Parkway, Fremont, California 94538 (the "Company") and each of the entities listed under "Investors" on the signature page hereto (each an "Investor" and collectively the "Investors"), each with offices at the address listed under such Investor's name on Schedule I hereto. WITNESSETH: WHEREAS, pursuant to that certain Convertible Subordinated Debenture Purchase Agreement by and between the Company and the Investors (the "Purchase Agreement"), the Company initially has agreed to sell and issue to the Investors, and the Investors have agreed to purchase from the Company, an aggregate of $5 million principal amount of the Company's 3% Convertible Subordinated Debentures (the "Debentures") on the terms and conditions set forth therein; WHEREAS, the Purchase Agreement contemplates that the Debentures will be convertible into shares (the "Common Shares") of common stock, no par value, of the Company ("Common Stock") pursuant to the terms and conditions set forth in the Debentures; and WHEREAS, pursuant to the terms of, and in partial consideration for, the Investors' agreement to enter into the Purchase Agreement, the Company has agreed to issue the Warrants exercisable for Warrant Shares and to provide the Investors with certain registration rights with respect to the Common Shares and Warrant Shares and certain other rights and remedies with respect to the Debentures as set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in the Purchase Agreement and this Agreement, the Company and the Investors agree as follows: 1. CERTAIN DEFINITIONS. Capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in the Purchase Agreement, Warrants or the Debentures. As used in this Agreement, the following terms shall have the following respective meanings: "CLOSING" and "CLOSING DATE" shall have the meanings ascribed to such terms in the Purchase Agreement. "COMMISSION" or "SEC" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "OUTSTANDING PRINCIPAL AMOUNT" shall have the meaning ascribed to such term in the Debentures. 1 "REGISTRABLE SECURITIES" shall mean: (i) the Common Shares and Warrants Shares issued to each Holder or its permitted transferee or designee upon conversion of the Debentures or exercise of the Warrants, as applicable, or upon any stock split, stock dividend, recapitalization or similar event with respect to such Common Shares or Warrant Shares; (ii) any securities issued or issuable to each Holder upon the conversion, exercise or exchange of any Debentures, Warrants, Warrant Shares, or Common Shares; and (iii) any other security of the Company issued as a dividend or other distribution with respect to, conversion or exchange of or in replacement of Registrable Securities. The terms "REGISTER", "REGISTERED" and "REGISTRATION" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. "REGISTRATION EXPENSES" shall mean all expenses to be incurred by the Company in connection with each Holder's registration rights under this Agreement, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, reasonable fees and disbursements of counsel to Holders (using a single counsel selected by a majority in interest of the Holders) for a "due diligence" examination of the Company and review of the Registration Statement and related documents, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursements of counsel for Holders not included within "Registration Expenses". "HOLDER" and "HOLDERS" shall include an Investor or the Investors, respectively, and any transferee of the Debentures, Warrants, Warrant Shares or Common Shares or Registrable Securities which have not been sold to the public to whom the registration rights conferred by this Agreement have been transferred in compliance with this Agreement. "REGISTRATION STATEMENT" shall have the meaning set forth in Section 2(a) herein. "REGULATION D" shall mean Regulation D as promulgated pursuant to the Securities Act, and as subsequently amended. "SECURITIES ACT" or "ACT" shall mean the Securities Act of 1933, as amended. "WARRANTS" shall mean the warrants in form and substance of Exhibit 1.1B to the Purchase Agreement between the Company and the Investors, dated as of the date hereof. "WARRANT SHARES" shall mean shares of Common Stock of the Company issued and issuable upon exercise of the Warrant. 2. REGISTRATION REQUIREMENTS. The Company shall use its best efforts to effect the registration of the Registrable Securities (including without limitation the execution of an 2 undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as would permit or facilitate the sale or distribution of all the Registrable Securities in the manner (including manner of sale) and in all states reasonably requested by the Holder. Such best efforts by the Company shall include the following: (a) The Company shall, as expeditiously as reasonably possible after the Closing Date: (i) But in any event within 30 days thereafter, prepare and file a registration statement with the Commission pursuant to Rule 415 under the Securities Act on Form S-3 under the Securities Act (or in the event that the Company is ineligible to use such form, such other form as the Company is eligible to use under the Securities Act) covering the Registrable Securities ("Registration Statement"). Such Registration Statement shall, in addition and without limitation, register (pursuant to Rule 416 under the Securities Act, or otherwise) such additional indeterminate number of Registrable Securities as shall be necessary to permit the conversion in full of the Debentures and the issuance of additional shares of Common Stock to Holders pursuant to the various reset provisions of the Debentures. Thereafter, the Company shall use its best efforts to cause such Registration Statement and other filings to be declared effective as soon as possible, and in any event prior to 90 days following the Closing Date. The Company shall provide Holders and their legal counsel reasonable opportunity to review any such Registration Statement or amendment or supplement thereto prior to filing. (ii) Prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement and notify the Holders of the filing and effectiveness of such Registration Statement and any amendments or supplements. (iii) Furnish to each Holder such numbers of copies of a current prospectus conforming with the requirements of the Act, copies of the Registration Statement, any amendment or supplement thereto and any documents incorporated by reference therein and such other documents as such Holder may reasonably require in order to facilitate the disposition of Registrable Securities owned by such Holder. (iv) Use its best efforts to register and qualify the securities covered by such Registration Statement under such other securities or "Blue Sky" laws of such jurisdictions as shall be reasonably requested by each Holder; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) Notify each Holder immediately of the happening of any event as a result of which the prospectus (including any supplements thereto or thereof) included in such Registration Statement, as then in effect, includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and use its best efforts to promptly update and/or correct such prospectus. 3 (vi) Notify each Holder immediately of the issuance by the Commission or any state securities commission or agency of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose. The Company shall use its best efforts to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible time. (vii) Permit a single firm of counsel, designated as Holders' counsel by a majority of the Registrable Securities included in the Registration Statement, to review the Registration Statement and all amendments and supplements thereto within a reasonable period of time prior to each filing, and shall not file any document in a form to which such counsel reasonably objects. (viii) Use its best efforts to list the Registrable Securities covered by such Registration Statement with all securities exchange(s) and/or markets on which the Common Stock is then listed and prepare and file any required filings with the National Association of Securities Dealers, Inc. or any exchange or market where the Common Shares are traded. (ix) Take all steps necessary to enable Holders to avail themselves of the prospectus delivery mechanism set forth in Rule 153 (or successor thereto) under the Act. (b) Set forth below in this Section 2(b) are (I) events that may arise that the Investors consider will interfere with the full enjoyment of their rights under the Debentures, the Purchase Agreement and this Agreement (the "Interfering Events"), and (II) certain remedies applicable in each of these events. Paragraphs (i) through (iv) of this Section 2(b) describe the Interfering Events, provide a remedy to the Investors if an Interfering Event occurs and provide that the Investors may require that the Company redeem outstanding Debentures at a specified price if certain Interfering Events are not timely cured. Paragraph (v) provides, inter alia, that if cash payments required as the remedy in the case of certain of the Interfering Events are not paid when due, the Company may be required by the Investors to redeem outstanding Debentures at a specified price. Paragraph (vi) provides, inter alia, that the Investors have the right to specific performance. The preceding paragraphs in this Section 2(b) are meant to serve only as an introduction to this Section 2(b), are for convenience only, and are not to be considered in applying, construing or interpreting this Section 2(b). (i) DELAY IN EFFECTIVENESS OF REGISTRATION STATEMENT. The Company agrees that it shall file the Registration Statement complying with the requirements of this Agreement promptly and in any event within 30 days following the date of the initial closing of the Purchase Agreement (the "Closing Date") and shall use its best efforts to cause such Registration Statement to become effective as soon as possible and in any event within 90 days from the Closing Date. In the event that such Registration Statement has not been declared effective within 90 days from the Closing Date, then the percentage (initially 90%) employed to determine the "Conversion Price" pursuant to Section 5(c) of the Debentures and all Conversion Price resets pursuant to Sections 5(d) and 5(e) of the Debentures (the "Agreed Percentage") shall be reduced by 1% during and after the 30-day period ("Default Period") from and after the 90th day following the Closing Date during any part of which such Registration Statement is not effective, and such Agreed Percentage shall be further reduced by an additional 1.5% during and 4 after each Default Period thereafter. For example, if the Registration Statement does not become effective until 120 days from the Closing Date, the Agreed Percentage from and after day 91 shall be equal to 89%. If the Registration Statement is not effective until the 150th day after the Closing Date, the Agreed Percentage from and after day 121 from the Closing Date shall be 87.5%. In each case, the Agreed Percentage and the Conversion Price shall be subject to further adjustment as set forth in the Debenture and the Purchase Agreement. If the Registration Statement has not been declared effective within 150 days after the Closing Date, then each Holder shall have the right in its sole discretion to sell its Debentures, Common Shares and/or Warrant Shares to the Company (in whole or in part) at a price in immediately available funds (the "Premium Redemption Price") equal to (A) as to the Debentures, 1.3 times (i.e., 130% of) the Outstanding Principal Amount of the Debentures plus any accrued but unpaid or unrecognized interest or default payments and (B) as to the Common Shares and/or Warrant Shares, 1.3 times the dollar amount which is the product of (x) the number of shares so to be redeemed pursuant to this paragraph, and (y) the fair market value of such shares (as defined in the Debentures) at the time such shares were received pursuant to conversion of Debentures or exercise of Warrants. Payment of such amount shall be due and payable within 3 business days of demand therefor, which demand shall be revocable by the Holder at any time prior to its actual receipt of the Premium Redemption Price. (ii) NO LISTING; PREMIUM PRICE REDEMPTION FOR DELISTING OF CLASS OF SHARES. (A) In the event that the Company fails, refuses or is unable to cause the Registrable Securities covered by the Registration Statement to be listed with the Approved Market and each other securities exchange and market on which the Common Stock is then traded at all times during the period ("Listing Period") commencing the earlier of the effective date of the Registration Statement or the 90th day following the Closing Date, and continuing thereafter for so long as the Debentures are outstanding, then the Company shall pay in cash to each Holder a default payment at a rate (the "Default Payment Rate") equal to two percent (2%) of the sum of (x) the Outstanding Principal Amount of, (y) the accrued but unpaid interest on, plus (z) the accrued but unpaid or unrecognized default payments on the Debentures (the "Debenture Amount") held by such Holder for each 30-day period (or portion thereof) during the Listing Period from and after such failure, refusal or inability to so list the Registrable Securities until the Registrable Securities are so listed. (B) In the event that shares of Common Stock of the Company are delisted from the Approved Market at any time following the Closing Date and remain delisted for 5 consecutive days, then at the option of each Holder and to the extent such Holder so elects, the Company shall on 2 business days notice redeem the Debentures and/or Common Shares and/or Warrant Shares held by such Holder, in whole or in part, at a redemption price equal to the Premium Redemption Price (as defined above); provided, however, that such Holder may revoke such request at any time prior to receipt of such payment of such redemption price. Default payments shall no longer accrue on Debentures after such shares have been redeemed by the Company pursuant to the foregoing provision. (iii) BLACKOUT PERIODS. In the event any Holder's ability to sell Registrable Securities under the Registration Statement is suspended: 5 (A) for more than (i) five (5) consecutive days or (ii) ten (10) days in any calendar year ("Suspension Grace Period"), including without limitation by reason of a suspension of trading of the Common Stock on the Approved Market, any suspension or stop order with respect to the Registration Statement or the fact that an event has occurred as a result of which the prospectus (including any supplements thereto) included in such Registration Statement then in effect includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; or (B) for more than (i) twenty (20) consecutive days or (ii) thirty (30) days in any calendar year ("Corporate Event Suspension Grace Period"), by reason of any corporate event, including, without limitation, a merger, acquisition or disposition; then the Company shall pay in cash to each Holder a default payment at the Default Payment Rate of the Debenture Amount for the Debentures held by such Holder for each 30-day period (or portion thereof) from and after the expiration of the Suspension Grace Period or Corporate Event Suspension Grace Period. Alternatively, a Holder shall have the right but not the obligation to have the Company redeem its Debentures and Common Shares and Warrant Shares at the price and on the terms (and subject to the right to revoke) set forth in Section 2(b)(i) above. (iv) CONVERSION DEFICIENCY; PREMIUM PRICE REDEMPTION FOR CONVERSION DEFICIENCY. In the event that the Company does not have a sufficient number of Common Shares available to satisfy the Company's obligations to any Holder upon receipt of a Conversion Notice (as defined in the Debenture) or is otherwise unable or unwilling to issue such Common Shares (including without limitation by reason of the limit described in Section 10 below) in accordance with the terms of the Debenture for any reason after receipt of a Conversion Notice, then: (A) The Company shall pay in cash to each Holder a default payment at the Default Payment Rate on the Debenture Amount for the Debentures held by such Holder for each 30-day period (or portion thereof) that the Company fails or refuses to issue Common Shares in accordance with the Debenture terms; and (B) At any time five days after the commencement of the running of the first 30-day period described above in clause (A) of this paragraph (iv), at the request of any Holder pursuant to a redemption notice, the Company promptly (1) shall purchase from such Holder, at a purchase price equal to the Premium Redemption Price, the Debenture Amount of Debentures equal to such Holder's pro rata share of the "Deficiency", as such terms are defined below, if the failure to issue Common Shares results from the lack of a sufficient number thereof and (2) shall purchase all (or such portion as such Holder may elect) of such Holder's Debentures at such Premium Redemption Price if the failure to issue Common Shares results from any other cause. The "Deficiency" shall be equal to the Debenture Amount of Debentures that would not be able to be converted for Common Shares, due to an insufficient number of Common Shares available, if all the outstanding Debentures were submitted for conversion at the Conversion Price set forth in the Debentures as of the date such Deficiency is determined. Any request by a Holder pursuant to this paragraph (iv)(B) shall be revocable by that Holder at any time prior to its receipt of the Premium Redemption Price. 6 (v) PREMIUM PRICE REDEMPTION FOR CASH PAYMENT DEFAULTS. (A) The Company acknowledges that any failure, refusal or inability by the Company described in the foregoing paragraphs (i) through (iv) will cause the Holders to suffer damages in an amount that will be difficult to ascertain, including without limitation damages resulting from the loss of liquidity in the Registrable Securities and the additional investment risk in holding the Registrable Securities. Accordingly, the parties agree that it is appropriate to include in this Agreement the foregoing provisions for default payments, discounts and mandatory redemptions in order to compensate the Holders for such damages. The parties acknowledge and agree that the default payments, discounts and mandatory redemptions set forth above represent the parties' good faith effort to quantify such damages and, as such, agree that the form and amount of such default payments, discounts and mandatory redemptions are reasonable and will not constitute a penalty. (B) Each default payment provided for in the foregoing paragraphs (ii) through (iv) shall be in addition to each other default payment; provided, however, that in no event shall the Company be obligated to pay to any Holder default payments in an aggregate amount greater than the Default Payment Rate of the Debenture Amount of the Debentures held by such Holder for any 30-day period (or portion thereof). All default payments (which payments shall be pro rata on a per diem basis for any period of less than 30 days) required to be made in connection with the above provisions shall be paid in cash at any time upon demand, and whether or not a demand is made, by the tenth (10th) day of each calendar month for each partial or full 30-day period occurring prior to that date. Until paid as required in this Agreement, default payments shall be deemed added to, and a part of, the Outstanding Principal Amount of a Holder's Debentures. (C) In the event that the Company fails or refuses to pay any default payment or honor any default adjustments of the Agreed Percentage when due, at any Holder's request and option the Company shall purchase all or a portion of the Debentures, Common Shares and/or Warrant Shares held by such Holder (with default payments accruing through the date of such purchase), within five (5) days of such request, at a purchase price equal to the Premium Redemption Price (as defined above), provided that such Holder may revoke such request at any time prior to receipt of such payment of such purchase price. Until such time as the Company purchases such Debentures at the request of such Holder pursuant to the preceding sentence, at any Holder's request and option the Company shall as to such Holder pay such amount by adding and including the amount of such default payment to the Outstanding Principal Amount of a Holder's Debentures. (vi) CUMULATIVE REMEDIES. The default payments and mandatory redemptions provided for above are in addition to and not in lieu or limitation of any other rights the Holders may have at law, in equity or under the terms of the Debentures, the Purchase Agreement, the Warrants or this Agreement, including without limitation the right to specific performance. Each Holder shall be entitled to specific performance of any and all obligations of the Company in connection with the registration rights of the Holders hereunder. (c) If the Holder(s) intend to distribute the Registrable Securities by means of an underwriting, the Holder(s) shall so advise the Company. Any such underwriting may only 7 be administered by investment bankers reasonably satisfactory to the Company. The Company shall only be obligated to permit one underwritten offering, which offering shall be determined by a majority-in-interest of the Holders. (d) The Company shall enter into such customary agreements for secondary offerings (including a customary underwriting agreement with the underwriter or underwriters, if any) and take all such other reasonable actions reasonably requested by the Holders in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities. When Registrable Securities are to be sold in an underwritten offering the Company shall: (i) make such representations and warranties to the Holders and the underwriter or underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters and holders in secondary offerings; (ii) cause to be delivered to the sellers of Registrable Securities and the underwriter or underwriters, if any, opinions of independent counsel to the Company, on and dated as of the Effectiveness Date, which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Holders and the underwriter(s), if any, and their counsel and covering, without limitation, such matters as are customarily given to underwriters and holders in underwritten offerings, addressed to the Holders and each underwriter, if any; (iii) cause to be delivered, immediately prior to the effectiveness of the Registration Statement (and at the time of delivery of any Registrable Securities sold pursuant thereto), a "comfort" letter from the Company's independent certified public accountants addressed to the Holders and each underwriter, if any, stating that such accountants are independent public accountants within the meaning of the Securities Act and the applicable published rules and regulations thereunder, and otherwise in customary form and covering such financial and accounting matters as are customarily covered by letters of the independent certified public accountants delivered in connection with registered offerings; (iv) the underwriting agreement shall include customary indemnification and contribution provisions to and from the underwriters and procedures for secondary underwritten offerings; and (v) deliver such documents and certificates as may be reasonably requested by the Holders of the Registrable Securities being sold or the managing underwriter or underwriters, if any, to evidence compliance with clause (i) above and with any customary conditions contained in the underwriting agreement, if any. (e) The Company shall make available for inspection by the Holders, representative(s) of all the Holders together, any underwriter participating in any disposition pursuant to a Registration Statement, and any attorney or accountant retained by any Holder or underwriter, all financial and other records customary for purposes of the Holders' due diligence examination of the Company and review of any Registration Statement, all SEC Documents (as defined in the Purchase Agreement) filed subsequent to the Closing, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and 8 employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such Registration Statement, provided that such parties agree to keep such information confidential. (f) Subject to Section 2(b) above, the Company may suspend the use of any prospectus used in connection with the Registration Statement only in the event, and for such period of time as, such a suspension is required by the rules and regulations of the Commission. The Company will use its best efforts to cause such suspension to terminate at the earliest possible date. (g) The Company shall file a Registration Statement with respect to any newly authorized and/or reserved shares within five (5) business days of any shareholders meeting authorizing same and shall use its best efforts to cause such Registration Statement to become effective within sixty (60) days of such shareholders meeting. If the Holders become entitled, pursuant to an event described in clause (iii) of the definition of Registrable Securities, to receive any securities in respect of Registrable Securities that were already included in a Registration Statement, subsequent to the date such Registration Statement is declared effective, and the Company is unable under the securities laws to add such securities to the then effective Registration Statement, the Company shall promptly file, in accordance with the procedures set forth herein, an additional Registration Statement with respect to such newly Registrable Securities. The Company shall use its best efforts to (i) cause any such additional Registration Statement, when filed, to become effective under the Securities Act, and (ii) keep such additional Registration Statement effective during the period described in Section 5 below. All of the registration rights and remedies under this Agreement shall apply to the registration of such newly reserved shares and such new Registrable Securities, including without limitation the provisions providing for default payments contained herein. 3. EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with any registration, qualification or compliance with registration pursuant to this Agreement shall be borne by the Company, and all Selling Expenses of a Holder shall be borne by such Holder. 4. REGISTRATION ON FORM S-3. The Company shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form or forms, or in the event that the Company is ineligible to use such form, such form as the Company is eligible to use under the Securities Act. 5. REGISTRATION PERIOD. In the case of the registration effected by the Company pursuant to this Agreement, the Company will use its best efforts to keep such registration effective until the later of (a) the first anniversary of the issue of the Debenture and Warrant and (b) the date upon which all shares of Common Stock issuable upon conversion of the Debentures have been sold freely without restriction. 6. INDEMNIFICATION. (a) THE COMPANY INDEMNITY. The Company will indemnify each Holder, each of its officers, directors and partners, and each person controlling each Holder, within the 9 meaning of Section 15 of the Securities Act and the rules and regulations thereunder with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls, within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder, any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any state securities law or in either case, any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to a Holder to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or the underwriter (if any) therefor and stated to be specifically for se therein. The indemnity agreement contained in this Section 6(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent will not be unreasonably withheld). (b) HOLDER INDEMNITY. Each Holder will, severally and not jointly, if Registrable Securities held by it are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors, officers, partners, and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder, each other Holder (if any), and each of their officers, directors and partners, and each person controlling such other Holder(s) against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, and will reimburse the Company and such other Holder(s) and their directors, officers and partners, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use therein, and provided that the maximum amount for which such Holder shall be liable under this indemnity shall not exceed the net proceeds received by such Holder from the sale of the Registrable Securities. The indemnity agreement contained in this Section 6(b) shall not apply to amounts paid in settlement 10 of any such claims, losses, damages or liabilities if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld). (c) PROCEDURE. Each party entitled to indemnification under this Article (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim in any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Article except to the extent that the Indemnifying Party is materially and adversely affected by such failure to provide notice. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. 7. CONTRIBUTION. If the indemnification provided for in Section 6 herein is unavailable to the Indemnified Parties in respect of any losses, claims, damages or liabilities referred to herein (other than by reason of the exceptions provided therein), then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities as between the Company on the one hand and any Holder on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of such Holder in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of any Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by such Holder. In no event shall the obligation of any Indemnifying Party to contribute under this Section 7 exceed the amount that such Indemnifying Party would have been obligated to pay by way of indemnification if the indemnification provided for under Section 6(a) or 6(b) hereof had been available under the circumstances. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Holders or the underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraphs. The amount paid or payable by an Indemnified Party as a 11 result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraphs shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this section, no Holder or underwriter shall be required to contribute any amount in excess of the amount by which (i) in the case of any Holder, the net proceeds received by such Holder from the sale of Registrable Securities or (ii) in the case of an underwriter, the total price at which the Registrable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that such Holder or underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 8. SURVIVAL. The indemnity and contribution agreements contained in Sections 6 and 7 and the representations and warranties of the Company referred to in Section 2(d)(i) shall remain operative and in full force and effect regardless of (i) any termination of this Agreement or the Purchase Agreement or any underwriting agreement, (ii) any investigation made by or on behalf of any Indemnified Party or by or on behalf of the Company, and (iii) the consummation of the sale or successive resales of the Registrable Securities. 9. INFORMATION BY HOLDERS. Each Holder shall furnish to the Company such information regarding such Holder and the distribution and/or sale proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. The intended method or methods of disposition and/or sale (Plan of Distribution) of such securities as so provided by such Investor shall be included without alteration in the Registration Statement covering the Registrable Securities and shall not be changed without written consent of such Holder. 10. NASDAQ LIMIT ON STOCK ISSUANCES. Section 7(g) of the Debenture shall govern limits imposed by NASDAQ rules on the conversion of Debentures or the exercise of Warrants. 11. REPLACEMENT CERTIFICATES. The certificate(s) representing the Common Shares or Warrant Shares held by any Investor (or then Holder) may be exchanged by such Investor (or such Holder) at any time and from time to time for certificates with different denominations representing an equal aggregate number of Common Shares or Warrant Shares, as reasonably requested by such Investor (or such Holder) upon surrendering the same. No service charge will be made for such registration or transfer or exchange. 12. TRANSFER OR ASSIGNMENT. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The rights granted to the Investors by the Company under this Agreement to cause the Company to register Registrable Securities may be transferred or assigned (in whole or in part) to a transferee or assignee of Debentures or Warrants, and all other rights granted to the Investors by the Company hereunder may be transferred or assigned to any transferee or assignee of any Debentures or Warrants; provided in each case that the Company must be given written notice by 12 the such Investor at the time of or within a reasonable time after said transfer or assignment, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned; and provided further that the transferee or assignee of such rights agrees in writing to be bound by the registration provisions of this Agreement. 13. MISCELLANEOUS. (a) REMEDIES. The Company and the Investors acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. (b) JURISDICTION. The Company and each of the Investors (i) hereby irrevocably submits to the exclusive jurisdiction of the United States District Court, the New York State courts and other courts of the United States sitting in New York County, New York for the purposes of any suit, action or proceeding arising out of or relating to this Agreement and (ii) hereby waives, and agrees not to assert in any such suit action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. The Company and each of the Investors consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this paragraph shall affect or limit any right to serve process in any other manner permitted by law. (c) NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing by facsimile, mail or personal delivery and shall be effective upon actual receipt of such notice. The addresses for such communications shall be: to the Company: Zitel Corporation 47211 Bayside Parkway Fremont, California 94538 Attention: Chief Financial Officer Facsimile: (510) 440-8526 to the Investors: To each Investor at the address and/or fax number set forth on Schedule I of this Agreement. with copies to: 13 Kleinberg, Kaplan, Wolff & Cohen, P.C. 551 Fifth Avenue New York, New York 10176 Facsimile: (212) 986-8866 Attention: Stephen M. Schultz, Esq. Any party hereto may from time to time change its address for notices by giving at least 10 days' written notice of such changed address to the other parties hereto. (d) INDEMNITY. Each party shall indemnify each other party against any loss, cost or damages (including reasonable attorney's fees) incurred as a result of such parties' breach of any representation, warranty, covenant or agreement in this Agreement. (e) WAIVERS. No waiver by any party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. The representations and warranties and the agreements and covenants of the Company and each Investor contained herein shall survive the Closing. (f) EXECUTION. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement, it being understood that all parties need not sign the same counterpart. (g) ENTIRE AGREEMENT. This Agreement, together with the Purchase Agreement, the Debentures and the Warrants and the agreements and documents contemplated hereby and thereby, contains the entire understanding and agreement of the parties, and may not be modified or terminated except by a written agreement signed by both parties. (h) GOVERNING LAW; CONSENT OF JURISDICTION. This Agreement and the validity and performance of the terms hereof shall be governed by and construed and enforced in accordance with the internal laws of the State of New York applicable to contracts executed and to be performed entirely in such State. (i) SEVERABILITY. The parties acknowledge and agree that the Investors are not agents, affiliates or partners of each other, that all representations, warranties, covenants and agreements of the Investors hereunder are several and not joint, that no Investor shall have any responsibility or liability for the representations, warrants, agreements, acts or omissions of any other Investor, and that any rights granted to "Investors" hereunder shall be enforceable by each Investor hereunder. (j) JURY TRIAL. Each party hereto waives the right to a trial by jury. (k) TITLES. The titles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. [SIGNATURE PAGES FOLLOW ] 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. ZITEL CORPORATION By: Anna M. McCann ------------------------------- Name: Anna M. McCann Title: V.P. Finance & Administration INVESTORS: HALIFAX FUND, L.P. By: Jeffrey E. Devers ------------------------------- Name: Jeffrey E. Devers Title: President PALLADIN PARTNERS I, L.P. By: PALLADIN GROUP L.P. Attorney-in-Fact By: Jeffrey E. Devers ------------------------------- Name: Jeffrey E. Devers Title: President PALLADIN OVERSEAS FUND LIMITED By: PALLADIN GROUP L.P. Attorney-in-Fact By: Jeffrey E. Devers ------------------------------- Name: Jeffrey E. Devers Title: President [SIGNATURE PAGE TO ZITEL CORPORATION CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGREEMENT] 15 THE GLENEAGLES FUND COMPANY By: PALLADIN GROUP L.P. Attorney-in-Fact By: Jeffrey E. Devers ------------------------------- Name: Jeffrey E. Devers Title: President PALLADIN SECURITIES, LLC By: Jeffrey E. Devers ------------------------------- Name: Jeffrey E. Devers Title: President COLONIAL PENN LIFE INSURANCE COMPANY By: PALLADIN GROUP L.P. Attorney-in-Fact By: Jeffrey E. Devers ------------------------------- Name: Jeffrey E. Devers Title: President LANCER SECURITIES LIMITED By: PALLADIN GROUP L.P. Attorney-in-Fact By: Jeffrey E. Devers ------------------------------- Name: Jeffrey E. Devers Title: President [SIGNATURE PAGE TO ZITEL CORPORATION CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGREEMENT] 16 EX-4.4 5 EXHIBIT 4.4 EXHIBIT 4.4 THIS WARRANT 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. ---------------------------- ZITEL CORPORATION ---------------------------- Common Stock Purchase Warrant February 2, 1999 ZITEL CORPORATION, a California corporation (the "COMPANY"), hereby certifies that for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, ________________________, having an address at _______________________ ("PURCHASER") or any other Warrant Holder is entitled, on the terms and conditions set forth below, to purchase from the Company at any time beginning on the date hereof and ending on the fifth anniversary of the Closing Date, as extended 1.5 times the number of days between the 90th day following the Closing Date and such anniversary on which there had been no Effective Registration, _________ fully paid and nonassessable shares of Common Stock, no par value, of the Company (the "COMMON STOCK"), at a purchase price per share of Common Stock equal to 130% of the Conversion Price, as such term is defined in the Debenture and as such Conversion Price may from time to time be adjusted pursuant to the terms of the Debenture and the Agreement (the "PURCHASE PRICE"), as the same may be adjusted pursuant to Section 5 herein. 1. DEFINITIONS. (a) The term "AGREEMENT" shall mean the Convertible Debenture Purchase Agreement dated as of February 2, 1999, between the Company and the Investors signatory thereto. (b) The term "APPROVED MARKET" shall mean the Nasdaq National Market System, the American Stock Exchange or the New York Stock Exchange. (c) The term "CLOSING BID PRICE" shall mean the last closing bid price on the principal Approved Market as reported by Bloomberg Financial Market or an equivalent reliable reporting service selected by the Warrant Holder and the Company. (d) The term "DEBENTURE" shall mean any of the Company's 3% Convertible Subordinated Debentures due February 1, 2000. (e) The term "EFFECTIVE REGISTRATION" shall have the meaning specified in the Agreement. 1 (f) The term "CLOSING DATE" shall mean the Closing Date as defined in Section 1.1 under the Agreement. (g) The term "REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Rights Agreement, dated as of February 2, 1999, between the Company and the Investors signatory thereto. (h) The term "WARRANT HOLDER" shall mean the Purchaser or any assignee of all or any portion of this Warrant. (i) The term "WARRANT SHARES" shall mean the Shares of Common Stock or other securities issuable upon exercise of this Warrant. (j) The term "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. Capitalized terms used but not defined in this Warrant shall have the meanings specified in the Agreement or the Debentures. 2. EXERCISE OF WARRANT. This Warrant may be exercised by the Warrant Holder, in whole or in part, at any time and from time to time by either of the following methods: (a) The Warrant Holder may surrender this Warrant, together with the form of subscription at the end hereof duly executed by Warrant Holder ("SUBSCRIPTION NOTICE"), at the offices of the Company or any transfer agent for the Common Stock; or (b) The Warrant Holder may also exercise this Warrant, in whole or in part, in a "cashless" or "net-issue" exercise by delivering to the offices of the Company or any transfer agent for the Common Stock this Warrant, together with a Subscription Notice specifying the number of Warrant Shares to be delivered to such Warrant Holder ("DELIVERABLE SHARES") and the number of Warrant Shares with respect to which this Warrant is being surrendered in payment of the aggregate Purchase Price for the Deliverable Shares ("SURRENDERED SHARES"); provided that the Purchase Price multiplied by the number of Deliverable Shares shall not exceed the value of the Surrendered Shares; and provided further that the sum of the number of Deliverable Shares and the number of Surrendered Shares so specified shall not exceed the aggregate number of Warrant Shares represented by this Warrant. For the purposes of this provision, each Warrant Share as to which this Warrant is surrendered will be attributed a value equal to the fair market value (as defined below) of the Warrant Share minus the Purchase Price of the Warrant Share. 2 In the event that the Warrant is not exercised in full, the number of Warrant Shares shall be reduced by the number of such Warrant Shares for which this Warrant is exercised and/or surrendered, and the Company, at its expense, shall within three (3) Trading Days (as defined below) issue and deliver or upon the order of Warrant Holder a new Warrant of like tenor in the name of Warrant Holder or as Warrant Holder (upon payment by Warrant Holder of any applicable transfer taxes) may request, reflecting such adjusted Warrant Shares. 3. DELIVERY OF STOCK CERTIFICATES. (a) Subject to the terms and conditions of this Warrant, as soon as practicable after the exercise of this Warrant in full or in part, and in any event within three (3) Trading Days thereafter, the Company shall transmit the certificates (together with any other stock or other securities or property to which Warrant Holder is entitled upon exercise) by messenger or overnight delivery service to reach the address designated by such holder within three (3) Trading Days after the receipt of the Subscription Notice ("T+3"). If such certificates are not received by the Warrant Holder within T+3, then the Warrant Holder will be entitled to revoke and withdraw its exercise of its Warrant at any time prior to its receipt of those certificates. In lieu of delivering physical certificates representing the Warrant Shares deliverable upon exercise of Warrants, provided the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the Warrant Holder, the Company shall use its best efforts to cause its transfer agent to electronically transmit the Warrant Shares issuable upon exercise to the Warrant Holder, by crediting the account of Warrant 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 exchange pursuant to Section 3 shall be deemed to have been made immediately prior to the close of business on the date of the Subscription Notice. The person or persons entitled to receive the Warrant Shares issuable upon such exercise shall be treated for all purposes as the record holder or holders of such Common Shares at the close of business on the date of the Subscription Notice. The term Trading Day means (x) if the Common Stock is listed on the New York Stock Exchange or the American Stock Exchange, a day on which there is trading on such stock exchange, (y) if the Common Stock is not listed on either of such stock exchanges but sale prices of the Common Stock are reported on an automated quotation system, a day on which trading is reported on the principal automated quotation system on which sales of the Common Stock are reported, or (z) if the foregoing provisions are inapplicable, a day on which quotations are reported by National Quotation Bureau Incorporated. (b) This Warrant may not be exercised as to fractional shares of Common Stock. In the event that the exercise of this Warrant, in full or in part, would result in the issuance of any fractional share of Common Stock, then in such event the Warrant Holder shall be entitled to cash equal to the fair market value of such fractional share. For purposes of this Warrant, "fair market value" shall equal the Closing Bid Price on the Approved Market which is the principal trading exchange or market for the Common Stock (the "Principal Market") on the date of determination or, if the Common Stock is not listed or admitted to trading on any 3 Approved Market, the average of the closing bid and asked prices on the over-the-counter market as furnished by any New York Stock Exchange member firm reasonably selected from time to time by the Company for that purpose and reasonably acceptable to the Warrant Holder, or, if the Common Stock is not listed or admitted to trading on any Approved Market or traded over-the-counter and the average price cannot be determined a contemplated above, the fair market value of the Common Stock shall be as reasonably determined in good faith by the Company's Board of Directors with the concurrence of the Warrant Holder. 4. (A) REPRESENTATIONS AND COVENANTS OF THE COMPANY. (a) The Company shall comply with its obligations under the Registration Rights Agreement with respect to the Warrant Shares, including, without limitation, the Company's obligation to have filed and declared and maintained effective a registration statement registering the Warrant Shares under the Securities Act of 1933, as amended (the "ACT"). (b) The Company shall take all necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, including, without limitation, the notification of the Principal Market, for the legal and valid issuance of this Warrant and the Warrant Shares to the Warrant Holder under this Warrant. (c) From the date hereof through the last date on which this Warrant is exercisable, the Company shall take all steps necessary to insure that the Common Stock remains listed on the Principal Market. (d) The Warrant Shares, when issued in accordance with the terms hereof, will be duly authorized and, when paid for or issued in accordance with the terms hereof, shall be validly issued, fully paid and non-assessable. The Company has authorized and reserved for issuance to Warrant Holder the requisite number of shares of Common Stock to be issued pursuant to this Warrant. (e) The Company shall at all times reserve and keep available, solely for issuance and delivery as Warrant Shares hereunder the number of shares specified in Section 3.10 of the Purchase Agreement. (f) With a view to making available to the Warrant Holder the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the Securities and Exchange Commission ("SEC") that may at any time permit Warrant Holder to sell securities of the Company to the public without registration, the Company agrees to use its best efforts to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and 4 (iii) furnish to any Warrant Holder forthwith upon request a written statement by the Company that it has complied with the reporting requirements of Rule 144 and of the Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as may be reasonably requested to permit any such Warrant Holder to take advantage of any rule or regulation of the SEC permitting the selling of any such securities without registration. (B) REPRESENTATIONS AND COVENANTS OF THE PURCHASER. The Purchaser shall not resell this Warrant or the Warrant Shares, unless such resale is pursuant to an effective registration statement under the Act or pursuant to an applicable exemption from such registration requirements. 5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number of and kind of securities purchasable upon exercise of this Warrant and the Purchase Price shall be subject to adjustment from time to time as follows: (a) SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the Company shall at any time after the date hereof but prior to the expiration of this Warrant subdivide its outstanding securities as to which purchase rights under this Warrant exist, by split-up, spin-off, or otherwise, or combine its outstanding securities as to which purchase rights under this Warrant exist, the number of Warrant Shares as to which this Warrant is exercisable as of the date of such subdivision, split-up, spin-off or combination shall forthwith be proportionately increased in the case of a subdivision, or proportionately decreased in the case of a combination. Appropriate proportional adjustments (decrease in the case of subdivision, increase in the case of combination) shall also be made to the Purchase Price payable per share, so that the aggregate Purchase Price payable for the total number of Warrant Shares purchasable under this Warrant as of such date shall remain the same as it would have been before such subdivision or combination. (b) STOCK DIVIDEND. If at any time after the date hereof the Company declares a dividend or other distribution on Common Stock payable in Common Stock or other securities or rights convertible into or exchangeable for Common Stock ("COMMON STOCK EQUIVALENTS") without payment of any consideration by holders of Common Stock for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon exercise or conversion thereof), then the number of shares of Common Stock for which this Warrant may be exercised shall be increased as of the record date (or the date of such dividend distribution if no record date is set) for determining which holders of Common Stock shall be entitled to receive such dividends, in proportion to the increase in the number of outstanding shares (and shares of Common Stock issuable upon conversion of all such securities convertible into Common Stock) of Common Stock as a result of such dividend, and the Purchase Price shall be proportionately reduced so that the aggregate Purchase Price for all the Warrant Shares issuable hereunder immediately after the record date (or on the date of such distribution, if applicable), for such dividend shall equal the aggregate Purchase Price so payable immediately before such record date (or on the date of such distribution, if applicable). 5 (c) OTHER DISTRIBUTIONS. If at any time after the date hereof the Company distributes to holders of its Common Stock, other than as part of its dissolution, liquidation or the winding up of its affairs, any shares of its capital stock, any evidence of indebtedness or any of its assets (other than Common Stock), then the number of Warrant Shares for which this Warrant is exercisable shall be increased to equal: (i) the number of Warrant Shares for which this Warrant is exercisable immediately prior to such event, (ii) multiplied by a fraction, (A) the numerator of which shall be the fair market value per share of Common Stock on the record date for the dividend or distribution, and (B) the denominator of which shall be the fair market value per share of Common Stock on the record date for the dividend or distribution minus the amount allocable to one share of Common Stock of the value (as determined in good faith by the Board of Directors of the Company) of any and all such evidences of indebtedness, shares of capital stock, other securities or property, so distributed. If the value of the distribution exceeds 10% of the value of the outstanding Common Stock, at the request of Warrant Holders holding an aggregate of at least 50,000 Warrants, the valuation described in the preceding sentence shall be determined, at the Company's expense, by a nationally recognized investment banking firm or other nationally recognized financial advisor retained by the Company with the approval of the Warrant Holder. The Purchase Price shall be reduced to equal: (i) the Purchase Price in effect immediately before the occurrence of any event (ii) multiplied by a fraction, (A) the numerator of which is the number of Warrant Shares for which this Warrant is exercisable immediately before the adjustment, and (B) the denominator of which is the number of Warrant Shares for which this Warrant is exercisable immediately after the adjustment. (d) MERGER, ETC. If at any time after the date hereof there shall be a merger or consolidation of the Company with or into or a transfer of all or substantially all of the assets of the Company to another entity, then the Warrant Holder shall be entitled to receive upon or after such transfer, merger or consolidation becoming effective, and upon payment of the Purchase Price then in effect, the number of shares or other securities or property of the Company or of the successor corporation resulting from such merger or consolidation, which would have been received by Warrant Holder for the shares of stock subject to this Warrant had this Warrant been exercised just prior to such transfer, merger or consolidation becoming effective or to the applicable record date thereof, as the case may be. The Company will not merge or consolidate with or into any other corporation, or sell or otherwise transfer its property, assets and business substantially as an entirety to another corporation, unless the corporation resulting from such merger or consolidation (if not the Company), or such transferee corporation, as the case may be, shall expressly assume, by supplemental agreement, the due and punctual performance and observance of each and every covenant and condition of this Warrant to be performed and observed by the Company, as adjusted to preserve the economic benefits receivable by the Warrant Holder upon exercise. (e) 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 such reorganization, consolidation, merger or sale, then such distribution shall be treated to the extent thereof as a distribution under Section 7(a) above and such Section shall also apply to such distribution. To the extent that, pursuant to the foregoing adjustments, (i) the Warrants become exercisable 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 fair market value of a share of 6 Common Stock is less than the Purchase Price, then the adjustments set forth in Section 5(f) herein shall also be applied as if the additional shares were issued after the effective date of the merger or reorganization. (f) RECLASSIFICATION, ETC. If at any time after the date hereof there shall be a reorganization or reclassification of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, then the Warrant Holder shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Purchase Price then in effect, the number of shares or other securities or property resulting from such reorganization or reclassification, which would have been received by the Warrant Holder for the shares of stock subject to this Warrant had this Warrant at such time been exercised. (g) PURCHASE PRICE ADJUSTMENT. In the event that within twelve (12) months of the Closing Date the Company issues or sells any Common Stock or securities which are convertible into or exchangeable for its Common Stock or any convertible 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 securities (other than shares or options issued or which may be 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 Agreement and listed in Section 2(c) of the Company's Disclosure Schedule or shares issued in a Matridigm Transaction) at an effective purchase price per share which is less than the greater of the Purchase Price then in effect or the fair market value (as defined in Section 3(b) above) of the Common Stock on the trading day next preceding such issue or sale, then in each such case, the Purchase 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 Purchase 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 fair market value or, Purchase 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 securities, warrants, options or other rights to subscribe for or to purchase or exchange for, shares of Common Stock ("CONVERTIBLE SECURITIES"), the maximum number of shares of Common Stock issuable upon exercise, exchange or conversion of such Convertible 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 Convertible Securities. The number of shares which may be purchased hereunder shall be increased proportionately to any reduction in Purchase Price pursuant to this paragraph 5(f), so that after such adjustments the aggregate Purchase Price payable hereunder for the increased number of shares shall be the same as the aggregate Purchase Price in effect just prior to such adjustments. 7 In the event of any such issuance for a consideration which is less than such fair market value and also less than the Purchase 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. 6. NO IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrant Holder against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any Warrant Shares above the amount payable therefor on such exercise, and (b) will take all such action as may be reasonably necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares on the exercise of this Warrant. 7. NOTICE OF ADJUSTMENTS. Whenever the Purchase Price or number of Shares purchasable hereunder shall be adjusted pursuant to Section 5 hereof, the Company shall execute and deliver to the Warrant Holder a certificate setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the Purchase Price and number of shares purchasable hereunder after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first class mail, postage prepaid) to the Warrant Holder. 8. RIGHTS AS STOCKHOLDER. Prior to exercise of this Warrant, the Warrant Holder shall not be entitled to any rights as a stockholder of the Company with respect to the Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings. However, in the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, 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 mail to each Warrant Holder, at least 10 Trading 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 or right, and the amount and character of such dividend, distribution or right. 9. LIMITATION ON EXERCISE. Notwithstanding anything to the contrary contained herein, this Warrant may not be exercised by the Warrant Holder to the extent that, after giving effect to Warrant Shares to be issued pursuant to a Subscription Notice, the total number of shares of Common Stock deemed beneficially owned by such holder (other than by virtue of ownership of this Warrant, or ownership of other securities that have limitations on the holder's rights to convert or exercise similar to the 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 (the "EXCHANGE ACT") exists, would 8 exceed the Warrant Holder's Restricted Ownership Percentage specified on Schedule I to the Agreement; provided that (w) each Warrant 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 or in the event of a Change in Control Transaction, (x) each Warrant Holder shall have the right at any time and from time to time to increase its Restricted Ownership Percentage or otherwise waive in whole or in part the restrictions of this Section 9 upon 61 days' prior notice to the Company or immediately in the event of a Change in Control Transaction, (y) each Warrant 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 Restricted Ownership Percentage or shall be effective upon 61 days' prior written notice or immediately in the event of a Change in Control Transaction if it results in an increase in the Restricted Ownership Percentage) and (z) each Warrant 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 a 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 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 create a new Change in Control Transaction. The term "DEEMED BENEFICIALLY OWNED" as used in this Warrant shall exclude shares that might otherwise be deemed beneficially owned by reason of the convertibility of the Preferred Shares. A "CHANGE IN CONTROL TRANSACTION" will be deemed to have occurred upon the earlier of the announcement or consummation of a transaction or series of transactions (other than the Merger) involving (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) in excess of 50% of the Company's Board of Directors consists of directors not nominated by the prior Board of Directors of the Company, or (z) any person (as defined in Section 13(d) of the Exchange Act, together with its affiliates and associates (as such terms are defined in Rule 405 under 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. The delivery of a Subscription Notice by the Warrant Holder shall be deemed a representation by such holder that it is in compliance with this paragraph. 10. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense promptly will execute and deliver, in lieu thereof a new Warrant of like tenor. 9 11. SPECIFIC PERFORMANCE; CONSENT TO JURISDICTION; CHOICE OF LAW. (a) The Company and the Warrant Holder acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Warrant were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall he entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Warrant and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which either of them may be entitled by law or equity. (b) Each of the Company and the Warrant Holder (i) hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts located in New York County, New York for the purposes of any suit, action or proceeding arising out of or relating to this warrant 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. Each of the Company and the Warrant Holder consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this paragraph shall affect or limit any right to serve process in any other manner permitted by applicable law. (c) The Company and the Warrant Holder irrevocably waive their right to trial by jury. (d) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York applicable to contracts executed and to be performed entirely within such State. 12. ENTIRE AGREEMENT; AMENDMENTS. This Warrant, the Exhibits hereto and the provisions contained in the Agreement or the Registration Rights Agreement or the Debentures contain the entire understanding of the parties with respect to the matters covered hereby and thereby and, except as specifically set forth herein and therein, neither the Company nor the Warrant Holder makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought. 13. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery or delivery by telex (with correct answer back received), telecopy or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: 10 to the Company: Zitel Corporation 47211 Bayside Parkway Fremont, California 94538 Attention: Chief Financial Officer Facsimile: (510) 440-8526 to the Warrant Holder: Halifax Fund, L.P. c/o The Palladin Group, L.P. Investment Manager 195 Maplewood Avenue Maplewood, New Jersey 07040 Attention: Robert Chender Facsimile: (973) 313-6941 with copies to: Kleinberg, Kaplan, Wolff & Cohen, P.C. 551 Fifth Avenue, 18th Floor New York, New York 10176 Attention: Stephen M. Schultz, Esq. Facsimile: (212) 986-8866 Either party hereto may from time to time change its address for notices under this Section 13 by giving at least 10 days' prior written notice of such changed address to the other party hereto. 14. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 15. ASSIGNMENT. This Warrant may be transferred or assigned, in whole or in part, at any time and from time to time by the then Warrant Holder upon the consent of the Company (which consent shall not be unreasonably withheld) by submitting this Warrant to the Company together with a duly executed Assignment in substantially the form and substance of the Form of Assignment which accompanies this Warrant and, upon the Company's receipt hereof, and in any event, within three (3) business days thereafter, the Company shall issue a Warrant to the Warrant Holder to evidence that portion of this Warrant, if any as shall not have been so transferred or assigned. No consent of the Company will be required for any transfer or assignment by the Warrant Holder to (i) an affiliate or affiliates of the Warrant 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 Warrant Holder. 11 Dated: ZITEL CORPORATION ----------------------- By: ------------------------------- Name: Title: [CORPORATE SEAL] Attest: By: --------------------------- Its (SIGNATURE PAGE OF ZITEL CORPORATION COMMON STOCK PURCHASE WARRANT) 12 (SUBSCRIPTION NOTICE) FORM OF WARRANT EXERCISE (TO BE SIGNED ONLY ON EXERCISE OF WARRANT) TO: ZITEL CORPORATION ATTN: SECRETARY The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise this Warrant: _____ (A) for, and to purchase thereunder, ________ shares of Common Stock of Zitel Corporation, a California corporation (the "COMMON STOCK"), and herewith, or by wire transfer, makes payment of $______________ therefor; or _____ (B) in a "cashless" or "net-issue exercise" for, and to purchase thereunder , ______ shares of Common Stock, and herewith makes payment therefor with _________ Surrendered Warrant Shares. The undersigned requests that the certificates for such shares be issued in the name of, and _____ (A) delivered to __________, whose address is _____________; or _____ (B) electronically transmitted and credited to the account of _______________, undersigned's prime broker (Account No. __________) with Depository Trust Company through its Deposit Withdrawal Agent Commission system. The undersigned acknowledges and confirms that the Common Stock issued pursuant to this notice of exercise has been sold or will be sold in accordance with the prospectus delivery requirements of the Securities Act of 1933, as amended, if applicable, or pursuant to an exemption under such Act. Dated: --------------------------- (Signature must conform to name of holder as specified on the face of the Warrant) - --------------------------------- (Address) Tax Identification Number: ------------- 13 FORM OF ASSIGNMENT (TO BE SIGNED ONLY ON TRANSFER OF WARRANT) For value received, the undersigned hereby sells, assigns, and transfers unto _____________ the right represented by the within Warrant to purchase ________ shares of Common Stock of a California corporation, to which the within Warrant relates, and ZITEL CORPORATION, appoints ________________ Attorney to transfer such right on the books of ZITEL CORPORATION, a California corporation, with full power of substitution of premises. Dated: ------------------------------ (Signature must conform to name of holder as specified on the face of the Warrant) - ------------------------------------ (Address) Signed in the presence of: - ------------------------------------ 14 EX-4.5 6 EXHIBIT 4.5 EXHIBIT 4.5 Zitel Corporation 3% Convertible Debentures Due 2000 and Common Stock Purchase Warrants PLACEMENT AGENCY AGREEMENT February 1, 1999 Rochon Capital Group, Ltd. As Placement Agent 16 Mary Street, Suite 2000 San Rafael, California 94901 Ladies and Gentlemen: This letter confirms the agreement (this "Agreement") of Zitel Corporation, a California corporation (the "Company"), to retain Rochon Capital Group, Ltd., a California corporation (the "Placement Agent"), as the Company's exclusive agent from February 1, 1999 through and including March 1, 1999 (the "Engagement Period") to identify for the Company prospective purchasers (collectively, the "Purchasers" and each individually, a "Purchaser") in a placement (the "Placement") of up to U.S. $5,000,000.00 aggregate principal amount of the Company's 3% Convertible Debentures Due 2000 (the "Debentures") convertible into shares of the Company's common stock, no par value per share (the "Common Stock"), and up to 75,000 warrants (the "Warrants") exercisable into shares of Common Stock. The Debentures and Warrants are collectively referred to herein as the "Securities." Terms of the Placement are set forth in the subscription documents, including the convertible debenture purchase agreement, convertible subordinated debenture, registration rights agreement, and common stock purchase warrant, issued in connection with the Placement (collectively, the "Subscription Documents"). The Placement Agent will act on a best efforts basis and will have no obligation to purchase any of the Securities offered by the Company in the Placement. During the Engagement Period, the Placement Agent shall have the exclusive right to make all offers and to arrange for all sales of securities by the Company, including without limitation the exclusive right to identify buyers for the Securities. The Engagement Period shall be automatically extended for a reasonable number of days if, during the Engagement Period, sales relating to commitments from Purchasers are not consummated during the Engagement Period due to delays in the preparation of final documentation; provided, however, that in no event will the Engagement Period be automatically extended beyond March 15, 1999 without the written consent of the Company and the Placement Agent. The Placement is intended to be exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Regulation D Rochon Capital Group, Ltd. February 1, 1999 Page 2 ("Regulation D") of the rules and regulations of the Securities and Exchange Commission (the "SEC") promulgated under the Securities Act. In order to effectuate the Closing (as defined in Section 1 hereof), the Company, the Placement Agent and a bank reasonably acceptable to both parties (the "Escrow Agent") shall enter into an escrow agreement (the "Escrow Agreement"). The engagement described herein shall be in accordance with applicable laws and pursuant to the following procedures, terms and conditions: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The representations and warranties of the Company made to the Purchasers as set forth in the Subscription Documents are hereby incorporated by reference as of the date of consummation of the sale of the Securities (the "Closing") and all such representations and warranties are hereby deemed made by the Company directly to the Placement Agent as though set forth in full herein. 2. COVENANTS OF THE COMPANY. (a) The covenants of the Company made to the Purchasers as set forth in the Subscription Documents are hereby incorporated by reference as of the Closing and all such covenants are hereby deemed made by the Company directly to the Placement Agent as though set forth in full herein. (b) Neither the Company nor any affiliate of the Company (as defined in Rule 501(b) of Regulation D) will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) which will be integrated with the sale of the Securities or the shares of Common Stock issuable upon conversion of the Debentures or exercise of the Warrants (the "Underlying Common Shares") in a manner which would require the registration under the Securities Act of the Securities or the Underlying Common Shares. (c) Any and all filings and documents required to be filed in connection with or as a result of the Placement pursuant to federal and state securities laws are the responsibility of the Company and will be filed by the Company. (d) Any press release to be issued by the Company announcing or referring to the Placement shall be subject to the prior review of the Placement Agent, and each such press release shall, at the request of the Placement Agent, identify Rochon Capital Group, Ltd. as the placement agent. This Agreement shall not be filed publicly by the Company without the prior written consent of the Placement Agent. 3. COVENANTS OF THE PLACEMENT AGENT. On the basis of, and in reliance on, the representations, warranties and covenants of the Purchasers set forth in the Subscription Documents, the Placement Agent hereby covenants with the Company as follows: (a) The Placement Agent will take no action, nor fail to take any action, if such action or failure to take such action would have the effect that the offer or sale of the Rochon Capital Group, Ltd. February 1, 1999 Page 3 Securities would not be exempt from the registration requirements of the Securities Act pursuant to Regulation D. (b) No action is being taken or is contemplated by the Placement Agent that would permit a public offering of the Securities in any jurisdiction where, or in any other circumstance in which, action for those purposes is required (other than in jurisdictions where such action has been duly taken). The Placement Agent will comply with applicable laws and regulations in any jurisdiction in which it may offer, sell or deliver the Securities and will not, directly or indirectly, offer, sell or deliver the Securities or distribute or publish any prospectus, circular, advertisement or other offering material in relation to the Securities in or from any country or jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations, and all offers, sales and deliveries of the Securities by it will be made on the foregoing terms. 4. COMPENSATION OF THE PLACEMENT AGENT; EXPENSES. As compensation for services rendered by the Placement Agent in connection with the transaction contemplated herein, the Company agrees to pay the Placement Agent, directly from the escrowed funds at the Closing, a fee of 3.5% of the gross proceeds from the sale of the Securities (the "Agency Fee"). In addition, the Company agrees to pay to the Placement Agent, directly from the escrowed funds at the Closing, an expense allowance of $10,000.00 as reimbursement for the Placement Agent's expenses, including without limitation attorney fees and costs, travel-related expenses and estimated telephone, facsimile and postage charges (the "Expense Reimbursement"). Costs incurred by the Placement Agent in excess of the Expense Reimbursement shall be the Placement Agent's sole responsibility. The Company will pay all of its expenses incurred in connection with the Placement and will also pay the Escrow Agent's fee and the reasonable accountable attorney fees and costs incurred by one investor. 5. CLOSING. The Closing may be held at such place or places as shall be specified by the Placement Agent and reasonably agreed to by the Company. Certificates evidencing the Securities in the names of the respective Purchasers and in the respective denominations aggregating all of the Securities sold at the Closing shall be delivered by the Company to the Escrow Agent. 6. CONDITIONS TO CLOSING. The Company and the Placement Agent agree that the issuance and sale of the Securities and all obligations of the Placement Agent provided herein shall be subject to the receipt by the Placement Agent of (i) a legal opinion of the Company's securities counsel, indicating that the Placement Agent is entitled to rely thereon, in the form required to be delivered to the Purchasers pursuant to the Subscription Documents and (ii) an escrow agreement duly executed by the Company in a form reasonably satisfactory to the Placement Agent. 7. INDEMNIFICATION. (a) The Company will indemnify and hold harmless the Placement Agent and each of its partners, directors, officers, associates, affiliates , subsidiaries, divisions, employees, Rochon Capital Group, Ltd. February 1, 1999 Page 4 consultants, attorneys and agents, and each person, if any, controlling either the Placement Agent or any of its affiliates within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all losses, claims, damages, liabilities, costs or expenses (and any legal or other expenses incurred by the Placement Agent in investigating or defending the same or in giving testimony or furnishing documents in response to a request of any government agency or to a subpoena) in any way relating to or in any way arising out of (i) the activities of the Placement Agent contemplated by this Agreement or in connection with the Placement, (ii) the inaccuracy of any representation or warranty, or the breach of any covenant, contained herein, or (iii) any offering documents or offering materials; and will reimburse, as incurred, the Placement Agent and each such controlling or other person for any legal or other expenses incurred by the Placement Agent or such controlling or other person in connection with investigating, defending or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action. Such indemnity shall not, however, cover any such loss, claim, damage, liability, cost or a breach by the Placement Agent of its obligations in Section 3 hereof (a "Non-Indemnity Event") or the willful misconduct of any person seeking indemnification hereunder. (b) The Placement Agent will indemnify and hold harmless the Company and each person, if any, controlling the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, to the same extent set forth in subsection (a) above, but only to the extent that any loss, claim, damage, liability, cost or expense arises out of or is based upon a Non-Indemnity Event. (c) If any action, proceeding or investigation is commenced by a third party as to which the indemnified party hereunder proposes to demand indemnification under this Agreement, it will notify the indemnifying party with reasonable promptness. The indemnified party shall have the right to retain counsel of its own choice (which choice shall be reasonably satisfactory to the indemnifying party) to represent it and such counsel shall, to the extent consistent with its professional responsibilities, cooperate with the indemnifying party and any counsel designated by the indemnifying party. The indemnifying party will not be liable under this Agreement for any settlement of any claim against the indemnifying party made without the indemnifying party's written consent, which consent shall not be unreasonably withheld. Notwithstanding anything to the contrary contained in the foregoing subsection (b) or the following subsection (d), the Placement Agent shall not be obligated to pay, and will not pay, any amount in respect of its obligation to indemnify or contribute greater than the Agency Fee (as defined in Section 4 hereof). (d) In order to provide for just and equitable contribution, if a claim for indemnification pursuant to this Section 7 is made but it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that such indemnification may not be enforced in such case, even though the express provisions hereof provided for indemnification in such case, then the Company, on the one hand, and the Placement Agent, on the other hand, shall contribute to the losses, claims, damages, liabilities or costs to which the indemnified persons may be subject in accordance with the relative benefits received from the Placement of the Securities by the Company, on the one hand, and the Placement Agent, on the other hand, and Rochon Capital Group, Ltd. February 1, 1999 Page 5 also the relative fault of the Company, on the one hand, and the Placement Agent, on the other hand, in connection with the statements, acts or omissions which resulted in such losses, claims, damages, liabilities or costs, and the relevant equitable considerations shall also be considered. No person found liable for a fraudulent misrepresentation shall be entitled to contribution from any person who is not also found liable for such fraudulent misrepresentation. 8. NON-CIRCUMVENTION; RIGHT OF FIRST REFUSAL. (a) NON-CIRCUMVENTION. The Company hereby agrees that, for a period of two years form the end of the Engagement Period, the Company will not enter into any agreement, transaction or arrangement with any of the institutions (including their agents, principals and affiliates and the accounts and funds which they manage or advise) which the Placement Agent has identified to the Company as prospective purchasers of the Securities in the Placement (collectively, the "Rochon Contacts"), regardless of whether a transaction is consummated with such prospective purchasers, unless the Company notifies the Placement Agent in writing of the agreement, transaction or arrangement, and pays the Placement Agent the Agency Fee set forth in Paragraph 4 hereof. Within five business days after the expiration of the Engagement Period, the Placement Agent will provide the Company with a list of the Rochon Contacts, which list and names the Company agrees to hold strictly confidential. Notwithstanding the foregoing, the parties agree that the prospective purchasers whose names appear on the list submitted to the Company by the Placement Agent in a letter dated May 23, 1997 shall continue to be subject to the provisions of Section 8(a) of the placement agency agreement by and between the Company and the Placement Agent dated May 19, 1997, and shall not be subject to the two-year limitation referred to in the first sentence of Section 8(a) of this Agreement; and, in addition, the parties agree that the list of prospective purchasers whose names appear in a letter to the Company from the Placement Agent dated June 19, 1998 shall be deemed to have been delivered to the Company by the Placement Agent within five business days after the expiration of the Engagement Period, as such term is defined in this Agreement, and the Placement Agent shall not be required to submit any additional lists of names in order to receive the non-circumvention protections described in this Section 8(a). (b) RIGHT OF FIRST REFUSAL. For a period of two hundred forty (240) days from the Closing Date, if the Company desires to sell any equity securities of the Company or any securities convertible into or exchangeable or exercisable for any equity securities of the Company (other than in connection with underwritten public offerings, acquisitions or strategic alliances in which the Company issues securities to potential corporate partners), then the Company shall offer the Placement Agent in writing the exclusive right to identify buyers for such securities upon terms that are reasonably acceptable to the Company and the Placement Agent. The Company shall set forth all terms of the Subsequent Transaction in the written offer to the Placement Agent and the Placement Agent will then have 10 business days from the date of the offer to accept or reject it. If accepted, the Placement Agent will have an additional 10 business days from acceptance to obtain commitments from investors to purchase the securities, or the Company will then be free to engage others to assist it in offering such securities on identical terms. If the Company chooses to offer or sell securities in the Subsequent Transaction on terms which differ in any way from those set forth in the written offer to the Placement Rochon Capital Group, Ltd. February 1, 1999 Page 6 Agent, then the Company must offer the Placement Agent in writing the right to act as the Company's exclusive agent in the Subsequent Transaction on the modified terms. The foregoing notwithstanding, in the event of a Change of Control of the Company (as that term is defined in the Subscription Documents), the right of first refusal set forth in this Section 8(b) shall terminate. 9. SURVIVAL. The respective indemnities of the Company and the Placement Agent and the representations, warranties and agreements of the Company set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of the Placement Agent, the Company or any person referred to in Section 7 hereof, and shall be binding upon any successors and assigns of the Company and shall survive any termination of this Agreement and/or issuance of the Securities. Any successor or assign of the Placement Agent and/or its designees, the Company or any such person or any legal representative of such person shall be entitled to the benefit of the respective indemnities, agreements, warranties and representations contained herein. 10. TERMINATION. Either party may terminate this Agreement by giving notice as hereinafter specified at any time after March 15, 1999 if the Closing has not occurred by such date. In the event of termination pursuant to this Section 10, the Company shall remain obligated to pay the Expense Reimbursement as set forth in Section 4 hereof. Subject to the foregoing sentence, any termination pursuant to this Section 10 shall be without liability of either party to the other party except as provided in the immediately preceding sentence. 11. General Provisions. (a) PARTIES. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Placement Agent, the Company, the controlling and other persons referred to in Section 7 hereof, and their respective successors, legal representatives, heirs, designees and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. (b) AMENDMENT. No amendment or modification hereto, or waiver of the terms hereof, shall be valid unless in a writing executed by each of the parties hereto or by the party or parties to be bound. (c) NOTICES. All notices, requests and other communications under this Agreement shall be in writing and shall be deemed to have been delivered 48 hours after having been mailed in a general or branch post office and enclosed in a registered or certified postpaid envelope; 24 hours after having been sent by overnight courier; when delivered to a telegraph company or when scanned graphically or otherwise by telegraphic communications equipment of the sending party and accompanied by a substantially contemporaneous telephone call; and, in each case, addressed to the respective parties at the addresses stated below or to such other Rochon Capital Group, Ltd. February 1, 1999 Page 7 changed addresses as the parties may have fixed by notice; provided, however, that any notice of change of address shall be effective only upon receipt. To the Company: Zitel Corporation 47211 Bayside Parkway Fremont, California 94538 Attention: Chief Financial Officer Telephone: 510-440-9600 Facsimile: 510-440-8526 with a copy to: Cooley Godward LLP One Maritime Plaza, 20th Floor San Francisco, California 94111 Attention: John L. Cardoza, Esq. Telephone: 415-693-2045 Facsimile: 415-951-3699 To the Placement Agent: Rochon Capital Group, Ltd. 16 Mary Street, Suite 2000 San Rafael, California 94901 Attention: Phillip L. Neiman Telephone: 415-256-2400 Facsimile: 415-256-1214 with a copy to: Bryan Cave LLP 700 Thirteenth Street, N.W. Washington, D.C. Attention: LaDawn Naegle, Esq. Telephone: 202-508-6046 Facsimile: 202-508-6200 (d) SEVERABILITY. If any provision of this Agreement, other than Section 4, Section 7 and Section 8, is found to be unenforceable, invalid or illegal, and cannot be modified to the satisfaction of the Placement Agent, such provision shall be deemed deleted from this Agreement and the remainder of this Agreement shall not be affected or impaired thereby. (e) ATTORNEYS' FEES. If any action, including, without limitation, arbitration, should arise among the parties hereto to enforce or interpret the provisions of this Agreement, the prevailing party in such action shall be reimbursed for all reasonable expenses incurred in connection with such action, including reasonable attorneys' fees and costs. (f) INTEGRATION. This Agreement expresses the entire agreement and understanding of the parties hereto with respect to the matters set forth herein and supersedes all prior written and oral agreements and understandings among the parties hereto with respect to the matters set forth herein. Rochon Capital Group, Ltd. February 1, 1999 Page 8 (g) GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of California without regard to its principles of conflicts of laws. (h) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall constitute an original, but all of which shall together constitute one and the same agreement. Facsimile signatures are considered to be originals and shall have the same effect. (i) FURTHER ASSURANCES. The parties agree to execute any and all such further agreements, instruments or documents, and to take any and all such further action, as may be necessary or desirable to carry into effect the purpose and intent of this Agreement. (j) HEADINGS. The headings in this Agreement are for convenience of reference only and are in no way intended to describe, interpret, define, modify, add to, or limit the scope, extent or intent of, this Agreement or any provision hereof. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] Rochon Capital Group, Ltd. February 1, 1999 Page 9 If the foregoing correctly sets forth the understandings among the Placement Agent and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, ZITEL CORPORATION By: /s/ Ann M. McCann ----------------------------------- Name: Anna M. McCann Title: Vice President Finance & Administration ACCEPTED AND AGREED TO AS OF THE DATE FIRST WRITTEN ABOVE: ROCHON CAPITAL GROUP, LTD. By: /s/ Phillip L. Neiman ------------------------------ Name: Phillip L. Neiman Title: President -----END PRIVACY-ENHANCED MESSAGE-----