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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. _________)*
Citadel Computer Systems Incorporated
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(Name of Issuer)
Common stock, par value $.01 per share
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(Title of Class of Securities)
172854-10-1
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(CUSIP Number)
Peter T. Dameris, 4400 Post Oak Parkway, Suite 1130, Houston, Texas 77027
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(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications)
October 6, 1997
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(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ].
Check the following box if a fee is being paid with the statement [ ]. (A fee is
not required only if the reporting person: (1) has a previous statement on
file reporting beneficial ownership of more than five percent of the class of
securities described in Item 1; and (2) has filed no amendment subsequent
thereto reporting beneficial ownership of five percent or less of such class.)
(See Rule 13d-7.)
NOTE: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are to
be sent.
*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities,
and for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities Exchange
Act of 1934 ("Act") or otherwise subject to the liabilities of that section of
the Act but shall be subject to all other provisions of the Act (however, see
the Notes).
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SCHEDULE 13D
<TABLE>
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CUSIP No. 172854-10-1 Page 2 of 6 Pages
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<S> <C> <C>
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1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
CORESTAFF, Inc.
76-0407849
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2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [ ]
N/A
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3 SEC USE ONLY
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4 SOURCE OF FUNDS*
WC
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5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e)
N/A
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6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
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7 SOLE VOTING POWER
NUMBER OF 4,500,000
SHARES -------------------------------------------------------------------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY -0-
EACH -------------------------------------------------------------------------------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON 4,500,000
WITH --------------------------------------------------------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
-0-
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11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
4,500,000
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12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
N/A
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13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
21.7%
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14 TYPE OF REPORTING PERSON*
CO
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</TABLE>
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
<PAGE> 3
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CUSIP No. 172854-10-1 Page 3 of 6 Pages
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Item 1. Security and Issuer
This statement relates to the Common Stock, par value $.01 per
share (the "Common Stock") of Citadel Computer Systems Incorporated (the
"Issuer"). The principal executive offices of the Issuer are located at 3811
Turtle Creek Boulevard, Suite 600, Dallas, Texas 75219.
Item 2. Identity and Background
This statement is being filed by CORESTAFF, Inc. (the "Reporting
Person"). The Reporting Person is a Delaware corporation, whose principal
business is providing temporary staffing and computer solutions services. The
business address of the Reporting Person is 4400 Post Oak Parkway, Suite 1130,
Houston, Texas 77027.
The Reporting Person has not, during the last five years, been (i)
convicted in a criminal proceeding (excluding traffic violations or similar
misdemeanors) or (ii) a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and, as a result of such
proceeding, was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting or mandating activities subject to,
federal or state securities laws or finding any violation with respect to such
laws.
Item 3. Source and Amount of Funds or Other Consideration.
The Reporting Person has acquired (i) a total of 2,500,000 shares
of Issuer Common Stock, (ii) a warrant to acquire 1,000,000 shares of Issuer
Common Stock at an exercise price of $4.00 per share and (iii) a warrant to
acquire 1,000,000 shares of Issuer Common Stock at an exercise price of $5.00
per share. The aggregate consideration paid by the Reporting Person for the
issued shares was $750,000. The source of such consideration was the Reporting
Person's corporate working capital.
Item 4. Purpose of Transaction
The Reporting Person has acquired the Issuer's securities for
investment. Depending on market conditions and other factors, the Reporting
Person may purchase additional shares of Issuer Common Stock, or may dispose of
all or a portion of the Issuer Common Stock which he now owns or hereafter may
acquire. Except as set forth in the next sentence, the Reporting Person as a
stockholder of the Issuer has no present plans or proposals which relate to or
would result in an extraordinary corporate transaction, such as a merger,
reorganization or liquidation involving the Issuer or any of its subsidiaries,
a sale or transfer of a material amount of the Issuer's assets, a change in the
present Board of Directors or management of the Issuer, including any plans or
proposals to change the number or term of directors or to fill any existing
vacancies on the Board, any material change in the present capitalization or
dividend policy of the Issuer, any other material change in the Issuer's
business or corporate structure, changes in the Issuer's charter or bylaws or
other actions which may impede the acquisition of control of the
<PAGE> 4
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CUSIP No. 172854-10-1 Page 4 of 6 Pages
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Issuer by any person or causing a class of securities of the Issuer to be
delisted from a national securities exchange or to cease to be authorized to be
quoted in an inter-dealer quotation system of a registered national securities
association, a class of equity securities becoming eligible for termination of
registration pursuant to Section 12 (g)(4) of the Securities Exchange Act of
1934 or any action similar to any of the foregoing. Notwithstanding the
foregoing, as part of the transaction to acquire the shares of Issuer Common
Stock, the Issuer and Steven B. Solomon, the Issuer's Chief Executive Officer,
agreed to use their best efforts to elect one person designated by the
Reporting Person to the Issuer's Board of Directors. Kenneth R. Johnsen, an
executive officer of the Reporting Person, has been elected to the Issuer's
Board of Directors pursuant to such right.
Item 5. Interest in Securities of the Issuer
As of October 6, 1997, the Reporting Person was the beneficial
owner of an aggregate of 4,500,000 shares of Issuer Common Stock, which
represents approximately 21.7% of the 20,763,998 shares of Issuer Common Stock
outstanding as of that date (assuming exercise of both warrants held by the
Reporting Person). The Reporting Person has sole power to vote (or to direct
the vote) and sole power to dispose (or to direct the disposition) of the
entire number of shares reported as beneficially owned by it.
Item 6. Contracts, Arrangements, Understandings or Relationships with
Respect to Securities of the Issuer
On October 6, 1997, the Issuer and the Reporting Person entered
into a purchase agreement (the "Purchase Agreement") pursuant to which the
Reporting Person acquired 2,500,000 shares of newly issued Common Stock of the
Issuer for an aggregate purchase price of $750,000. In addition, the Issuer
also issued two warrants to the Reporting Person for the purchase of an
aggregate of 2,000,000 shares of Issuer Common Stock . The first warrant is
for the purchase of 1,000,000 shares of Issuer Common Stock at an exercise of
$4.00 per share and the second warrant is for the purchase of 1,000,000 shares
of Issuer Common Stock at an exercise price of $5.00 per share. Both warrants
are exercisable immediately and expire on the tenth anniversary of the date of
issuance (October 6, 2007).
Pursuant to the Purchase Agreement, the Issuer and Steven B.
Solomon, the Issuer's Chief Executive Officer, agreed to use their best efforts
to elect one person designated by the Reporting Person to the Issuer's Board of
Directors. Kenneth R. Johnsen, an executive officer of the Reporting Person,
has been elected to the Issuer's Board of Directors pursuant to such right. In
addition, so long as the Reporting Person owns more than 5% of the Issuer's
Common Stock, the Reporting Person has the right to approve, which approval can
not be unreasonably withheld, certain fundamental transactions involving the
Issuer, including dividends, sales or redemptions of stock in excess of certain
thresholds, mergers and acquisitions, affiliated transactions, sales of
substantial assets, changes in the nature of the business, incurrence of
additional funded indebtedness and liquidation.
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CUSIP No. 172854-10-1 Page 5 of 6 Pages
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Pursuant to the Purchase Agreement, the Issuer and the Reporting
Person also entered into a registration rights agreement (the "Registration
Agreement") for the Issuer's Common Stock acquired by or acquirable by the
Reporting Person. The Registration Agreement provides that the Reporting
Person has the right to require the Issuer to register the Reporting Person's
shares of Common Stock for resale with the Securities and Exchange Commission
at the election of the Reporting Person at any time after October 6, 1998. In
addition, the Registration Agreement also provides the Reporting Person with
the right to participate in any public offering of equity securities effected
by the Issuer. All costs of such registrations (other than selling expenses or
underwriting discounts) are at the Issuer's expense.
Except as described in this statement, there are no other
contracts, arrangements, understandings or relationships (legal or otherwise)
between the Reporting Person and any person with respect to any securities of
the Issuer.
Item 7. Materials to be Filed as Exhibits
(a) Purchase Agreement dated October 6, 1997 between the Reporting
Person and the Issuer.
(b) Warrant No. 1 for the purchase of 1,000,000 shares of Issuer
Common Stock at an exercise price of $4.00 per share.
(c) Warrant No. 2 for the purchase of 1,000,000 shares of Issuer
Common Stock at an exercise price of $5.00 per share.
(d) Registration Rights Agreement dated October 6, 1997 between
the Reporting Person and the Issuer.
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CUSIP No. 172854-10-1 Page 6 of 6 Pages
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SIGNATURE
After reasonable inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this statement is true,
complete and correct.
CORESTAFF, INC.
October 15, 1997 /s/ Peter T. Dameris
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Date By: Peter T. Dameris
Its: Senior Vice President
<PAGE> 7
Exhibit No. Index to Exhibits
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(a) Purchase Agreement dated October 6, 1997 between the Reporting
Person and the Issuer.
(b) Warrant No. 1 for the purchase of 1,000,000 shares of Issuer
Common Stock at an exercise price of $4.00 per share.
(c) Warrant No. 2 for the purchase of 1,000,000 shares of Issuer
Common Stock at an exercise price of $5.00 per share.
(d) Registration Rights Agreement dated October 6, 1997 between
the Reporting Person and the Issuer.
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EXHIBIT 99(a)
PURCHASE AGREEMENT
BETWEEN
CORESTAFF, INC.
AND
CITADEL COMPUTER SYSTEMS INCORPORATED
DATED OCTOBER 2, 1997
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TABLE OF CONTENTS
<TABLE>
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Page
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ARTICLE I AUTHORIZATION AND CLOSING...............................................................................1
1.1 Authorization of the Stock............................................................................1
1.2 Purchase and Sale of the Stock........................................................................1
1.3 The Closing...........................................................................................1
ARTICLE II CONDITIONS OF CORESTAFF'S OBLIGATION AT THE CLOSING....................................................1
2.1 Representations and Warranties, Covenants.............................................................1
2.2 Certificate of Incorporation..........................................................................2
2.3 First Step Software License Agreement.................................................................2
2.4 Development Services Agreement........................................................................2
2.5 Citadel Products Sales Agreement......................................................................3
2.6 Registration Rights Agreement.........................................................................3
2.7 Warrants..............................................................................................3
2.8 Closing Documents.....................................................................................3
2.9 Compliance with Applicable Laws.......................................................................4
2.10 Waiver...............................................................................................4
ARTICLE III COVENANTS.............................................................................................4
3.1 Financial Statements and Other Information............................................................4
3.2 Inspection of Property................................................................................6
3.3 Restrictions..........................................................................................6
3.4 Affirmative Covenants.................................................................................8
3.5 Current Public Information............................................................................8
3.6 Public Disclosures....................................................................................8
3.7 Election of Director..................................................................................9
ARTICLE IV TRANSFER OF RESTRICTED SECURITIES......................................................................9
4.1 Transfer of Restricted Securities.....................................................................9
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY..........................................................10
5.1 Organization and Corporate Power.....................................................................10
5.2 Capital Stock and Related Matters....................................................................10
5.3 Subsidiaries; Investments............................................................................11
5.4 Authorization; No Breach.............................................................................11
5.5 Financial Statements.................................................................................11
5.6 Tax Matters..........................................................................................12
</TABLE>
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<TABLE>
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5.7 Litigation, etc......................................................................................12
5.8 Brokerage............................................................................................13
5.9 Governmental Consent, etc............................................................................13
5.10 ERISA...............................................................................................13
5.11 Compliance with Laws................................................................................13
5.12 Compliance with Securities Laws.....................................................................14
5.13 Disclosure..........................................................................................14
5.14 Closing Date........................................................................................14
ARTICLE VI DEFINITIONS...........................................................................................14
ARTICLE VII MISCELLANEOUS........................................................................................16
7.1 Expenses.............................................................................................16
7.2 Remedies.............................................................................................16
7.3 CORESTAFF's Investment Representations...............................................................16
7.4 Consent to Amendments................................................................................17
7.5 Survival of Representation and Warranties............................................................17
7.6 Successors and Assigns...............................................................................17
7.7 Generally Accepted Accounting Principles.............................................................17
7.8 Severability.........................................................................................18
7.9 Counterparts.........................................................................................18
7.10 Descriptive Headings; Interpretation................................................................18
7.11 Governing Law.......................................................................................18
7.12 Notices.............................................................................................18
7.13. Arbitration with Respect to Certain Indemnification Matters........................................19
</TABLE>
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LIST OF EXHIBITS
Exhibit A Certificate of Incorporation
Exhibit B Form of First Step Software License Agreement
Exhibit C Form of Development Services Agreement
Exhibit D Form of Citadel Product Sales Agreement
Exhibit E Registration Rights Agreement
Exhibit F Form of Warrants
LIST OF SCHEDULES
Schedule 3.3(a) Dividends
Schedule 3.3(b) Redemptions
Schedule 3.4 Affirmative Covenants
Schedule 5.2(a) Capital Stock
Schedule 5.3 Investments
Schedule 5.4 Authorization
Schedule 5.5(a) Financial Statements
Schedule 5.5(b) Contracts
Schedule 5.6 Taxes
Schedule 5.7 Litigation
Schedule 5.9 Governmental Consents
Schedule 5.10 Benefit Plans
Schedule 5.12 Compliance with Securities Laws
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<PAGE> 5
PURCHASE AGREEMENT
CITADEL COMPUTER SYSTEMS INCORPORATED
THIS AGREEMENT is made as of October 2, 1997, between CITADEL
COMPUTER SYSTEMS INCORPORATED, a Delaware corporation (the "COMPANY"), and
CORESTAFF, INC., a Delaware corporation ("CORESTAFF"). Except as otherwise
indicated herein, capitalized terms used herein are defined in Section 6
hereof.
The parties hereto agree as follows:
ARTICLE I
AUTHORIZATION AND CLOSING
1.1 AUTHORIZATION OF THE STOCK. The Company shall authorize the
issuance and sale to CORESTAFF of up to 2,500,000 shares (the "STOCK") of its
Common Stock, par value $.01 per share (the "COMMON STOCK").
1.2 PURCHASE AND SALE OF THE STOCK. At the Closing (as defined in
Section 1.3 below), the Company shall sell to CORESTAFF and, subject to the
terms and conditions set forth herein, CORESTAFF shall purchase from the
Company, 2,500,000 shares of Common Stock at a price of $.30 per share.
1.3 THE CLOSING. The closing of the purchase and sale of the Stock to
be purchased pursuant to Section 1.2 (the "CLOSING") shall take place at the
offices of CORESTAFF, Inc., 5 Post Oak Road, Suite 1100, Houston, Texas 77027
at 10:00 a.m. on October 6, 1997 or at such other place or on such other date
as may be mutually agreeable to the Company and CORESTAFF. At the Closing, the
Company shall deliver to CORESTAFF stock certificates evidencing the Stock to
be purchased by CORESTAFF, registered in CORESTAFF's name, upon payment of the
purchase price thereof by a cashier's or certified check, or by wire transfer
of immediately available funds to such account as designated by the Company in
the amount of $750,000.
ARTICLE II
CONDITIONS OF CORESTAFF'S OBLIGATION
AT THE CLOSING
The obligation of CORESTAFF to purchase and pay for the Stock at the
Closing is subject to the satisfaction as of the Closing of the following
conditions:
2.1 REPRESENTATIONS AND WARRANTIES, COVENANTS. The representations
and warranties contained in Section 5 hereof shall be true and correct in all
material respects at and as of the Closing as though then made, except to the
extent of changes caused by the transactions
<PAGE> 6
expressly contemplated herein, and the Company shall have performed in all
material respects all of the covenants required to be performed by it hereunder
prior to the Closing.
2.2 CERTIFICATE OF INCORPORATION. The Company's certificate of
incorporation (the "CERTIFICATE OF INCORPORATION") shall be in the form set
forth as Exhibit A hereto, shall be in full force and effect under the laws of
Delaware as of the Closing and shall not have been amended or modified.
2.3 FIRST STEP SOFTWARE LICENSE AGREEMENT. The Company shall have
entered into an exclusive license agreement, in form and substance
substantially similar to Exhibit B to be attached hereto prior to the Closing
(the "FIRST STEP LICENSE AGREEMENT") with Millennium Computer Corp., a
Subsidiary of CORESTAFF ("MILLENNIUM") and the First Step License Agreement
shall not have been amended or modified and shall be in full force and effect
as of the Closing. Pursuant to the First Step License Agreement, (a) Millennium
will (i) develop the First Step Software program for Novell only to the
Company's specifications as a full turn-key package on additional platforms
necessary for marketing purposes, at no cost to the Company; provided, however,
if the estimated cost for such development exceeds $250,000, Millennium has the
option to withdraw the First Step Software as part of this transaction; (ii)
provide platform upgrades for Novell only on a schedule to be determined by the
parties and (iii) provide the Company with an exclusive license to sell the
First Step Software until March 31, 1998 and (b) the Company will (i) represent
and warrant to Millennium that it is satisfied with the form and substance of
the First Step Software as currently developed by Millennium and (ii) agree
that Millennium's liability to the Company under the First Step License
Agreement or with respect to the First Step Software shall be limited to the
aggregate amount of royalty payments paid to Millennium by the Company. Any
additional changes to the First Step Software program will be at Millennium's
sole discretion. All pricing of products and royalties payable to Millennium
will be mutually agreed upon and a percentage of maintenance fees will be paid
to the Company. The parties will determine the level of the company's revenue
commitments on the exclusive license from October 1, 1997 through March 31,
1998. Millennium will provide technical support service on the First Step
product at no cost to the Company. The Company will continue to maintain all
sales relationships with existing First Step customers. In the event it is
agreed that the Company will take over existing prospects from Millennium, the
Company will pay an additional royalty to Millennium in an amount to be
determined by both parties. Such determination will be made upon transfer of a
customer of Millennium to the Company.
2.4 DEVELOPMENT SERVICES AGREEMENT. The Company and Millennium shall
have entered into a Development Services Agreement in form and substance
substantially similar to Exhibit C to be attached hereto prior to the Closing
(the "DEVELOPMENT SERVICES AGREEMENT"), and the Development Services Agreement
shall be in full force and effect as of the Closing. Pursuant to the
Development Services Agreement, Millennium will provide development services to
the Company at their standard customer rate, less a ten percent discount. The
Company will purchase from Millennium a minimum of $250,000 of development
services from the Closing through September 1, 1998.
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2.5 CITADEL PRODUCTS SALES AGREEMENT. The Company and Millennium
shall have entered into a Citadel Products Sales Agreement in form and
substance substantially similar to Exhibit D to be attached hereto prior to the
Closing (the "CITADEL PRODUCTS SALES AGREEMENT"), and the Citadel Products
Sales Agreement shall be in full force and effect as of the Closing. Pursuant
to the Citadel Product Sales Agreement, Millennium will sell the Company's
products and will receive a higher royalty for sales to existing customers of
CORESTAFF in an amount to be determined by the parties.
2.6 REGISTRATION RIGHTS AGREEMENT. The Company and CORESTAFF shall
have entered into a registration rights agreement in form and substance
substantially similar to Exhibit E attached hereto (the "REGISTRATION RIGHTS
AGREEMENT"), and the Registration Rights Agreement shall be in full force and
effect as of the Closing.
2.7 WARRANTS. The Company shall have granted two Warrants to
CORESTAFF in the form of Warrants attached hereto as Exhibit F (the
"WARRANTS"). The Warrants will provide that CORESTAFF will have the right to
purchase an additional 2,000,000 shares of Common Stock, at an exercise price
of $4 per share for the first 1,000,000 shares and an exercise price of $5 per
share for the second 1,000,000 shares.
2.8 CLOSING DOCUMENTS. The Company shall have delivered to CORESTAFF
all of the following documents:
(i) an Officer's Certificate, dated the date of the Closing,
stating that the conditions specified in Section 1 and Sections 2.1
through 2.7, inclusive, have been fully satisfied;
(ii) certified copies of the resolutions duly adopted by the
Board authorizing the execution, delivery and performance of this
Agreement, the First Step Software License Agreement, the Development
Services Agreement, the Citadel Products Sales Agreement, the
Registration Rights Agreement, the Warrants and each of the other
agreements contemplated hereby (collectively, the "DOCUMENTS"), the
issuance and sale of the Stock and the consummation of all other
transactions contemplated by this Agreement. Notwithstanding the
forgoing, each of the parties hereto understands and agrees that the
forms of the First Step Software License Agreement, the Development
Services Agreement and the Citadel Products Sales Agreement have not
been finalized prior to execution of this Agreement and each party's
obligation to close this transaction is expressly subject to each
party's agreement on the terms and conditions of such agreements in
accordance with the provisions of Sections 2.3, 2.4 and 2.5 above.
(iii) certified copies of the Certificate of Incorporation and
the Company's bylaws, each as in effect at the Closing; and
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(iv) such other documents relating to the transactions
contemplated by this Agreement as CORESTAFF or its counsel may
reasonably request.
2.9 COMPLIANCE WITH APPLICABLE LAWS. The purchase of Stock by
CORESTAFF hereunder shall not be prohibited by any applicable law or
governmental regulation, shall not subject CORESTAFF to any penalty, liability
or, in CORESTAFF's sole judgment, other onerous conditions under or pursuant to
any applicable law or governmental regulation; provided, that for purposes of
this Section 2.9, the filing of a Form 3 or Schedule 13D shall be deemed not to
constitute an "onerous condition," and shall be permitted by laws and
regulations of the jurisdictions to which CORESTAFF is subject.
2.10 WAIVER. Any condition specified in this Section 2 may be waived
only if such waiver is set forth in a writing executed by CORESTAFF.
2.11 WAIVER. Notwithstanding the forgoing, each of the parties hereto
understands and agrees that the forms of the First Step Software License
Agreement, the Development Services Agreement and the Citadel Products Sales
Agreement have not been finalized prior to execution of this Agreement and each
party's obligation to close this transaction is expressly subject to each
party's agreement on the terms and conditions of such agreements in accordance
with the provisions of Sections 2.3, 2.4 and 2.5 above.
ARTICLE III
COVENANTS
3.1 FINANCIAL STATEMENTS AND OTHER INFORMATION. The Company shall
deliver to the person designated to serve on the Company's board of directors
by CORESTAFF (so long as CORESTAFF holds at least five percent (5%) of the
Company's outstanding Common Stock):
(a) as soon as available but in any event within 45 days after
the end of each quarterly accounting period (other than the fourth fiscal
quarter) in each fiscal year, unaudited statements of income and cash flows of
the Company and its Subsidiaries for such quarterly period and for the period
from the beginning of the fiscal year to the end of such quarter, and balance
sheets of the Company and its Subsidiaries as of the end of such quarterly
period, all prepared in accordance with generally accepted accounting
principles, consistently applied, subject to the absence of footnote
disclosures and to normal year-end adjustments;
(b) as soon as available but in any event within 30 days after
the end of each month in each fiscal year commencing October 1997, unaudited
monthly profit and loss statements of the Company and its Subsidiaries for such
month and for the period from the
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<PAGE> 9
beginning of the fiscal year to the end of such month, and balance sheets of
the Company and its Subsidiaries as of the end of such month, all prepared in
accordance with generally accepted accounting principles;
(c) accompanying the financial statements referred to in
paragraph (a), an Officer's Certificate stating that neither the Company nor
any of its Subsidiaries is in default under any of its other material
agreements or, if any such default exists, specifying the nature and period of
existence thereof and what actions the Company and its Subsidiaries have taken
and propose to take with respect thereto;
(d) within 90 days after the end of each fiscal year,
consolidated statements of income and cash flows of the Company and its
Subsidiaries for such fiscal year, and consolidated balance sheets of the
Company and its Subsidiaries as of the end of such fiscal year, setting forth
in each case comparisons to the annual budget and to the preceding fiscal year,
all prepared in accordance with generally accepted accounting principles,
consistently applied, and accompanied by (i) with respect to the consolidated
portions of such statements (except with respect to budget data), an opinion of
an independent accounting firm of recognized national standing acceptable to
CORESTAFF, provided, that Grant Thornton, LLP shall be deemed acceptable for
purposes of this Section 3.1(d), and (ii) a copy of such firm's annual
management letter to the Board;
(e) promptly upon receipt thereof, any additional reports,
management letters or other detailed information concerning significant aspects
of the Company's operations or financial affairs given to the Company by its
independent accountants (and not otherwise contained in other materials
provided hereunder);
(f) at least 30 days prior to the beginning of each fiscal year,
annual budgets prepared on a monthly basis for the Company and each of its
Subsidiaries (or regions) for such fiscal year (displaying anticipated
statements of income and cash flows), and promptly upon preparation thereof any
other significant budgets prepared by the Company and any revisions of such
annual or other budgets, and within 30 days after any monthly period in which
there is a material adverse deviation from any annual budgets, an Officer's
Certificate explaining the deviation and what actions the Company has taken and
proposes to take with respect thereto;
(g) promptly (but in any event within five business days) after
the discovery or receipt of notice of any default under any material agreement
to which it or any of its Subsidiaries is a party or any other event or
circumstance affecting the Company or any Subsidiary which is reasonably likely
to have a material adverse effect on the financial condition, operating
results, assets, operations or business prospects of the Company or any
Subsidiary (including the filing of any material litigation against the Company
or any Subsidiary or the existence of any material dispute with any Person
which involves a reasonable likelihood of such litigation being commenced), an
Officer's Certificate specifying the nature and period of existence thereof and
what actions the Company and its Subsidiaries have taken and propose to take
with respect thereto; and
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<PAGE> 10
(h) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as any Person
entitled to receive information under this Section 3.1 may reasonably request.
Each of the financial statements referred to in paragraphs (a) and (d) shall be
true and correct in all material respects as of the dates and for the periods
stated therein, subject in the case of the unaudited financial statements to
changes resulting from normal year-end audit adjustments (none of which would,
alone or in the aggregate, be materially adverse to the financial condition,
operating results, assets, operations or business prospects of the Company and
its Subsidiaries taken as a whole). Notwithstanding the foregoing, the
financial statements referred to in paragraphs (a) and (d) shall be in the form
of a Form 10-QSB and Form 10-KSB respectively, so long as the Company remains
subject to the requirements of the Securities Exchange Act.
3.2 INSPECTION OF PROPERTY. The Company shall permit any
representatives designated by CORESTAFF (so long as CORESTAFF holds at least
five percent (5%) of the Company's outstanding Common Stock) or any holder of
at least 25% of the outstanding Stock, upon reasonable notice and during normal
business hours and such other times as any such holder may reasonably request,
to (i) visit and inspect any of the properties of the Company and its
Subsidiaries, (ii) examine the corporate and financial records of the Company
and its Subsidiaries and make copies thereof or extracts therefrom and (iii)
discuss the affairs, finances and accounts of any such corporations with the
directors, officers, key employees and independent accountants of the Company
and its Subsidiaries; provided that the Company shall have the right to have
its chief financial officer present at any meetings with the Company's
independent accountants.
3.3 RESTRICTIONS. The Company shall not without the prior written
consent, which consent shall not be unreasonably withheld or delayed, of
CORESTAFF so long as it is a holder of more than five percent (5%) of the
Company's outstanding Stock:
(a) directly or indirectly declare or pay any dividends or make
any distributions upon any of its equity securities other than the convertible
preferred securities and convertible indebtedness set forth on Schedule 3.3(a);
(b) directly or indirectly redeem, purchase or otherwise
acquire, or permit any Subsidiary to redeem, purchase or otherwise acquire, any
of the Company's equity securities (other than shares of the Company's
redeemable convertible preferred securities or indebtedness as set forth in
Schedule 3.3(b)) (including, without limitation, warrants, options and other
rights to acquire equity securities),
(c) except as expressly contemplated by this Agreement
(including the Company's intent to offer up to $5 million of securities from
time to time as approved by
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CORESTAFF, which consent shall not be unreasonably withheld), authorize, issue,
sell or enter into any agreement providing for the issuance (contingent or
otherwise), or permit any Subsidiary to authorize, issue, sell or enter into
any agreement providing for the issuance (contingent or otherwise) of, (i) any
notes or debt securities containing equity features (including, without
limitation, any notes or debt securities convertible into or exchangeable for
equity securities, issued in connection with the issuance of equity securities
or containing profit participation features) or (ii) any equity securities (or
any securities convertible into or exchangeable for any equity securities) or
rights to acquire any equity securities, other than the issuance of equity
securities by a Subsidiary to the Company or another Subsidiary, the issuance
of equity securities pursuant to the exercise of currently outstanding stock
options or warrants or the conversion of currently outstanding convertible
securities;
(d) merge or consolidate with any Person or permit any
Subsidiary to merge or consolidate with any Person (other than a wholly owned
Subsidiary);
(e) sell, lease or otherwise dispose of, or permit any
Subsidiary to sell, lease or otherwise dispose of, more than 10% of the
consolidated assets of the Company and its Subsidiaries (computed on the basis
of book value, determined in accordance with generally accepted accounting
principles consistently applied, or fair market value, determined by the Board
in its reasonable good faith judgment) in any transaction or series of related
transactions (other than sales of inventory in the ordinary course of
business);
(f) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into partnership form);
(g) acquire, or permit any Subsidiary to acquire, any material
interest in any business (whether by a purchase of assets, purchase of stock,
merger or otherwise), or enter into any joint venture other than ordinary
course transactions involving licensing or partnering on software products;
(h) enter into, or permit any Subsidiary to enter into, the
ownership, active management or operation of any business other than the
operation of computer software and services;
(i) enter into, or permit any Subsidiary to enter into, any
material transaction with any of its or any Subsidiary's officers, directors,
employees or Affiliates or any individual related by blood, marriage or
adoption to any such Person (a "RELATIVE") or any entity in which any such
Person or individual owns a beneficial interest (a "RELATED ENTITY"), except
for normal employment arrangements and benefit programs on reasonable terms for
transactions, in accordance with past practices, and except as otherwise
expressly contemplated by this Agreement; provided that in no event shall any
Relative or Related Entity be employed by, render services to or receive
compensation from the Company or any Subsidiary; or
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(j) create, incur, assume or suffer to exist, or permit any
Subsidiary to create, incur, assume or suffer to exist, Indebtedness exceeding
the amounts approved therefor by the Board in the annual budget.
3.4 AFFIRMATIVE COVENANTS. So long as CORESTAFF holds more than five
percent (5%) of the Company's outstanding Common Stock, the Company shall, and
shall cause each Subsidiary to:
(a) other than as disclosed in Schedule 3.4 hereto, comply with
all applicable laws, rules and regulations of all governmental authorities, the
violation of which would reasonably be expected to have a material adverse
effect upon the financial condition, operating results, assets, operations or
business prospects of the Company and its Subsidiaries taken as a whole, and
pay and discharge when payable all taxes, assessments and governmental charges
(except to the extent the same are being contested in good faith and adequate
reserves therefor have been established); and
(b) enter into and maintain appropriate nondisclosure and
noncompete agreements with its key employees.
3.5 CURRENT PUBLIC INFORMATION. The Company shall file all reports
required to be filed by it under the Securities Act and the Securities Exchange
Act and the rules and regulations adopted by the Securities and Exchange
Commission thereunder and shall take such further action as any holder or
holders of Restricted Securities may reasonably request, all to the extent
required to enable such holders to sell Restricted Securities pursuant to (i)
Rule 144 adopted by the Securities and Exchange Commission under the Securities
Act (as such rule may be amended from time to time) or any similar rule or
regulation hereafter adopted by the Securities and Exchange Commission assuming
the relevant holding period has elapsed and the other terms and conditions of
Rule 144 are satisfied or (ii) a registration statement on Form S-2 or S-3 or
similar form available to "small business issuers" or any similar registration
form hereafter adopted by the Securities and Exchange Commission. Upon request,
the Company shall deliver to any holder of Restricted Securities a written
statement as to whether it has complied with such requirements.
3.6 PUBLIC DISCLOSURES. The Company shall not, nor shall it permit
any Subsidiary to, disclose CORESTAFF's name or identity as an investor in the
Company in any press release or other public announcement or in any document or
material filed with any governmental entity, without the prior written consent
of CORESTAFF, unless such disclosure is required by applicable law or
governmental regulations or by order of a court of competent jurisdiction, in
which case prior to making such disclosure the Company shall give written
notice to CORESTAFF describing in reasonable detail the proposed content of
such disclosure and shall permit CORESTAFF to review and comment upon the form
and substance of such disclosure. The parties agree that the Company will be
required to file a Current Report on Form 8-K and will be required to disclose
the transactions contemplated hereby in its Form 10-KSB and 10-QSB
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<PAGE> 13
filings. The parties further agree that Citadel will issue a prior release
regarding the transaction following the Closing after reasonable review and
approval by CORESTAFF (except as required by law).
3.7 ELECTION OF DIRECTOR. The Company hereby agrees to elect one
representative designated by CORESTAFF to the Company's Board of Directors
immediately following the Closing. The Company and Steven B. Solomon hereby
agree to use their best efforts to nominate and elect such designee at all
annual or special stockholder meetings at which directors are being elected
until such time as CORESTAFF is the beneficial owner of less than two percent
(2)% of the Company's then outstanding Common Stock.
ARTICLE IV
TRANSFER OF RESTRICTED SECURITIES
4.1 TRANSFER OF RESTRICTED SECURITIES.
(a) Restricted Securities are transferable only pursuant to (i)
public offerings registered under the Securities Act, (ii) Rule 144 or Rule
144A of the Securities and Exchange Commission (or any similar rule or rules
then in force) if such rule or rules are available and (iii) subject to the
conditions specified in paragraph (b) below, any other legally available means
of transfer to a transferee reasonably acceptable to the Company; provided,
however, that if such transferee is unacceptable to the Company, the holder
shall have the right to provide the Company with a 30-day right of first offer
to purchase such Restricted Securities for cash or the same payment terms
offered on the terms proposed by such unacceptable transferee and if such offer
is not consummated by the Company within such 30-day period, the holder shall
have the right to transfer such Restricted Securities to such transferee on
terms not less favorable than those offered to the Company; provided, further
that such 30-day period shall be extended to 90 days in the event that such
proposed transferee is a direct competitor of the Company in any material
respect.
(b) In connection with the transfer of any Restricted Securities
(other than a transfer described in subparagraph 4(a)(i) or (ii) above), the
holder thereof shall deliver written notice to the Company describing in
reasonable detail the transfer or proposed transfer, together with an opinion
of Hogan & Hartson L.L.P. or other counsel which (to the Company's reasonable
satisfaction) is knowledgeable in securities law matters to the effect that
such transfer of Restricted Securities may be effected without registration of
such Restricted Securities under the Securities Act. In addition, if the holder
of the Restricted Securities delivers to the Company an opinion of Hogan &
Hartson L.L.P. or such other counsel that no subsequent transfer of such
Restricted Securities shall require registration under the Securities Act, the
Company shall promptly upon such contemplated transfer deliver new certificates
for such Restricted Securities which do not bear the Securities Act legend set
forth in Section 7.3. If the Company is not required to deliver new
certificates for such Restricted Securities not bearing such legend, the
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<PAGE> 14
holder thereof shall not transfer the same until the prospective transferee has
confirmed to the Company in writing its agreement to be bound by the conditions
contained in this paragraph and Section 7.3.
(c) Upon the request of CORESTAFF, the Company shall promptly
supply to CORESTAFF or its prospective transferees all information regarding
the Company required to be delivered in connection with a transfer pursuant to
Rule 144A of the Securities and Exchange Commission.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As a material inducement to CORESTAFF to enter into this
Agreement and purchase the Stock, the Company hereby represents and warrants to
CORESTAFF that:
5.1 ORGANIZATION AND CORPORATE POWER. The Company is a corporation
duly organized, validly existing and in good standing under the laws of
Delaware and is qualified to do business in every jurisdiction in which the
failure to so qualify might reasonably be expected to have a material adverse
effect on the financial condition, operating results, assets, operations or
business prospects of the Company and its Subsidiaries taken as a whole. The
Company has all requisite corporate power and authority and all material
licenses, permits and authorizations necessary to own and operate its
properties, to carry on its businesses as now conducted and presently proposed
to be conducted and to carry out the transactions contemplated by this
Agreement. The copies of the Company's Certificate of Incorporation and bylaws
which have been furnished to CORESTAFF's counsel reflect all amendments made
thereto at any time prior to the date of this Agreement and are correct and
complete.
5.2 CAPITAL STOCK AND RELATED MATTERS.
(a) As of the Closing and immediately thereafter, the authorized
capital stock of the Company shall consist of 30,000,000 shares of Common
Stock, of which (i) 18, 763,998 shares are issued and outstanding, 2,000,000 of
which shall be reserved for issuance to CORESTAFF pursuant to the Warrants, and
12,133,164 of which shall be reserved for issuance pursuant to outstanding
options or warrants (the "Outstanding Options"). As of the Closing, the Company
shall not have outstanding any stock or securities convertible or exchangeable
for any shares of its capital stock or containing any profit participation
features, nor shall it have outstanding any rights or options to subscribe for
or to purchase its capital stock or any stock or securities convertible into or
exchangeable for its capital stock or any stock appreciation rights or phantom
stock plans other than pursuant to and as contemplated by this Agreement, the
Warrants and the Company's Stock Option Plan or as set forth in the Company
Securities Exchange Act filings or as disclosed in Schedule 5.2(a) hereto. As
of the Closing, the Company shall not be subject to any obligation (contingent
or otherwise) to repurchase or otherwise acquire or retire
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<PAGE> 15
any shares of its capital stock or any warrants, options or other rights to
acquire its capital stock, except pursuant to this Agreement, the Warrants, and
the Outstanding Options or as disclosed pursuant to Schedule 5.2(a). As of the
Closing, all of the outstanding shares of the Company's capital stock shall be
validly issued, fully paid and nonassessable.
(b) There are no statutory or, to the best of the Company's
knowledge, contractual stockholders preemptive rights or rights of refusal with
respect to the issuance of the Stock hereunder, except as expressly provided
herein. Based in part on the investment representations of CORESTAFF in Section
7.3 hereof, the Company has not violated any applicable federal or state
securities laws in connection with the offer, sale or issuance of any of its
capital stock, and the offer, sale and issuance of the Stock hereunder do not
and will not require registration under the Securities Act or any applicable
state securities laws. To the best of the Company's knowledge, there are no
agreements between the Company's stockholders with respect to the voting or
transfer of the Company's capital stock or with respect to any other aspect of
the Company's affairs, except for this Agreement.
5.3 SUBSIDIARIES; INVESTMENTS. Other than as set forth in Schedule
5.3, the Company does not own or hold any shares of stock or any other security
or interest in any other Person or any rights to acquire any such security or
interest, and the Company has never had any Subsidiary.
5.4 AUTHORIZATION; NO BREACH. The execution, delivery and performance
of this Agreement, the Documents and all other agreements contemplated hereby
to which the Company is a party have been duly authorized by the Company. This
Agreement and the Documents and all other agreements contemplated hereby each
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms. The execution and delivery by the Company of this
Agreement, the Documents and all other agreements contemplated hereby to which
the Company is a party, the offering, sale and issuance of the Stock hereunder,
and the fulfillment of and compliance with the respective terms hereof and
thereof by the Company do not and will not (i) conflict with or result in a
breach of the terms, conditions or provisions of, (ii) constitute a default
under, (iii) result in the creation of any lien, security interest, charge or
encumbrance upon the Company's capital stock or assets pursuant to, (iv) give
any third party the right to modify, terminate or accelerate any obligation
under, (v) result in a violation of, or (vi) require any authorization,
consent, approval, exemption or other action by or notice to any court or
administrative or governmental body pursuant to, the Certificate of
Incorporation or bylaws of the Company, or any law, statute, rule or regulation
to which the Company is subject, or any agreement, instrument, order, judgment
or decree to which the Company is a party or by which it is bound except as set
forth in Schedule 5.4.
5.5 FINANCIAL STATEMENTS.
(a) Attached hereto as Exhibit 5.5(a) are the following
financial statements (collectively the "FINANCIAL STATEMENTS") (i) audited
balance sheet and statement of income, changes in stockholder's equity, and
cash flow as of and for the fiscal years ended
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<PAGE> 16
February 28, 1995 and 1996 (the "MOST RECENT FISCAL YEAR END") for the Company,
and (ii) an unaudited balance sheet and statement of income, changes in
stockholders' equity, and cash flow as of and for the nine months ended
November 30, 1996. The Financial Statements have been prepared in accordance
with GAAP applied on a consistent basis throughout the periods covered thereby,
are correct and complete, fairly present the financial condition of the Company
as of such dates, and are consistent with the books and records of the Company
(which books and records are correct and complete). The Financial Statements
for year ended February 29, 1996 were audited by Grant Thornton, LLP.
The Company and its Subsidiaries do not have any material obligation
or liability (whether accrued, absolute, contingent, unliquidated or otherwise,
whether or not known to the Company or any Subsidiary, whether due or to become
due and regardless of when asserted) other than: (i) liabilities set forth on
most recent balance sheet (including any notes thereon delivered to CORESTAFF
pursuant to Section 3.1 hereof, (ii) liabilities and obligations which have
arisen after the date of such balance sheet in the ordinary course of business
(none of which is a material liability resulting from breach of contract,
breach of warranty, tort, infringement, claim or lawsuit) and (iii) liabilities
and obligations which have been disclosed in writing to CORESTAFF.
5.6 TAX MATTERS. Other than as set forth in Schedule 5.6, the Company
has filed all tax returns (if any) which it is required to file under
applicable laws and regulations; all such returns are complete and correct in
all material respects; other than as set forth in Schedule 5.6, the Company has
paid all taxes due and owing by it and has withheld and paid over all taxes
which it is obligated to withhold from amounts paid or owing to any employee,
stockholder, creditor or other third party; the Company has not waived any
statute of limitations with respect to taxes or agreed to any extension of time
with respect to a tax assessment or deficiency; the assessment of any
additional taxes for periods for which returns have been filed is not expected;
no foreign, federal, state or local tax audits are pending or being conducted
with respect to the Company, no information related to tax matters has been
requested by any foreign, federal, state or local taxing authority and no
notice indicating an intent to open an audit or other review has been received
by the Company from any foreign, federal, state or local taxing authority; and
there are no unresolved questions or claims concerning the Company's tax
liability. The Company has not made an election under Section 341(f) of the IRC.
5.7 LITIGATION, ETC. Except as set forth on Schedule 5.7 (Litigation)
attached hereto, there are no actions, suits, proceedings, orders,
investigations or claims pending or, to the best of the Company's knowledge,
threatened against or affecting the Company (or to the best of the Company's
knowledge, pending or threatened against or affecting any of the officers,
directors or employees of the Company with respect to their businesses or
proposed business activities) at law or in equity, or before or by any
governmental department, commission, board, bureau, agency or instrumentality
(including, without limitation, any actions, suit, proceedings or
investigations with respect to the transactions contemplated by this Agreement)
which could have a material adverse effect on the financial condition,
operating results, assets, operations or
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<PAGE> 17
business prospects of the Company and its Subsidiaries taken as a whole; the
Company is not subject to any arbitration proceedings under collective
bargaining agreements or otherwise or, to the best of the Company's knowledge,
any governmental investigations or inquiries; and, to the best of the Company's
knowledge, there is no basis for any of the foregoing. The Company is not
subject to any judgment, order or decree of any court or other governmental
agency. The Company has not received any opinion or memorandum or legal advice
from legal counsel to the effect that it is exposed, from a legal standpoint,
to any liability or disadvantage which may be material to its business.
5.8 BROKERAGE. There are no claims for brokerage commissions,
finders, fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Company. The Company shall pay, and hold CORESTAFF harmless against,
any liability, loss or expense (including, without limitation, attorneys, fees
and out-of-pocket expenses) arising in connection with any such claim.
5.9 GOVERNMENTAL CONSENT, ETC. Other than as set forth on Schedule
5.9, no permit, consent, approval or authorization of, or declaration to or
filing with, any governmental authority is required in connection with the
execution, delivery and performance by the Company of this Agreement or the
other agreements contemplated hereby, or the consummation by the Company of any
other transactions contemplated hereby or thereby.
5.10 ERISA. Except as set forth on Schedule 5.10 hereto, the Company
does not maintain or have any obligation to contribute to or any other
liability with respect to or under (including but not limited to current or
potential withdrawal liability), nor has it ever maintained or had any
obligation to contribute to or any other liability with respect to or under,
(i) any plan or arrangement whether or not terminated, which provides medical,
health, life insurance or other welfare type benefits for current or future
retired or terminated employees (except for limited continued medical benefit
coverage required to be provided under Section 4980B of the IRC or as required
under applicable state law), (ii) any "multiemployer plan" (as defined in
Section 3(37) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), (iii) any employee plan which is a tax-qualified "defined
benefit plan" (as defined in Section 3(35) of ERISA), whether or not
terminated, (iv) any employee plan which is a tax-qualified "defined
contribution plan" (as defined in Section 3(34) of ERISA), whether or not
terminated, or (v) any other plan or arrangement providing benefits to current
or former employees, including any bonus plan, plan for deferred compensation,
employee health or other welfare benefit plan or other arrangement, whether or
not terminated. For purposes of this Section 5.10, the term "COMPANY" includes
all organizations under common control with the Company pursuant to Section
414(b) or (c) of the IRC.
5.11 COMPLIANCE WITH LAWS. The Company has not violated any law or any
governmental regulation or requirement which violation would reasonably be
expected to have a material adverse effect upon the financial condition,
operating results, assets, operations or business prospects of the Company, and
the Company has not received notice of any such
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<PAGE> 18
violation. The Company is not subject to any clean up liability, and the
Company has no reason to believe it may become subject to any clean up
liability, under any federal, state or local environmental law, rule or
regulation.
5.12 COMPLIANCE WITH SECURITIES LAWS. Other than as set forth on
Schedule 5.12, the Company has complied in all material respects with all laws,
rules, regulations and requirements of the Securities Act, the Securities
Exchange Act and any other Federal or state securities laws. Other than as set
forth on Schedule 5.12, the Company has made all filings required to be made
with the Securities and Exchange Commission and all of such filings are true
and correct in all material respects.
5.13 DISCLOSURE. Neither this Agreement nor any of the schedules,
attachments, written statements, documents, certificates or other items
prepared or supplied to CORESTAFF by or on behalf of the Company with respect
to the transactions contemplated hereby contain any untrue statement of a
material fact or omit a material fact necessary to make each statement
contained herein or therein not misleading, in light of the circumstances under
which it was made. There is no fact which the Company has not disclosed to
CORESTAFF in writing and of which any of its officers, directors or executive
employees is aware and which has had or might reasonably be anticipated to have
a material adverse effect upon the existing or expected financial condition,
operating results, assets, customer or supplier relations, employee relations
or business prospects of the Company.
5.14 CLOSING DATE. The representations and warranties of the Company
contained in this Section 5 and elsewhere in this Agreement and all information
contained in any exhibit, schedule or attachment hereto or in any writing
delivered by, or on behalf of, the Company to CORESTAFF shall be true and
correct in all material respects on the date of the Closing as though then
made, except as affected by the transactions expressly contemplated by this
Agreement.
ARTICLE VI
DEFINITIONS
6.1 For the purposes of this Agreement, the following terms have the
meanings set forth below:
"AFFILIATE" of any particular person or entity means any other
person or entity controlling, controlled by or under common control with such
particular person or entity.
"COMMON STOCK" means the Company's common stock, par value $.01
per share.
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<PAGE> 19
"INDEBTEDNESS" means all indebtedness for borrowed money
(including purchase money obligations) maturing one year or more from the date
of creation or incurrence thereof or renewable or extendible at the option of
the debtor to a date one year or more from the date of creation or incurrence
thereof, all indebtedness under revolving credit arrangements extending over a
year or more, all capitalized lease obligations and all guarantees of any of
the foregoing.
"INVESTOR COMMON" means (i) the Stock issued hereunder and (ii)
any Common Stock issued or issuable with respect to the Common Stock referred
to in clause (i) above by way of stock dividends or stock splits or in
connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. As to any particular shares of Investor
Common, such shares shall cease to be Investor Common when they have been (a)
effectively registered under the Securities Act and disposed of in accordance
with the Registration statement covering, them or (b) distributed to the public
through a broker, dealer or market maker pursuant to Rule 144 under the
Securities Act (or any similar rule then in force).
"INVESTOR STOCK" means the Investor Common and all shares of
Common Stock acquired pursuant to exercise of the Warrants.
"IRC" means the Internal Revenue Code of 1986, as amended, and
any reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"OFFICER'S CERTIFICATE" means a certificate signed by the
Company's president or its chief financial officer, stating that (i) the
officer signing such certificate has made or has caused to be made such
investigations as are necessary in order to permit him to verify the accuracy
of the information set forth in such certificate and (ii) to the best of such
officer's knowledge, such certificate does not misstate any material fact and
does not omit to state any fact necessary to make the certificate not
misleading.
"PERSON" means an individual, a partnership, a limited liability
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"RESTRICTED SECURITIES" means (i) the Stock issued hereunder and
pursuant to the Warrants and (ii) any securities issued with respect to the
securities referred to in clause (i) above by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. As to any particular Restricted
Securities, such securities shall cease to be Restricted Securities when they
have (A) been effectively registered under the Securities Act and disposed of
in accordance with the registration statement covering them, (B) become
eligible for sale pursuant to Rule 144(k) (or any similar provision then in
force) under the Securities Act or (C) been otherwise transferred and new
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<PAGE> 20
certificates for them not bearing the Securities Act legend set forth in
Section 7.3 have been delivered by the Company in accordance with Section
4.1(b). Whenever any particular securities cease to be Restricted Securities,
the holder thereof shall be entitled to receive from the Company, without
expense, new securities of like tenor not bearing a Securities Act legend of
the character set forth in Section 7.3.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or
any similar federal law then in force.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended, or any similar federal law then in force.
"SECURITIES AND EXCHANGE COMMISSION" includes any governmental
body or agency succeeding to the functions thereof.
"SUBSIDIARY" means any corporation of which the securities having
a majority of the ordinary voting power in electing the board of directors are,
at the time as of which any determination is being made, owned by the Company
either directly or through one or more Subsidiaries.
ARTICLE VII
MISCELLANEOUS
7.1 EXPENSES. Each party agrees to bear its own expenses associated
with the transactions contemplated hereby.
7.2 REMEDIES. CORESTAFF and each approved transferee shall have all
rights and remedies set forth in this Agreement and the Certificate of
Incorporation and all rights and remedies which such holders have been granted
at any time under any other agreement or contract and all of the rights which
such holders have under any law. Any Person having any rights under any
provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law.
7.3 CORESTAFF'S INVESTMENT REPRESENTATIONS. CORESTAFF hereby
represents that it is acquiring the Restricted Securities purchased hereunder
or acquired pursuant hereto for its own account with the present intention of
holding such securities for purposes of investment, and that it has no
intention of selling such securities in a public distribution in violation of
the federal securities laws or any applicable state securities laws; provided
that nothing contained herein shall prevent CORESTAFF and subsequent holders of
Restricted Securities from transferring such securities in compliance with the
provisions of Article IV
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<PAGE> 21
hereof. Each certificate for Restricted Securities shall be imprinted with a
legend in substantially the following form:
"The securities represented by this certificate were
originally issued on ____________ and have not been
registered under the Securities Act of 1933, as amended. The
transfer of the securities represented by this certificate is
subject to the conditions specified in the Purchase
Agreement, dated as of September 26, 1997, between Citadel
Computer Systems Incorporated (the "Company") and a certain
investor, and the Company reserves the right to refuse the
transfer of such securities until such conditions have been
fulfilled with respect to such transfer. A copy of such
conditions shall be furnished by the Company to the holder
hereof upon written request and without charge."
7.4 CONSENT TO AMENDMENTS. Except as otherwise expressly provided
herein, the provisions of this Agreement may be amended only with the consent
of the Company and the holder of a majority of the Investor Stock, the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company has obtained the written
consent of the holders of a majority of the Investor Stock. No other course of
dealing between the Company and the holder of any Stock or any delay in
exercising any rights hereunder or under the Certificate of Incorporation shall
operate as a waiver of any rights of any such holders. For purposes of this
Agreement, shares of Stock held by the Company or any Subsidiaries shall not be
deemed to be outstanding.
7.5 SURVIVAL OF REPRESENTATION AND WARRANTIES. All representations
and warranties contained herein or made in writing by any party in connection
herewith shall survive for a period of three years after the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby, regardless of any investigation made by CORESTAFF or on
its behalf
7.6 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not. In addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for CORESTAFF's benefit as a purchaser
or holder of Stock are also for the benefit of, and enforceable by, any
subsequent approved holder of such Stock. The rights and obligations of
CORESTAFF under this Agreement and the agreements contemplated hereby may be
assigned by CORESTAFF at any time, in whole or in part, to any Subsidiary of
CORESTAFF, or any successor thereto.
7.7 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Where any accounting
determination or calculation is required to be made under this Agreement or the
exhibits hereto,
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<PAGE> 22
such determination or calculation (unless otherwise provided) shall be made in
accordance with generally accepted accounting principles, consistently applied,
except that if because of a change in generally accepted accounting principles
the Company would have to alter a previously utilized accounting method or
policy in order to remain in compliance with generally accepted accounting
principles, such determination or calculation shall continue to be made in
accordance with the Company's previous accounting methods and policies.
7.8 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating, the
remainder of this Agreement.
7.9 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
7.10 DESCRIPTIVE HEADINGS; INTERPRETATION. The descriptive headings of
this Agreement are inserted for convenience only and do not constitute a
Section of this Agreement. The use of the word "including" in this Agreement
shall be by way of example rather than by limitation.
7.11 GOVERNING LAW. The corporate law of Delaware shall govern all
issues concerning the relative rights of the Company and its stockholders. All
other questions concerning the construction, validity and interpretation of
this Agreement and the exhibits and schedules hereto shall be governed by and
construed in accordance with the internal laws of the State of Texas, without
giving effect to any choice of law or conflict of law provision or rule that
would cause the application of the laws of any jurisdiction other than the
State of Texas.
7.12 NOTICES. All notices, demands or other communications to be given
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable express courier service (charges
prepaid), 48 hours after being deposited to the recipient by United States
mail, first class, postage prepaid, or sent by facsimile. Such notices, demands
and other communications shall be sent to CORESTAFF and to the Company at the
address indicated below:
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<PAGE> 23
If to the Company:
Citadel Computer Systems Incorporated
3811 Turtle Creek Boulevard, Suite 600
Dallas, TX 75219
Attention: Steven B. Solomon
Tel No.: (214) 520-9292
Fax No.: (214) 520-0034
If to CORESTAFF:
CORESTAFF, Inc.
4400 Post Oak Parkway, Suite 2000
Houston, TX 77027
Attention: Kenneth R. Johnsen
Tel No.: (713) 548-3485
Fax No.: (713) 548-3430
with a copy to:
Peter T. Dameris, Esq.
CORESTAFF, Inc.
4400 Post Oak Parkway, Suite 1130
Houston, TX 77027
Tel No.: (713) 548-3400
Fax No.: (713) 627-1059
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
7.13 ARBITRATION WITH RESPECT TO CERTAIN INDEMNIFICATION MATTERS. THE
PARTIES AGREE TO SUBMIT TO ARBITRATION, IN ACCORDANCE WITH THESE PROVISIONS,
ANY DISPUTED CLAIM OR CONTROVERSY ARISING FROM OR RELATED TO THE ALLEGED BREACH
OF THIS AGREEMENT OR ANY DISPUTED CLAIM MADE PURSUANT TO SECTION 2.3, THE FIRST
STEP LICENSE AGREEMENT, THE FIRST STEP SOFTWARE, THE DEVELOPMENT SERVICES
AGREEMENT, THE CITADEL PRODUCTS SALES AGREEMENT OR ANY OTHER DISPUTE BETWEEN
THE PARTIES RELATED HERETO OR THERETO. THE PARTIES FURTHER AGREE THAT THE
ARBITRATION PROCESS AGREED UPON HEREIN SHALL BE THE EXCLUSIVE MEANS FOR
RESOLVING ALL DISPUTES MADE SUBJECT TO ARBITRATION HEREIN, BUT THAT NO
ARBITRATOR SHALL HAVE AUTHORITY TO EXPAND THE SCOPE OF THESE ARBITRATION
PROVISIONS. ANY ARBITRATION HEREUNDER SHALL BE CONDUCTED UNDER THE PROCEDURES
OF THE AMERICAN ARBITRATION ASSOCIATION (AAA). EITHER PARTY MAY INVOKE
ARBITRATION PROCEDURES HEREIN BY WRITTEN NOTICE FOR ARBITRATION CONTAINING A
STATEMENT OF THE MATTER TO BE ARBITRATED. THE PARTIES SHALL THEN HAVE
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<PAGE> 24
FOURTEEN (14) DAYS IN WHICH THEY MAY IDENTIFY A MUTUALLY AGREEABLE, NEUTRAL
ARBITRATOR. AFTER THE FOURTEEN (14) DAY PERIOD HAS EXPIRED, THE PARTIES SHALL
PREPARE AND SUBMIT TO THE AAA A JOINT SUBMISSION, WITH EACH PARTY TO CONTRIBUTE
HALF OF THE APPROPRIATE ADMINISTRATIVE FEE. IN THE EVENT THE PARTIES CANNOT
AGREE UPON A NEUTRAL ARBITRATOR WITHIN FOURTEEN (14) DAYS AFTER WRITTEN NOTICE
FOR ARBITRATION IS RECEIVED, THEIR JOINT SUBMISSION TO THE AAA SHALL REQUEST A
PANEL OF THREE ARBITRATORS WHO ARE PRACTICING ATTORNEYS WITH PROFESSIONAL
EXPERIENCE IN THE FIELD OF CORPORATE LAW, AND THE PARTIES SHALL ATTEMPT TO
SELECT AN ARBITRATOR FROM THE PANEL ACCORDING TO AAA PROCEDURES. UNLESS
OTHERWISE AGREED BY THE PARTIES, THE ARBITRATION HEARING SHALL TAKE PLACE IN
HOUSTON, TEXAS, AT A PLACE DESIGNATED BY THE AAA. ALL ARBITRATION PROCEDURES
HEREUNDER SHALL BE CONFIDENTIAL. EACH PARTY SHALL BE RESPONSIBLE FOR ITS COSTS
INCURRED IN ANY ARBITRATION, AND THE ARBITRATOR SHALL NOT HAVE AUTHORITY TO
INCLUDE ALL OR ANY PORTION OF SAID COSTS IN AN AWARD, REGARDLESS OF WHICH PARTY
PREVAILS. THE ARBITRATOR MAY INCLUDE EQUITABLE RELIEF. ANY ARBITRATION AWARDED
SHALL BE ACCOMPANIED BY A WRITTEN STATEMENT CONTAINING A SUMMARY OF THE ISSUES
IN CONTROVERSY, A DESCRIPTION OF THE AWARD, AND AN EXPLANATION OF THE REASONS
FOR THE AWARD.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT
OR IN ANY OF THE DOCUMENTS, IN NO EVENT WILL EITHER CORESTAFF OR THE COMPANY BE
LIABLE TO THE OTHER UNDER THIS AGREEMENT, THE DOCUMENTS OR ANY OTHER COURSE OF
DEALING BETWEEN THE PARTIES IN EXCESS OF THE AMOUNTS PAID TO SUCH PARTY
PURSUANT TO THE PARTICULAR AGREEMENT, DOCUMENT OR TRANSACTION BETWEEN THE
PARTIES THAT IS THE SUBJECT OF ANY DISPUTE.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
CITADEL COMPUTER SYSTEMS INCORPORATED
By: /s/ Steven B. Solomon
------------------------------------
Name: Steven B. Solomon
Title: President
CORESTAFF, INC.
By: /s/ Peter T. Dameris
------------------------------------
Name: Peter T. Dameris
Title: Senior Vice President
For purposes of Section 3.7 hereof only:
/s/ Steven B. Solomon
----------------------------------------
Steven B. Solomon
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<PAGE> 1
EXHIBIT 99(b)
WARRANT
TO PURCHASE COMMON SHARES OF
CITADEL COMPUTER SYSTEMS INCORPORATED
Warrant No. I
No. of Common Shares: 1,000,000
<PAGE> 2
THIS WARRANT AND THE SHARES OF COMMON SHARES PURCHASABLE HEREUNDER HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
ANY STATE SECURITIES LAWS AND CANNOT BE OFFERED, SOLD OR TRANSFERRED IN THE
ABSENCE OF REGISTRATION OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION
UNDER THE ACT, APPLICABLE STATE SECURITIES LAWS AND REGULATIONS PROMULGATED
THEREUNDER. THE TRANSFERABILITY OF THE WARRANT ALSO IS RESTRICTED AS PROVIDED
IN SECTION 9 HEREOF.
No. of Common Shares: 1,000,000 Warrant No. 1
October 6, 1997
WARRANT
TO PURCHASE COMMON SHARES OF
CITADEL COMPUTER SYSTEMS INCORPORATED
THIS IS TO CERTIFY THAT CORESTAFF, INC. or registered assigns, is
entitled, during the Exercise Period (as hereinafter defined), to purchase from
Citadel Computer Systems Incorporated, a Delaware corporation (the "Company"),
One Million (1,000,000) Common Shares (as hereinafter defined and subject to
adjustment as provided herein), at a purchase price of Four Dollars ($4.00) per
share, all on the terms and conditions and pursuant to the provisions
hereinafter set forth.
1. DEFINITIONS
As used in this Warrant, the following terms have the respective
meanings set forth below:
"ADDITIONAL COMMON SHARES" means all Common Shares of any class
issued by the Company after the date hereof, other than Warrant Shares.
"AFFILIATE" of a Person means a Person Controlled By, Controlling
or Under Common Control with such Person.
"BUSINESS DAY" means any day that is not a Saturday or Sunday or
a day on which banks are generally closed for business in the State of
Connecticut.
"COMMISSION" means the United States Securities and Exchange
Commission or any other agency then administering the Securities Act and other
securities laws.
<PAGE> 3
"COMMON SHARES" means (except where the context otherwise
indicates) shares of the common stock, par value $.01 per share, of the Company
as constituted on the date hereof, and any shares into which such Common Shares
may thereafter be changed, and shall also include (i) shares of the Company of
any other class (regardless of how denominated) issued to the holders of shares
of any class of Common Shares upon any reclassification thereof which is also
not preferred as to dividends or assets over any other class of shares of the
Company and which is not subject to redemption and (ii) common shares of any
successor or acquiring corporation (as defined in Section 4.8) received by or
distributed to the holders of any class of Common Shares of the Company in the
circumstances contemplated by Section 4.8.
"CONTROLLED BY" or "CONTROLLING" or "UNDER COMMON CONTROL" shall
mean possession, directly or indirectly, of power to direct or cause direction
of management or policies (whether through ownership of voting securities, by
contract or otherwise).
"CONVERTIBLE SECURITIES" means evidences of indebtedness, shares
or other securities which are convertible into or exchangeable, with or without
payment of additional consideration in cash or property, for Additional Common
Shares, either immediately or upon the occurrence of a specified date or a
specified event.
"CURRENT STOCK PRICE" means the average of the high and low price
of the Common Shares in the Company's trading market over the last 20 trading
days prior to the date in question.
"CURRENT WARRANT PRICE" in respect of a Common Share, means
$4.00, as adjusted after the Issuance Date in accordance with the provisions of
this Warrant.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"EXERCISE DATE" means the Issuance Date.
"EXERCISE PERIOD" means the period during which this Warrant is
exercisable pursuant to Section 2.1.
"EXPIRATION DATE" means the tenth anniversary of the Issuance
Date.
"GAAP" means generally accepted accounting principles, applied on
a consistent basis.
"HOLDER" means the Person in whose name the Warrant is registered
on the books of the Company maintained for such purpose.
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<PAGE> 4
"ISSUANCE DATE" means the date of this Warrant.
"MAJORITY HOLDERS" means the holders of Warrants exercisable for
more than 50% of the aggregate number of Common Shares purchasable upon
exercise of all Warrants, whether or not then exercisable.
"OTHER PROPERTY" has the meaning set forth in Section 4.8.
"OUTSTANDING" means, when used with reference to Common Shares,
at any date as of which the number of shares thereof is to be determined, all
issued shares of Common Shares, except Common Shares then owned or held by or
for the account of the Company or any subsidiary thereof, and shall include all
Common Shares issuable in respect of outstanding scrip or any certificates
representing fractional interests in shares of Common Shares and shall also
include all Common Shares issuable upon conversion or exercise of securities
convertible or exercisable for Common Shares, if such securities are issued at
any date as of which the number of Common Shares is to be determined, excluding
any such securities then owned or held by or for the account of the Company or
any subsidiary thereof.
"PERMITTED ISSUANCES" means (i) Common Shares issued upon
exercise of this Warrant, (ii) Common Shares issued to employees and directors
of the Company or its subsidiaries pursuant to any stock purchase, stock
ownership, stock bonus or stock option plans heretofore or hereafter duly
adopted or assumed by the Company or any subsidiary thereof, (iii) Common
Shares issued pursuant to any dividend reinvestment plan heretofore or
hereafter duly adopted or assumed by the Company, (iv) Common Shares issued by
the Company in connection with the conversion of Convertible Securities
outstanding on the date of the Purchase Agreement, (v) other Common Shares
which may become issuable pursuant to the exercise of certain warrants to
purchase up to 500,000 shares at $3 per share that may be granted to Novell
Inc. as disclosed to CORESTAFF, and (vi) 500,000 Common Shares which may become
issuable pursuant to stock options issued to employees.
"PERSON" means any individual, sole proprietorship, partnership,
joint venture, trust, incorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"RESTRICTED COMMON SHARES" shall mean Common Shares which are, or
which upon their issuance on the exercise of this Warrant would be, evidenced
by a certificate bearing the restrictive legend set forth in Section 9.1.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations thereunder, all as the same shall be in effect at
the time.
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<PAGE> 5
"TRANSFER" means any disposition of any Warrant or of any
interest thereof, with or without consideration.
"WARRANTS" means this Warrant and all Warrants issued upon
transfer, division or combination of, or in substitution for, any thereof in
accordance with the terms of this Warrant. All Warrants shall at all times be
identical as to terms and conditions and date, except as to the number of
Common Shares for which they may be exercised.
"WARRANT PRICE" means an amount equal to (i) the number of
Common Shares being purchased upon exercise of this Warrant pursuant to Section
2.1, multiplied by (ii) the Current Warrant Price as of the date of such
exercise.
"WARRANT SHARES" means the Common Shares purchased by the holders
of the Warrants upon the exercise thereof.
2. EXERCISE OF WARRANT
2.1. MANNER OF EXERCISE
From and after the Exercise Date and until 5:00 P.M., Dallas
time, on the Expiration Date, Holder may exercise this Warrant, on any Business
Day, for all (but not less than all) of the number of Common Shares purchasable
hereunder as specified in Section 2.2 hereof.
In order to exercise this Warrant, Holder shall deliver to
the Company at its principal office at 3811 Turtle Creek Boulevard, Suite 600,
Dallas, Texas 75219 or at the office or agency designated by the Company
pursuant to Section 12, (i) a written notice of Holder's election to exercise
this Warrant, which notice shall specify the number of Common Shares to be
purchased, (ii) payment of the Warrant Price by Holder's wire transfer of
immediately available funds and (iii) this Warrant. Such notice shall be
substantially in the form of the subscription form appearing at the end of this
Warrant as Exhibit A, duly executed by Holder or its agent or attorney. Upon
receipt thereof, the Company shall, as promptly as practicable, and in any
event within ten (10) Business Days thereafter, execute or cause to be executed
and deliver or cause to be delivered to Holder a certificate or certificates
representing the aggregate number of full shares of Common Shares issuable upon
such exercise, as hereinafter provided. The share certificate or certificates
so delivered shall be, to the extent possible, in such denomination or
denominations as such Holder shall request in the notice and shall be
registered in the name of Holder or, if permitted by to Section 9, such other
name as shall be designated in the notice. This Warrant shall be deemed to have
been exercised and such certificate or certificates shall be deemed to have
been issued, and Holder or any other Person so designated to be named therein
shall be deemed to have
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<PAGE> 6
become a holder of record of such shares for all purposes, as of the date the
notice, together with the wire transfer and this Warrant, is received by the
Company as described above and all taxes required to be paid by Holder, if any,
pursuant to Section 2.3 prior to the issuance of such shares have been paid.
Notwithstanding any provision herein to the contrary, the Company shall not be
required to register shares in the name of any Person who acquired this Warrant
(or part hereof) or any Warrant Stock other than in accordance with this
Warrant.
2.2 COMMON SHARES PURCHASABLE UPON EXERCISE OF THE WARRANT
The number of Common Shares purchasable under this Warrant shall be
One Million (1,000,000), as such number may be adjusted in accordance with the
terms of this Warrant.
2.3. PAYMENT OF TAXES
All Common Shares issuable upon the exercise of this Warrant pursuant
to the terms hereof shall be validly issued, fully paid and nonassessable and
without any preemptive rights. The Company shall pay all expenses in connection
with, and all taxes and other governmental charges, if any, that may be imposed
with respect to, the issue or delivery thereof (other than income or similar
taxes imposed on a Holder). The Company shall not be required, however, to pay
any tax or other charge imposed in connection with any transfer involved in the
issue of any certificate for Common Shares issuable upon exercise of this
Warrant in any name other than that of Holder, and in such case the Company
shall not be required to issue or deliver any stock certificate until such tax
or other charge has been paid or it has been established to the satisfaction of
the Company that no such tax or other charge is due.
2.4. NO FRACTIONAL SHARES
The Company shall not issue a fractional Common Share upon exercise
of any Warrant. Any entitlement of the Holder to any fractional Common Share
shall be deemed to be canceled upon such exercise.
2.5. CONTINUED VALIDITY
A holder of Common Shares issued upon the exercise of this Warrant
(other than a holder who acquires such shares after the same have been publicly
sold pursuant to a prospectus under the Securities Act or otherwise distributed
to the public under such legislation or comparable legislation of any other
jurisdiction), shall continue to be entitled with respect to such shares to all
rights (subject to related obligations) to which it would have been entitled as
Holder under Sections 9, 10 and 14 of this Warrant. The Company will, at the
time of each
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<PAGE> 7
exercise of this Warrant, upon the request of the holder of the Common Shares
issued upon such exercise hereof, acknowledge in writing, in form reasonably
satisfactory to such holder, its continuing obligation to afford to such holder
all such rights; provided, however, that if such holder shall fail to make any
such request, such failure shall not affect the continuing obligation of the
Company to afford to such holder all such rights.
2.6. CONDITIONAL EXERCISE
The exercise of this Warrant may, at the Holder's election, be made
conditional upon the closing of the sale of the Warrant Shares pursuant to a
registered public offering thereof effected in accordance with the Registration
Rights Agreement referred to in Section 9.3 hereof.
3. TRANSFER, DIVISION AND COMBINATION
3.1. TRANSFER
Subject to compliance with Section 9, transfer of this Warrant and
all rights hereunder, in whole or in part, shall be registered on the books of
the Company to be maintained for such purpose, upon surrender of this Warrant
at the principal office of the Company referred to in Section 2.1 or the office
or agency designated by the Company pursuant to Section 12, together with a
written assignment of this Warrant substantially in the form of Exhibit B
hereto duly executed by Holder or its agent or attorney and funds sufficient to
pay any transfer taxes payable upon the making of such transfer. Upon such
surrender the Company shall, subject to Section 9, execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees and in the
denomination specified in such instrument of assignment, and shall issue to the
assignor a new Warrant evidencing the portion of this Warrant not so assigned,
and this Warrant shall promptly be canceled. A Warrant, if properly assigned in
compliance with Section 9, may be exercised by a new Holder for the purchase of
Common Shares without having a new Warrant issued.
3.2. DIVISION AND COMBINATION
Subject to Section 9, this Warrant may be divided or combined with
other Warrants upon presentation hereof at the aforesaid office or agency of
the Company, together with a written notice specifying the names and
denominations in which new Warrants are to be issued, signed by Holder or its
agent or attorney. Subject to compliance with Section 3.1 and with Section 9,
as to any transfer which may be involved in such division or combination, the
Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice.
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<PAGE> 8
3.3. EXPENSES
The Company shall prepare, issue and deliver at its own expense
(other than transfer taxes) the new Warrant or Warrants under this Section 3.
3.4. MAINTENANCE OF BOOKS
The Company agrees to maintain, at its aforesaid office or agency,
books for the registration and the registration of transfer of the Warrants.
4. ADJUSTMENTS
The number of Common Shares for which this Warrant is exercisable,
or the price at which such shares may be purchased upon exercise of this
Warrant, shall be subject to adjustment from time to time as set forth in this
Section 4. The Company shall give each Holder notice of any event described
below which requires an adjustment pursuant to this Section 4 at the time of
such event.
4.1. STOCK DIVIDENDS. SUBDIVISIONS AND COMBINATIONS
If at any time the Company shall:
(a) take a record of the holders of its Common Shares for the
purpose of entitling them to receive a dividend payable in, or other
distribution of Additional Common Shares,
(b) subdivide its outstanding Common Shares into a larger number of
Common Shares, or
(c) combine its outstanding Common Shares into a smaller number of
Common Shares,
then (i) the number of Common Shares for which this Warrant is exercisable
immediately after the occurrence of any such event shall be adjusted to equal
the number of Common Shares which a record holder of the same number of Common
Shares for which this Warrant is exercisable immediately prior to the
occurrence of such event would own or be entitled to receive after the
happening of such event, and (ii) the Current Warrant Price shall be adjusted
to equal the amount obtained by multiplying the Current Warrant Price by a
fraction, the numerator of which is the number of Common Shares for which this
Warrant is exercisable immediately prior to the adjustment and the denominator
of which is the number of shares for which this Warrant is exercisable
immediately after such adjustment.
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<PAGE> 9
4.2. CERTAIN OTHER DISTRIBUTIONS
If at any time the Company shall declare or pay any dividend on the
on the Common Shares or make a distribution on the Common Shares of:
(a) cash (other than a cash distribution or dividend payable out of
earnings or earned surplus legally available for the payment of dividends under
the laws of the jurisdiction of incorporation of the Company),
(b) any evidences of its indebtedness, any of its shares or any
other securities or property of any nature whatsoever (other than cash,
Convertible Securities or Additional Common Shares), or
(c) any warrants or other rights to subscribe for or purchase any
evidences of its indebtedness, any of its shares or any other securities or
property of any nature whatsoever (other than cash, Convertible Securities,
Additional Common Shares or rights pursuant to any shareholders' rights plans
of the Company),
then in each such event provision shall be made so that the Holder of this
Warrant shall receive upon exercise hereof, in addition to the number of Common
Shares issuable upon exercise hereof, the cash, securities or other property
which such Holder would have received as a dividend or distribution (other than
out of earnings or earned surplus legally available for the payment of
dividends under applicable law) if continuously since the Issuance Date such
Holder (i) had been the holder of record of the Common Shares issuable upon
such exercise and (ii) had retained all dividends in stock or other securities
(other than Common Shares or Convertible Securities) paid or payable in respect
of such Common Shares or in respect of any such securities so paid or payable
in respect of such securities so paid or payable as such dividends or
distributions. For purposes of this Section 4.2, a dividend or distribution
payable other than in cash shall be considered to be payable out of earnings or
earned surplus only to the extent that such earnings or earned surplus shall be
charged in an amount equal to the fair value of such dividend or distribution,
as determined by the Company's Board of Directors.
4.3. ISSUANCE OF ADDITIONAL COMMON SHARES
(a) If at any time the Company shall (except as hereinafter
provided) issue or sell any Additional Common Shares, other than Permitted
Issuances, for total consideration in an amount per Additional Common Share
less than the Current Stock Price, then the Current Warrant Price as to the
number of shares for which this Warrant is exercisable prior to such adjustment
shall be adjusted by multiplying such Current Warrant Price by a fraction, the
numerator of which shall be the sum of (i) the number of Common Shares
(including for purposes of this Section 4.3(a), all of the Common Shares
issuable upon exercise hereof)
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<PAGE> 10
Outstanding immediately prior to such issuance or sale of such Additional
Common Shares, multiplied by the Current Warrant Price in effect immediately
prior to such issuance or sale of such Additional Common Shares (the "Current
Value"), plus (ii) the total consideration received by the Company upon such
issuance or sale of such Additional Common Shares, and the denominator of which
shall be the sum of (x) the Current Value and (y) the total consideration which
would have been received by the Company upon such issuance or sale of
Additional Common Shares if they had been sold at the Current Stock Price.
(b) The provisions of paragraph (a) of Section 4.3 shall not
apply to any issuance of Additional Common Shares for which an adjustment is
provided under Section 4.1. No adjustment of the Current Warrant Price shall be
made under paragraph (a) of Section 4.3 upon the issuance of any Additional
Common Shares which are issued pursuant to the conversion or exchange rights in
any Convertible Securities, if any such adjustment shall previously have been
made upon the issuance of such Convertible Securities (or upon the issuance of
any option or other rights therefor) pursuant to Section 4.4 or Section 4.5.
4.4. ISSUANCE OF WARRANTS OR OTHER RIGHTS
If at any time the Company shall take a record of the holders of
its Common Shares for the purpose of entitling them to receive a distribution
of, or shall in any manner (whether directly or by assumption in a merger in
which the Company is the surviving corporation other than a merger described in
Section 4.8) issue or sell, any warrants or other rights to subscribe for or
purchase any Additional Common Shares or any Convertible Securities, other than
Permitted Issuances, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and the price per share for which
Common Shares are issuable upon the exercise of such warrants or other rights
or upon conversion or exchange of such Convertible Securities shall be less
than the Current Stock Price, then the Current Warrant Price shall be adjusted
as provided in Section 4.3 on the basis that the maximum number of Additional
Common Shares issuable pursuant to all such warrants or other rights or
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued and outstanding and the Company
shall have received all of the minimum consideration payable therefor, if any,
as of the date of the actual issuance of such warrants or other rights. No
additional adjustment of the Current Warrant Price shall be made upon the
actual issue of such Common Shares or of such Convertible Securities upon
exercise of such warrants or other rights or upon the actual issue of such
Common Shares upon such conversion or exchange of such Convertible Securities.
4.5. ISSUANCE OF CONVERTIBLE SECURITIES
If at any time the Company shall take a record of the holders of
its Common Shares for the purpose of entitling them to receive a distribution
of, or
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<PAGE> 11
shall in any manner (whether directly or by assumption in a merger in which the
Company is the surviving corporation other than a merger described in Section
4.8) issue or sell, any Convertible Securities, other than Permitted Issuances,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Shares are issuable upon
such conversion or exchange shall be less than the Current Stock Price, then
the Current Warrant Price shall be adjusted as provided in Section 4.3 on the
basis that the maximum number of Additional Common Shares necessary to effect
the conversion or exchange of all such Convertible Securities shall be deemed
to have been issued and outstanding and the Company shall have received all of
the consideration payable therefor, if any, as of the date of actual issuance
of such Convertible Securities. No additional adjustment of the Current Warrant
Price shall be made under this Section 4.5 upon the actual issue of any
Convertible Securities which are issued pursuant to the exercise of any
warrants or other subscription or purchase rights therefor, if any such
adjustment shall previously have been made upon the issuance of such warrants
or other rights pursuant to Section 4.4. No further adjustments of the Current
Warrant Price shall be made upon the actual issue of such Common Shares upon
conversion or exchange of such Convertible Securities and, if any issue or sale
of such Convertible Securities is made upon exercise of any warrant or other
right to subscribe for or to purchase any such Convertible Securities for which
adjustments of the Current Warrant Price has been or is to be made pursuant to
other provisions of this Section 4, no further adjustments of the number of
shares for which this Warrant is exercisable shall be made by reason of such
issue or sale.
4.6. SUPERSEDING ADJUSTMENT
If, at any time after any adjustment of the Current Warrant Price
shall have been made pursuant to Section 4.4 or Section 4.5 as the result of
any issuance of warrants, rights or Convertible Securities,
(a) such warrants or rights, or the right of conversion or
exchange in such other Convertible Securities, shall expire, and all or a
portion of such warrants or rights, or the right of conversion or exchange with
respect to all or a portion of such other Convertible Securities, as the case
may be, shall not have been exercised, or
(b) the consideration per share for which Common Shares are
issuable pursuant to such warrants or rights, or the terms of such other
Convertible Securities, shall be increased solely by virtue of provisions
therein contained for an automatic increase in such consideration per share
upon the occurrence of a specified date or event,
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<PAGE> 12
then such previous adjustment shall be rescinded and annulled. Thereupon, a
recomputation shall be made of the effect of such rights or options or other
Convertible Securities on the basis of
(c) treating the number of Additional Common Shares or other
property, if any, theretofore actually issued or issuable pursuant to the
previous exercise of any such warrants or rights or any such right of
conversion or exchange, as having been issued on the date or dates of any such
exercise and for the consideration actually received and receivable therefor,
and
(d) treating any such warrants or rights or any such other
Convertible Securities which then remain outstanding as having been granted or
issued immediately after the time of such increase of the consideration per
share for which Common Shares or other property are issuable under such
warrants or rights or other Convertible Securities, whereupon a new adjustment
of the Current Warrant Price shall be made, which new adjustment shall
supersede the previous adjustment so rescinded and annulled.
4.7. OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION
The following provisions shall be applicable to the making of
adjustments of the number of Common Shares for which this Warrant is
exercisable and the Current Warrant Price provided for in this Section 4:
(a) Computation of Consideration. To the extent that any
Additional Common Shares or any Convertible Securities or any warrants or other
rights to subscribe for or purchase any Additional Common Shares or any
Convertible Securities shall be issued for cash consideration, the consideration
received by the Company therefor shall be the amount of the cash received by
the Company therefor, or, if such Additional Common Shares or Convertible
Securities are offered by the Company for subscription, the subscription price,
or, if such Additional Common Shares or Convertible Securities are sold to
underwriters or dealers for public offering without a subscription offering,
the initial public offering price (in any such case subtracting any amounts
paid or receivable for accrued interest or accrued dividends and without taking
into account any compensation discounts or expenses paid or incurred by the
Company for and in the underwriting of, or otherwise in connection with, the
issuance thereof). To the extent that such issuance shall be for a
consideration other than cash, then, except as herein otherwise expressly
provided, the amount of such consideration shall be deemed to be the fair value
of such consideration at the time of such issuance as determined in good faith
by the Board of Directors of the Company. In case any Additional Common Shares
or any Convertible Securities or any warrants or other rights to subscribe for
or purchase such Additional Common Shares or Convertible Securities shall be
issued in connection with any merger in which the Company issues any
securities, the amount of consideration therefor shall be deemed to be the fair
value,
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<PAGE> 13
as determined in good faith by the Board of Directors of the Company, of such
portion of the assets and business of the nonsurviving corporation as such
Board in good faith shall determine to be attributable to such Additional
Common Shares, Convertible Securities, warrants or other rights, as the case
may be. The consideration for any Additional Common Shares issuable pursuant to
any warrants or other rights to subscribe for or purchase the same shall be the
consideration received by the Company for issuing such warrants or other rights
plus the additional minimum consideration payable to the Company upon exercise
of such warrants or other rights. The consideration for any Additional Common
Shares issuable pursuant to the terms of any Convertible Securities shall be
the consideration received by the Company for issuing warrants or other rights
to subscribe for or purchase such Convertible Securities, plus the minimum
consideration paid or payable to the Company in respect of the subscription for
or purchase of such Convertible Securities, plus the additional minimum
consideration, if any, payable to the Company upon the exercise of the right of
conversion or exchange in such Convertible Securities. In case of the issuance
at any time of any Additional Common Shares or Convertible Securities in
payment or satisfaction of any dividends upon any class of stock other than
Common Shares, the Company shall be deemed to have received for such Additional
Common Shares or Convertible Securities a consideration equal to the amount of
such dividend so paid or satisfied.
(b) When Adjustments to Be Made. The adjustments required by
this Section 4 shall be made whenever and as often as any specified event
requiring an adjustment shall occur, except that any adjustment of the number
of Common Shares for which this Warrant is exercisable that would otherwise be
required may be postponed (except in the case of a subdivision or combination
of the Common Shares, as provided for in Section 4.1) up to, but not beyond the
date of exercise if such adjustment either by itself or with other adjustments
not previously made adds or subtracts less than 1% of the Common Shares for
which this Warrant is exercisable immediately prior to the making of such
adjustment. Any adjustment representing a change of less than such minimum
amount (except as aforesaid) which is postponed shall be carried forward and
made as soon as such adjustment, together with other adjustments required by
this Section 4 and not previously made, would result in a minimum adjustment or
on the date of exercise. For the purpose of any adjustment, any specified event
shall be deemed to have occurred at the close of business on the date of its
occurrence.
(c) Fractional Interests. In computing adjustments under this
Section 4, fractional interests in Common Shares shall be taken into account to
the nearest 1/10th of a share.
(d) When Adjustment Not Required. If the Company shall take a
record of the holders of its Common Shares for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights and
shall,
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<PAGE> 14
thereafter and before the distribution to stockholders thereof, legally
abandon its plan to pay or deliver such dividend, distribution, subscription or
purchase rights, then thereafter no adjustment shall be required by reason of
the taking of such record and any such adjustment previously made in respect
thereof shall be rescinded and annulled.
4.8. REORGANIZATION. RECLASSIFICATION, MERGER, CONSOLIDATION OR
DISPOSITION OF ASSETS
In case the Company shall reorganize its capital, reclassify its
capital stock, consolidate or merge with or into another corporation (where the
Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Shares of the Company), or sell,
transfer or otherwise dispose of all or substantially all its property, assets
or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or
any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase rights) in
addition to or in lieu of common shares of the successor or acquiring
corporation ("Other Property"), are to be received by or distributed to the
holders of Common Shares of the Company, then each Holder shall have the right
thereafter to receive, upon exercise of such Warrant, the number of common
shares of the successor or acquiring corporation or of the Company, if it is
the surviving corporation, and Other Property receivable upon or as a result of
such reorganization, reclassification, merger, consolidation or disposition of
assets by a holder of the number of Common Shares for which this Warrant is
exercisable immediately prior to such event. In case of any such
reorganization, reclassification, merger, consolidation or disposition of
assets, the successor or acquiring corporation (if other than the Company)
shall expressly assume the due and punctual observance and performance of each
and every covenant and condition of this Warrant to be performed and observed
by the Company and all the obligations and liabilities hereunder, subject to
such modifications as may be deemed appropriate (as determined by resolution of
the Board of Directors of the Company) in order to provide for adjustments of
the Common Shares for which this Warrant is exercisable which shall be as
nearly equivalent as practicable to the adjustments provided for in this
Section 4. For purposes of this Section 4.8 "common shares of the successor or
acquiring corporation" shall include shares of such corporation of any class
which is not preferred as to dividends or assets over any other class of shares
of such corporation and which is not subject to redemption and shall also
include any evidences of indebtedness, shares or other securities which are
convertible into or exchangeable for any such shares, either immediately or
upon the arrival of a specified date or the happening of a specified event and
any warrants or other rights to subscribe for or purchase any such shares. The
foregoing provisions of this Section 4.8 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.
- 13 -
<PAGE> 15
4.9. OTHER ACTION AFFECTING COMMON SHARES
In case at any time or from time to time the Company shall take any
action in respect of its Common Shares, other than the payment of dividends
permitted by Section 4.2(a) or any other action described in this Section 4,
then, unless such action will not have an adverse effect upon the rights of the
Holders, the number of Common Shares or other shares for which this Warrant is
exercisable and/or the purchase price thereof shall be adjusted in such manner
as may be equitable in the circumstances.
4.10. CERTAIN LIMITATIONS
Notwithstanding anything herein to the contrary, the Company agrees
not to enter into any transaction which, by reason of any adjustment hereunder,
would cause the Current Warrant Price to be less than the par value per share
of the Common Shares.
5. NOTICES TO WARRANT HOLDERS
5.1. NOTICE OF ADJUSTMENTS
Whenever the number of Common Shares for which this Warrant is
exercisable, or whenever the price at which a Common Share may be purchased
upon exercise of the Warrants, shall be adjusted pursuant to Section 4, the
Company shall forthwith prepare a certificate to be executed by the chief
financial officer of the Company setting forth, in reasonable detail, the event
requiring the adjustment and the method by which such adjustment was calculated
(including a description of the basis on which the Board of Directors of the
Company determined the fair value of any evidences of indebtedness, shares,
other securities or property or warrants or other subscription or purchase
rights referred to in Section 4.2 or 4.7(a)), specifying the number of Common
Shares for which this Warrant is exercisable and (if such adjustment was made
pursuant to Section 4.8 or 4.9) describing the number and kind of any other
shares or Other Property for which this Warrant is exercisable, and any change
in the purchase price or prices thereof; after giving effect to such adjustment
or change. The Company shall promptly cause a signed copy of such certificate
to be delivered to each Holder in accordance with Section 14.2. The Company
shall keep at its office or agency designated pursuant to Section 12 copies of
all such certificates and cause the same to be available for inspection at said
office during normal business hours by any Holder or any prospective purchaser
of a Warrant designated by a Holder thereof.
- 14 -
<PAGE> 16
5.2. NOTICE OF CERTAIN CORPORATE ACTION
The Holder shall be entitled to the same rights to receive notice
of corporate action as any holder of Common Shares.
6. NO IMPAIRMENT
The Company shall not by any action including, without limitation,
amending 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 actions as may be necessary or appropriate to protect the rights of
Holder against impairment. Without limiting the generality of the foregoing,
the Company will (a) take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable Common Shares upon the exercise of this Warrant, and (b) use its
best efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be necessary to
enable the Company to perform its obligations under this Warrant.
Upon the request of Holder, the Company will at any time during the
period this Warrant is outstanding acknowledge in writing, in form reasonably
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
7. RESERVATION AND AUTHORIZATION OF COMMON SHARES: REGISTRATION WITH OR
APPROVAL OF ANY GOVERNMENTAL AUTHORITY
From and after the date hereof, the Company shall at all times
reserve and keep available for issue upon the exercise of Warrants such number
of its authorized but unissued Common Shares as will be sufficient to permit
the exercise in full of all outstanding Warrants. All Common Shares which shall
be so issuable, when issued upon exercise of any Warrant and paid for in
accordance with the terms of such Warrant, shall be duly and validly issued and
fully paid and nonassessable, and not subject to preemptive rights.
Before taking any action which would cause an adjustment reducing
the Current Warrant Price below the then par value per share of the Common
Shares issuable upon exercise of the Warrants, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and nonassessable Common Shares at such adjusted
Current Warrant Price.
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<PAGE> 17
Before taking any action which would result in an adjustment in the
number of Common Shares for which this Warrant is exercisable or in the Current
Warrant Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction in respect thereof.
If any Common Shares required to be reserved for issuance upon
exercise of Warrants require registration or qualification with any
governmental authority in the United States or any other jurisdiction
(otherwise than as provided in Section 9) or any stock exchange before such
shares may be so issued, the Company will in good faith and as expeditiously as
possible and at its expense endeavor to cause such shares to be duly
registered.
8. TAKING OF RECORD: SHARE AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by the Company
to the holders of its Common Shares with respect to which any provision of
Section 4 refers to the taking of a record of such holders, the Company will in
each such case take such a record as of the close of business on a Business
Day. The Company will not at any time, except upon dissolution, liquidation or
winding, up of the Company, close its stock transfer books or Warrant transfer
books so as to result in preventing or delaying the exercise or transfer of any
Warrant.
9. RESTRICTIONS ON TRANSFERABILITY
This Warrant shall not be transferred or assigned, in whole or in
part, without the prior written consent of the Company, except to a direct or
indirect subsidiary of Holder. In addition to obtaining such consent, no
transfer or assignment of this Warrant or the Warrant Shares shall be made
before satisfaction of the conditions specified in this Section 9, which
conditions are intended to ensure compliance with the provisions of the
Securities Act with respect to the Transfer of any Warrant and the Warrant
Shares. Holder, by acceptance of this Warrant, agrees to be bound by the
provisions of this Section 9.
9.1. RESTRICTIVE LEGEND
Except as otherwise provided in this Section 9, each certificate
for Warrant Shares initially issued upon the exercise of this Warrant, and each
certificate for Warrant Shares issued to any subsequent transferee of any such
certificate, shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act"), or
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<PAGE> 18
any state securities laws and cannot be offered, sold or transferred in
the absence of registration or the availability of an exemption from
registration under the Act, applicable state securities laws and
regulations promulgated thereunder."
9.2. PROPOSED TRANSFERS
Prior to any Transfer or attempted Transfer of any Warrants or any
Restricted Common Shares, the holder of such Warrants or Restricted Common
Shares shall obtain from counsel to such Holder an opinion reasonably
satisfactory to the Company and upon which it may rely that the proposed
Transfer of such Warrants or such Restricted Common Shares may be effected
without registration under the Securities Act. Each certificate, if any,
evidencing such Restricted Common Shares issued upon such Transfer shall bear
the restrictive legend set forth in Section 9.1, and each Warrant issued upon
such Transfer shall bear the restrictive legend set forth on the first page
hereof unless in the opinion of Holder's counsel, which opinion shall be
reasonably satisfactory to the Company and upon which it may rely, such legend
is not required in order to ensure compliance with the Securities Act.
9.3. REGISTRATION.
The Holders of the Warrants and Warrant Shares have rights to
request and obtain registration of such Warrant Shares as provided for in a
Registration Rights Agreement made at even date herewith between the Company
and CORESTAFF, Inc. to which reference is hereby made.
10. SUPPLYING INFORMATION
The Company shall cooperate with each Holder of a Warrant and each
holder of Restricted Common Shares in supplying such information as may be
reasonably necessary for such holder to complete and file any information
reporting forms presently or hereafter required by the Commission as a
condition to the availability of an exemption from the Securities Act for the
sale of any Warrant or Restricted Common Shares.
11. LOSS OR MUTILATION
Upon receipt by the Company from any Holder of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant and indemnity reasonably satisfactory to it (it
being understood that the written agreement of CORESTAFF, Inc. shall be
sufficient indemnity) and in case of mutilation upon surrender and cancellation
hereof, the Company will
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<PAGE> 19
execute and deliver in lieu hereof a new Warrant of
like tenor to such Holder; provided, in the case of mutilation, no indemnity
shall be required if this Warrant in identifiable form is surrendered to the
Company for cancellation.
12. OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the Company
shall maintain an office or agency (which may be the principal executive
offices of the Company) where the Warrants may be presented for exercise,
registration of transfer, division or combination as provided in this Warrant
and shall advise the holders of the Warrants of any change in such office or
agency.
13. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by Holder
to purchase Common Shares, and no enumeration herein of the rights or
privileges of Holder hereof, shall give rise to any liability of such Holder
for the purchase price of any Common Shares or as a stockholder of the Company,
whether such liability is asserted by the Company or by creditors of the
Company.
14. MISCELLANEOUS
14.1 NONWAIVER AND EXPENSES
No course of dealing or any delay or failure to exercise any right
hereunder on the part of Holder shall operate as a waiver of such right or
otherwise prejudice Holder's rights, powers or remedies. If the Company fails
to make, when due, any payments provided for hereunder, or fails to comply with
any other provision of this Warrant, the Company shall pay to Holder such
amounts as shall be sufficient to cover any costs and expenses including, but
not limited to, reasonable legal fees, including those of court proceedings,
incurred by Holder in collecting any amounts due pursuant hereto or in
otherwise enforcing any of its rights, powers and remedies hereunder. However,
if such court proceedings are unsuccessfully instituted by Holder against the
Company, then Holder shall pay to the Company such amount as shall be
sufficient to cover the costs and expenses, including reasonable legal fees, of
the Company in its defense in such court proceedings.
14.2. NOTICE GENERALLY
Any notice, demand, request, consent, approval, declaration,
delivery or other communication hereunder to be made pursuant to the provisions
of this Warrant shall be sufficiently given or made if in writing and either
delivered in
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<PAGE> 20
person with receipt acknowledged or sent by registered or certified mail,
return receipt requested, postage prepaid or by telecopier or other form of
facsimile transmission, addressed as follows:
(a) If to the Company:
Citadel Computer Systems Incorporated
3811 Turtle Creek Boulevard, Suite 600
Dallas, TX 75219
Facsimile number: (214) 520-0034
Telephone number: (214) 520-9292
Attention: Steven B. Solomon,
President and Chief Executive Officer
With a copy to:
Wood, Exall & Bonnet, L.L.P.
12222 Merit Drive, Suite 880
Dallas, TX 75251
Facsimile number: (972) 991-9261
Telephone number: (972) 991-8510
Attention: David Wood, Esq.
If to Holder:
CORESTAFF, Inc.
4400 Post Oak Parkway, Suite 2000
Houston, TX 77027
Facsimile number: (281) 602-3430
Telephone number: (713) 548-3485
Attention: Kenneth R. Johnsen
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<PAGE> 21
With a copy to:
Peter T. Dameris, Esq.
CORESTAFF, Inc.
4400 Post Oak Parkway, Suite 1130
Houston, TX 77027
Tel No.: (713) 548-3400
Fax No.: (713) 627-1059
or in either case at such other address as may be substituted by notice given
as herein provided. The giving of any notice required hereunder may be waived
in writing by the party entitled to receive such notice. Every notice, demand,
request, consent, approval, declaration, delivery or other communication
hereunder shall be deemed to have been duly given or served on the date on
which personally delivered, with receipt acknowledged, or three (3) Business
Days after the same shall have been deposited in the United States mail or on
the day on which received if given by telecopier or other form of facsimile
transmission or on the next Business Day if received after normal business
hours of the recipient party. Failure or delay in delivering copies of any
notice, demand, request, approval, declaration, delivery or other communication
to the person designated above to receive a copy shall in no way adversely
affect the effectiveness of such notice, demand, request, approval,
declaration, delivery or other communication.
14.3. REMEDIES
Each holder of Warrant and Warrant Shares, in addition to being
entitled to exercise all rights granted by law, including recovery of damages,
will be entitled to specific performance of its rights under this Warrant.
14.4. SUCCESSORS AND ASSIGNS
Subject to the provisions of Section 3.1, this Warrant and the
rights evidenced hereby shall inure to the benefit of and be binding upon the
successors of the Company and the successors and assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant, and shall be enforceable by any such Holder.
14.5. AMENDMENT
This Warrant and all other Warrants may be modified or amended or
the provisions hereof waived with the written consent of the Company and the
Majority Holders, provided that no such Warrant may be modified or amended to
reduce the number of shares of Common Shares for which such Warrant is
- 20 -
<PAGE> 22
exercisable (before giving effect to any adjustment as provided therein)
without the prior written consent of the Holder thereof.
14.6 SEVERABILITY
Wherever possible, each provision of this Warrant shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Warrant shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Warrant.
14.7. HEADINGS
The headings used in this Warrant are for the convenience of
reference only and shall not, for any purpose, be considered in the
interpretation of this Warrant.
14.8. GOVERNING LAW
This Warrant shall be governed by the laws of the State of
Delaware, without regard to the provisions thereof relating to conflict of laws.
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<PAGE> 23
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and attested by its Secretary or an Assistant Secretary.
Dated: October 6, 1997 CITADEL COMPUTER SYSTEMS
INCORPORATED
By: /s/ Steven B. Solomon
------------------------------------
Steven B. Solomon
President and Chief
Executive Officer
Accepted and Agreed To:
CORESTAFF, INC.
By: /s/ Peter T. Dameris
---------------------------------------
Peter T. Dameris
Senior Vice President, General Counsel
and Secretary
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<PAGE> 24
EXHIBIT A
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably
exercises this Warrant for the purchase of Common Shares of Citadel Computer
Systems Incorporated, and herewith makes payment therefor, all at the price and
on the terms and conditions specified in this Warrant and requests that
certificates for the Common Shares hereby purchased (and any securities or
other property issuable upon such exercise) be issued in the name of and
delivered to _________________________ whose address is ______________________.
---------------------------------
(Name of Registered Owner)
---------------------------------
(Signature of Registered Owner)
---------------------------------
(Street Address)
---------------------------------
(City) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with the name as
written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE> 25
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
Common Shares set forth below:
Name and Address of Assignee No. of Common Shares
and does hereby irrevocably constitute and appoint attorney-in-fact to register
such transfer on the books of Citadel Computer Systems Incorporated maintained
for the purpose, with full power of substitution in the premises.
Dated: Print Name:
-------------------- ------------------------
Signature:
-------------------------
Witness:
---------------------------
NOTICE: (1) The signature on this assignment must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
(2) The sale, transfer or assignment of this Warrant shall not be
effective, unless made in full compliance with Section 9 hereof.
<PAGE> 1
EXHIBIT 99(c)
WARRANT
TO PURCHASE COMMON SHARES OF
CITADEL COMPUTER SYSTEMS INCORPORATED
Warrant No. II
No. of Common Shares: 1,000,000
<PAGE> 2
THIS WARRANT AND THE SHARES OF COMMON SHARES PURCHASABLE HEREUNDER HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
ANY STATE SECURITIES LAWS AND CANNOT BE OFFERED, SOLD OR TRANSFERRED IN THE
ABSENCE OF REGISTRATION OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION
UNDER THE ACT, APPLICABLE STATE SECURITIES LAWS AND REGULATIONS PROMULGATED
THEREUNDER. THE TRANSFERABILITY OF THE WARRANT ALSO IS RESTRICTED AS PROVIDED
IN SECTION 9 HEREOF.
No. of Common Shares: 1,000,000 Warrant No. 2
October 6, 1997
WARRANT
TO PURCHASE COMMON SHARES OF
CITADEL COMPUTER SYSTEMS INCORPORATED
THIS IS TO CERTIFY THAT CORESTAFF, INC. or registered
assigns, is entitled, during the Exercise Period (as hereinafter defined), to
purchase from Citadel Computer Systems Incorporated, a Delaware corporation
(the "Company"), One Million (1,000,000) Common Shares (as hereinafter defined
and subject to adjustment as provided herein), at a purchase price of Five
Dollars ($5.00) per share, all on the terms and conditions and pursuant to the
provisions hereinafter set forth.
1. DEFINITIONS
As used in this Warrant, the following terms have the
respective meanings set forth below:
"ADDITIONAL COMMON SHARES" means all Common Shares of any
class issued by the Company after the date hereof, other than Warrant Shares.
"AFFILIATE" of a Person means a Person Controlled By,
Controlling or Under Common Control with such Person.
"BUSINESS DAY" means any day that is not a Saturday or Sunday
or a day on which banks are generally closed for business in the State of
Connecticut.
"COMMISSION" means the United States Securities and Exchange
Commission or any other agency then administering the Securities Act and other
securities laws.
<PAGE> 3
"COMMON SHARES" means (except where the context otherwise
indicates) shares of the common stock, par value $.01 per share, of the Company
as constituted on the date hereof, and any shares into which such Common Shares
may thereafter be changed, and shall also include (i) shares of the Company of
any other class (regardless of how denominated) issued to the holders of shares
of any class of Common Shares upon any reclassification thereof which is also
not preferred as to dividends or assets over any other class of shares of the
Company and which is not subject to redemption and (ii) common shares of any
successor or acquiring corporation (as defined in Section 4.8) received by or
distributed to the holders of any class of Common Shares of the Company in the
circumstances contemplated by Section 4.8.
"CONTROLLED BY" or "CONTROLLING" or "UNDER COMMON CONTROL"
shall mean possession, directly or indirectly, of power to direct or cause
direction of management or policies (whether through ownership of voting
securities, by contract or otherwise).
"CONVERTIBLE SECURITIES" means evidences of indebtedness,
shares or other securities which are convertible into or exchangeable, with or
without payment of additional consideration in cash or property, for Additional
Common Shares, either immediately or upon the occurrence of a specified date or
a specified event.
"CURRENT STOCK PRICE" means the average of the high and low
price of the Common Shares in the Company's trading market over the last 20
trading days prior to the date in question.
"CURRENT WARRANT PRICE" in respect of a Common Share, means
$5.00, as adjusted after the Issuance Date in accordance with the provisions of
this Warrant.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"EXERCISE DATE" means the Issuance Date.
"EXERCISE PERIOD" means the period during which this Warrant
is exercisable pursuant to Section 2.1.
"EXPIRATION DATE" means the tenth anniversary of the Issuance
Date.
"GAAP" means generally accepted accounting principles, applied
on a consistent basis.
"HOLDER" means the Person in whose name the Warrant is
registered on the books of the Company maintained for such purpose.
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"ISSUANCE DATE" means the date of this Warrant.
"MAJORITY HOLDERS" means the holders of Warrants exercisable
for more than 50% of the aggregate number of Common Shares purchasable upon
exercise of all Warrants, whether or not then exercisable.
"OTHER PROPERTY" has the meaning set forth in Section 4.8.
"OUTSTANDING" means, when used with reference to Common
Shares, at any date as of which the number of shares thereof is to be
determined, all issued shares of Common Shares, except Common Shares then owned
or held by or for the account of the Company or any subsidiary thereof, and
shall include all Common Shares issuable in respect of outstanding scrip or any
certificates representing fractional interests in shares of Common Shares and
shall also include all Common Shares issuable upon conversion or exercise of
securities convertible or exercisable for Common Shares, if such securities are
issued at any date as of which the number of Common Shares is to be determined,
excluding any such securities then owned or held by or for the account of the
Company or any subsidiary thereof.
"PERMITTED ISSUANCES" means (i) Common Shares issued upon
exercise of this Warrant, (ii) Common Shares issued to employees and directors
of the Company or its subsidiaries pursuant to any stock purchase, stock
ownership, stock bonus or stock option plans heretofore or hereafter duly
adopted or assumed by the Company or any subsidiary thereof, (iii) Common
Shares issued pursuant to any dividend reinvestment plan heretofore or
hereafter duly adopted or assumed by the Company, (iv) Common Shares issued by
the Company in connection with the conversion of Convertible Securities
outstanding on the date of the Purchase Agreement, (v) other Common Shares
which may become issuable pursuant to the exercise of certain warrants to
purchase up to 500,000 shares at $3 per share that may be granted to Novell
Inc. as disclosed to CORESTAFF, and (vi) 500,000 Common Shares which may become
issuable pursuant to stock options issued to employees.
"PERSON" means any individual, sole proprietorship,
partnership, joint venture, trust, incorporated organization, association,
corporation, institution, public benefit corporation, entity or government
(whether federal, state, county, city, municipal or otherwise, including,
without limitation, any instrumentality, division, agency, body or department
thereof).
"RESTRICTED COMMON SHARES" shall mean Common Shares which
are, or which upon their issuance on the exercise of this Warrant would be,
evidenced by a certificate bearing the restrictive legend set forth in Section
9.1.
"SECURITIES ACT" means the Securities Act of 1933, as
amended, and the rules and regulations thereunder, all as the same shall be in
effect at the time.
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"TRANSFER" means any disposition of any Warrant or of any
interest thereof, with or without consideration.
"WARRANTS" means this Warrant and all Warrants issued upon
transfer, division or combination of, or in substitution for, any thereof in
accordance with the terms of this Warrant. All Warrants shall at all times be
identical as to terms and conditions and date, except as to the number of
Common Shares for which they may be exercised.
"WARRANT PRICE" means an amount equal to (i) the number of
Common Shares being purchased upon exercise of this Warrant pursuant to Section
2.1, multiplied by (ii) the Current Warrant Price as of the date of such
exercise.
"WARRANT SHARES" means the Common Shares purchased by the
holders of the Warrants upon the exercise thereof.
2. EXERCISE OF WARRANT
2. 1. MANNER OF EXERCISE
From and after the Exercise Date and until 5:00 P.M., Dallas
time, on the Expiration Date, Holder may exercise this Warrant, on any Business
Day, for all (but not less than all) of the number of Common Shares purchasable
hereunder as specified in Section 2.2 hereof.
In order to exercise this Warrant, Holder shall deliver to
the Company at its principal office at 3811 Turtle Creek Boulevard, Suite 600,
Dallas, Texas 75219 or at the office or agency designated by the Company
pursuant to Section 12, (i) a written notice of Holder's election to exercise
this Warrant, which notice shall specify the number of Common Shares to be
purchased, (ii) payment of the Warrant Price by Holder's wire transfer of
immediately available funds and (iii) this Warrant. Such notice shall be
substantially in the form of the subscription form appearing at the end of this
Warrant as Exhibit A, duly executed by Holder or its agent or attorney. Upon
receipt thereof, the Company shall, as promptly as practicable, and in any
event within ten (10) Business Days thereafter, execute or cause to be executed
and deliver or cause to be delivered to Holder a certificate or certificates
representing the aggregate number of full shares of Common Shares issuable upon
such exercise, as hereinafter provided. The share certificate or certificates
so delivered shall be, to the extent possible, in such denomination or
denominations as such Holder shall request in the notice and shall be
registered in the name of Holder or, if permitted by to Section 9, such other
name as shall be designated in the notice. This Warrant shall be deemed to have
been exercised and such certificate or certificates shall be deemed to have
been issued, and Holder or any other Person so designated to be named therein
shall be deemed to have
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become a holder of record of such shares for all purposes, as of the date the
notice, together with the wire transfer and this Warrant, is received by the
Company as described above and all taxes required to be paid by Holder, if any,
pursuant to Section 2.3 prior to the issuance of such shares have been paid.
Notwithstanding any provision herein to the contrary, the Company shall not be
required to register shares in the name of any Person who acquired this Warrant
(or part hereof) or any Warrant Stock other than in accordance with this
Warrant.
2.2 COMMON SHARES PURCHASABLE UPON EXERCISE OF THE WARRANT
The number of Common Shares purchasable under this Warrant
shall be One Million (1,000,000), as such number may be adjusted in accordance
with the terms of this Warrant.
2.3. PAYMENT OF TAXES
All Common Shares issuable upon the exercise of this Warrant
pursuant to the terms hereof shall be validly issued, fully paid and
nonassessable and without any preemptive rights. The Company shall pay all
expenses in connection with, and all taxes and other governmental charges, if
any, that may be imposed with respect to, the issue or delivery thereof (other
than income or similar taxes imposed on a Holder). The Company shall not be
required, however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for Common Shares
issuable upon exercise of this Warrant in any name other than that of Holder,
and in such case the Company shall not be required to issue or deliver any
stock certificate until such tax or other charge has been paid or it has been
established to the satisfaction of the Company that no such tax or other charge
is due.
2.4. NO FRACTIONAL SHARES
The Company shall not issue a fractional Common Share upon
exercise of any Warrant. Any entitlement of the Holder to any fractional Common
Share shall be deemed to be canceled upon such exercise.
2.5. CONTINUED VALIDITY
A holder of Common Shares issued upon the exercise of this
Warrant (other than a holder who acquires such shares after the same have been
publicly sold pursuant to a prospectus under the Securities Act or otherwise
distributed to the public under such legislation or comparable legislation of
any other jurisdiction), shall continue to be entitled with respect to such
shares to all rights (subject to related obligations) to which it would have
been entitled as Holder under Sections 9, 10 and 14 of this Warrant. The
Company will, at the time of each
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exercise of this Warrant, upon the request of the holder of the Common Shares
issued upon such exercise hereof, acknowledge in writing, in form reasonably
satisfactory to such holder, its continuing obligation to afford to such holder
all such rights; provided, however, that if such holder shall fail to make any
such request, such failure shall not affect the continuing obligation of the
Company to afford to such holder all such rights.
2.6. CONDITIONAL EXERCISE
The exercise of this Warrant may, at the Holder's election,
be made conditional upon the closing of the sale of the Warrant Shares pursuant
to a registered public offering thereof effected in accordance with the
Registration Rights Agreement referred to in Section 9.3 hereof.
3. TRANSFER, DIVISION AND COMBINATION
3.1. TRANSFER
Subject to compliance with Section 9, transfer of this
Warrant and all rights hereunder, in whole or in part, shall be registered on
the books of the Company to be maintained for such purpose, upon surrender of
this Warrant at the principal office of the Company referred to in Section 2.1
or the office or agency designated by the Company pursuant to Section 12,
together with a written assignment of this Warrant substantially in the form of
Exhibit B hereto duly executed by Holder or its agent or attorney and funds
sufficient to pay any transfer taxes payable upon the making of such transfer.
Upon such surrender the Company shall, subject to Section 9, execute and
deliver a new Warrant or Warrants in the name of the assignee or assignees and
in the denomination specified in such instrument of assignment, and shall issue
to the assignor a new Warrant evidencing the portion of this Warrant not so
assigned, and this Warrant shall promptly be canceled. A Warrant, if properly
assigned in compliance with Section 9, may be exercised by a new Holder for the
purchase of Common Shares without having a new Warrant issued.
3.2. DIVISION AND COMBINATION
Subject to Section 9, this Warrant may be divided or combined
with other Warrants upon presentation hereof at the aforesaid office or agency
of the Company, together with a written notice specifying the names and
denominations in which new Warrants are to be issued, signed by Holder or its
agent or attorney. Subject to compliance with Section 3.1 and with Section 9,
as to any transfer which may be involved in such division or combination, the
Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice.
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3.3. EXPENSES
The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under this
Section 3.
3.4. MAINTENANCE OF BOOKS
The Company agrees to maintain, at its aforesaid office or
agency, books for the registration and the registration of transfer of the
Warrants.
4. ADJUSTMENTS
The number of Common Shares for which this Warrant is
exercisable, or the price at which such shares may be purchased upon exercise
of this Warrant, shall be subject to adjustment from time to time as set forth
in this Section 4. The Company shall give each Holder notice of any event
described below which requires an adjustment pursuant to this Section 4 at the
time of such event.
4. 1. STOCK DIVIDENDS. SUBDIVISIONS AND COMBINATIONS
If at any time the Company shall:
(a) take a record of the holders of its Common Shares for
the purpose of entitling them to receive a dividend payable in, or other
distribution of Additional Common Shares,
(b) subdivide its outstanding Common Shares into a larger
number of Common Shares, or
(c) combine its outstanding Common Shares into a smaller
number of Common Shares,
then (i) the number of Common Shares for which this Warrant is exercisable
immediately after the occurrence of any such event shall be adjusted to equal
the number of Common Shares which a record holder of the same number of Common
Shares for which this Warrant is exercisable immediately prior to the
occurrence of such event would own or be entitled to receive after the
happening of such event, and (ii) the Current Warrant Price shall be adjusted
to equal the amount obtained by multiplying the Current Warrant Price by a
fraction, the numerator of which is the number of Common Shares for which this
Warrant is exercisable immediately prior to the adjustment and the denominator
of which is the number of shares for which this Warrant is exercisable
immediately after such adjustment.
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<PAGE> 9
4.2. CERTAIN OTHER DISTRIBUTIONS
If at any time the Company shall declare or pay any dividend
on the Common Shares or make a distribution on the Common Shares of:
(a) cash (other than a cash distribution or dividend payable
out of earnings or earned surplus legally available for the payment of
dividends under the laws of the jurisdiction of incorporation of the Company),
(b) any evidences of its indebtedness, any of its shares or
any other securities or property of any nature whatsoever (other than cash,
Convertible Securities or Additional Common Shares), or
(c) any warrants or other rights to subscribe for or purchase
any evidences of its indebtedness, any of its shares or any other securities or
property of any nature whatsoever (other than cash, Convertible Securities,
Additional Common Shares or rights pursuant to any shareholders' rights plans
of the Company),
then in each such event provision shall be made so that the Holder of this
Warrant shall receive upon exercise hereof, in addition to the number of Common
Shares issuable upon exercise hereof, the cash, securities or other property
which such Holder would have received as a dividend or distribution (other than
out of earnings or earned surplus legally available for the payment of
dividends under applicable law) if continuously since the Issuance Date such
Holder (i) had been the holder of record of the Common Shares issuable upon
such exercise and (ii) had retained all dividends in stock or other securities
(other than Common Shares or Convertible Securities) paid or payable in respect
of such Common Shares or in respect of any such securities so paid or payable
in respect of such securities so paid or payable as such dividends or
distributions. For purposes of this Section 4.2, a dividend or distribution
payable other than in cash shall be considered to be payable out of earnings or
earned surplus only to the extent that such earnings or earned surplus shall be
charged in an amount equal to the fair value of such dividend or distribution,
as determined by the Company's Board of Directors.
4.3. ISSUANCE OF ADDITIONAL COMMON SHARES
(a) If at any time the Company shall (except as hereinafter
provided) issue or sell any Additional Common Shares, other than Permitted
Issuances, for total consideration in an amount per Additional Common Share
less than the Current Stock Price, then the Current Warrant Price as to the
number of shares for which this Warrant is exercisable prior to such adjustment
shall be adjusted by multiplying such Current Warrant Price by a fraction, the
numerator of which shall be the sum of (i) the number of Common Shares
(including for purposes of this Section 4.3(a), all of the Common Shares
issuable upon exercise hereof)
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<PAGE> 10
Outstanding immediately prior to such issuance or sale of such Additional
Common Shares, multiplied by the Current Warrant Price in effect immediately
prior to such issuance or sale of such Additional Common Shares (the "Current
Value"), plus (ii) the total consideration received by the Company upon such
issuance or sale of such Additional Common Shares, and the denominator of which
shall be the sum of (x) the Current Value and (y) the total consideration which
would have been received by the Company upon such issuance or sale of
Additional Common Shares if they had been sold at the Current Stock Price.
(b) The provisions of paragraph (a) of Section 4.3 shall not
apply to any issuance of Additional Common Shares for which an adjustment is
provided under Section 4.1. No adjustment of the Current Warrant Price shall be
made under paragraph (a) of Section 4.3 upon the issuance of any Additional
Common Shares which are issued pursuant to the conversion or exchange rights in
any Convertible Securities, if any such adjustment shall previously have been
made upon the issuance of such Convertible Securities (or upon the issuance of
any option or other rights therefor) pursuant to Section 4.4 or Section 4.5.
4.4. ISSUANCE OF WARRANTS OR OTHER RIGHTS
If at any time the Company shall take a record of the holders
of its Common Shares for the purpose of entitling them to receive a
distribution of, or shall in any manner (whether directly or by assumption in a
merger in which the Company is the surviving corporation other than a merger
described in Section 4.8) issue or sell, any warrants or other rights to
subscribe for or purchase any Additional Common Shares or any Convertible
Securities, other than Permitted Issuances, whether or not the rights to
exchange or convert thereunder are immediately exercisable, and the price per
share for which Common Shares are issuable upon the exercise of such warrants
or other rights or upon conversion or exchange of such Convertible Securities
shall be less than the Current Stock Price, then the Current Warrant Price
shall be adjusted as provided in Section 4.3 on the basis that the maximum
number of Additional Common Shares issuable pursuant to all such warrants or
other rights or necessary to effect the conversion or exchange of all such
Convertible Securities shall be deemed to have been issued and outstanding and
the Company shall have received all of the minimum consideration payable
therefor, if any, as of the date of the actual issuance of such warrants or
other rights. No additional adjustment of the Current Warrant Price shall be
made upon the actual issue of such Common Shares or of such Convertible
Securities upon exercise of such warrants or other rights or upon the actual
issue of such Common Shares upon such conversion or exchange of such
Convertible Securities.
4.5. ISSUANCE OF CONVERTIBLE SECURITIES
If at any time the Company shall take a record of the holders
of its Common Shares for the purpose of entitling them to receive a
distribution of, or
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<PAGE> 11
shall in any manner (whether directly or by assumption in a merger in which the
Company is the surviving corporation other than a merger described in Section
4.8) issue or sell, any Convertible Securities, other than Permitted Issuances,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Shares are issuable upon
such conversion or exchange shall be less than the Current Stock Price, then
the Current Warrant Price shall be adjusted as provided in Section 4.3 on the
basis that the maximum number of Additional Common Shares necessary to effect
the conversion or exchange of all such Convertible Securities shall be deemed
to have been issued and outstanding and the Company shall have received all of
the consideration payable therefor, if any, as of the date of actual issuance
of such Convertible Securities. No additional adjustment of the Current Warrant
Price shall be made under this Section 4.5 upon the actual issue of any
Convertible Securities which are issued pursuant to the exercise of any
warrants or other subscription or purchase rights therefor, if any such
adjustment shall previously have been made upon the issuance of such warrants
or other rights pursuant to Section 4.4. No further adjustments of the Current
Warrant Price shall be made upon the actual issue of such Common Shares upon
conversion or exchange of such Convertible Securities and, if any issue or sale
of such Convertible Securities is made upon exercise of any warrant or other
right to subscribe for or to purchase any such Convertible Securities for which
adjustments of the Current Warrant Price has been or is to be made pursuant to
other provisions of this Section 4, no further adjustments of the number of
shares for which this Warrant is exercisable shall be made by reason of such
issue or sale.
4.6. SUPERSEDING ADJUSTMENT
If, at any time after any adjustment of the Current Warrant
Price shall have been made pursuant to Section 4.4 or Section 4.5 as the result
of any issuance of warrants, rights or Convertible Securities,
(a) such warrants or rights, or the right of conversion or
exchange in such other Convertible Securities, shall expire, and all or a
portion of such warrants or rights, or the right of conversion or exchange with
respect to all or a portion of such other Convertible Securities, as the case
may be, shall not have been exercised, or
(b) the consideration per share for which Common Shares are
issuable pursuant to such warrants or rights, or the terms of such other
Convertible Securities, shall be increased solely by virtue of provisions
therein contained for an automatic increase in such consideration per share
upon the occurrence of a specified date or event,
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<PAGE> 12
then such previous adjustment shall be rescinded and annulled. Thereupon, a
recomputation shall be made of the effect of such rights or options or other
Convertible Securities on the basis of
(c) treating the number of Additional Common Shares or other
property, if any, theretofore actually issued or issuable pursuant to the
previous exercise of any such warrants or rights or any such right of
conversion or exchange, as having been issued on the date or dates of any such
exercise and for the consideration actually received and receivable therefor,
and
(d) treating any such warrants or rights or any such other
Convertible Securities which then remain outstanding as having been granted or
issued immediately after the time of such increase of the consideration per
share for which Common Shares or other property are issuable under such
warrants or rights or other Convertible Securities, whereupon a new adjustment
of the Current Warrant Price shall be made, which new adjustment shall
supersede the previous adjustment so rescinded and annulled.
4.7. OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION
The following provisions shall be applicable to the making of
adjustments of the number of Common Shares for which this Warrant is
exercisable and the Current Warrant Price provided for in this Section 4:
(a) Computation of Consideration. To the extent that any
Additional Common Shares or any Convertible Securities or any warrants or other
rights to subscribe for or purchase any Additional Common Shares or any
Convertible Securities shall be issued for cash consideration, the
consideration received by the Company therefor shall be the amount of the cash
received by the Company therefor, or, if such Additional Common Shares or
Convertible Securities are offered by the Company for subscription, the
subscription price, or, if such Additional Common Shares or Convertible
Securities are sold to underwriters or dealers for public offering without a
subscription offering, the initial public offering price (in any such case
subtracting any amounts paid or receivable for accrued interest or accrued
dividends and without taking into account any compensation discounts or
expenses paid or incurred by the Company for and in the underwriting of, or
otherwise in connection with, the issuance thereof). To the extent that such
issuance shall be for a consideration other than cash, then, except as herein
otherwise expressly provided, the amount of such consideration shall be deemed
to be the fair value of such consideration at the time of such issuance as
determined in good faith by the Board of Directors of the Company. In case any
Additional Common Shares or any Convertible Securities or any warrants or other
rights to subscribe for or purchase such Additional Common Shares or
Convertible Securities shall be issued in connection with any merger in which
the Company issues any securities, the amount of consideration therefor shall
be deemed to be the fair value,
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as determined in good faith by the Board of Directors of the Company, of such
portion of the assets and business of the nonsurviving corporation as such
Board in good faith shall determine to be attributable to such Additional
Common Shares, Convertible Securities, warrants or other rights, as the case
may be. The consideration for any Additional Common Shares issuable pursuant to
any warrants or other rights to subscribe for or purchase the same shall be the
consideration received by the Company for issuing such warrants or other rights
plus the additional minimum consideration payable to the Company upon exercise
of such warrants or other rights. The consideration for any Additional Common
Shares issuable pursuant to the terms of any Convertible Securities shall be
the consideration received by the Company for issuing warrants or other rights
to subscribe for or purchase such Convertible Securities, plus the minimum
consideration paid or payable to the Company in respect of the subscription for
or purchase of such Convertible Securities, plus the additional minimum
consideration, if any, payable to the Company upon the exercise of the right of
conversion or exchange in such Convertible Securities. In case of the issuance
at any time of any Additional Common Shares or Convertible Securities in
payment or satisfaction of any dividends upon any class of stock other than
Common Shares, the Company shall be deemed to have received for such Additional
Common Shares or Convertible Securities a consideration equal to the amount of
such dividend so paid or satisfied.
(b) When Adjustments to Be Made. The adjustments required by
this Section 4 shall be made whenever and as often as any specified event
requiring an adjustment shall occur, except that any adjustment of the number
of Common Shares for which this Warrant is exercisable that would otherwise be
required may be postponed (except in the case of a subdivision or combination
of the Common Shares, as provided for in Section 4.1) up to, but not beyond the
date of exercise if such adjustment either by itself or with other adjustments
not previously made adds or subtracts less than 1% of the Common Shares for
which this Warrant is exercisable immediately prior to the making of such
adjustment. Any adjustment representing a change of less than such minimum
amount (except as aforesaid) which is postponed shall be carried forward and
made as soon as such adjustment, together with other adjustments required by
this Section 4 and not previously made, would result in a minimum adjustment or
on the date of exercise. For the purpose of any adjustment, any specified event
shall be deemed to have occurred at the close of business on the date of its
occurrence.
(c) Fractional Interests. In computing adjustments under this
Section 4, fractional interests in Common Shares shall be taken into account to
the nearest 1/10th of a share.
(d) When Adjustment Not Required. If the Company shall take a
record of the holders of its Common Shares for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights and
shall,
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thereafter and before the distribution to stockholders thereof, legally
abandon its plan to pay or deliver such dividend, distribution, subscription or
purchase rights, then thereafter no adjustment shall be required by reason of
the taking of such record and any such adjustment previously made in respect
thereof shall be rescinded and annulled.
4.8. REORGANIZATION. RECLASSIFICATION, MERGER, CONSOLIDATION OR
DISPOSITION OF ASSETS
In case the Company shall reorganize its capital, reclassify
its capital stock, consolidate or merge with or into another corporation (where
the Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Shares of the Company), or sell,
transfer or otherwise dispose of all or substantially all its property, assets
or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or
any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase rights) in
addition to or in lieu of common shares of the successor or acquiring
corporation ("Other Property"), are to be received by or distributed to the
holders of Common Shares of the Company, then each Holder shall have the right
thereafter to receive, upon exercise of such Warrant, the number of common
shares of the successor or acquiring corporation or of the Company, if it is
the surviving corporation, and Other Property receivable upon or as a result of
such reorganization, reclassification, merger, consolidation or disposition of
assets by a holder of the number of Common Shares for which this Warrant is
exercisable immediately prior to such event. In case of any such
reorganization, reclassification, merger, consolidation or disposition of
assets, the successor or acquiring corporation (if other than the Company)
shall expressly assume the due and punctual observance and performance of each
and every covenant and condition of this Warrant to be performed and observed
by the Company and all the obligations and liabilities hereunder, subject to
such modifications as may be deemed appropriate (as determined by resolution of
the Board of Directors of the Company) in order to provide for adjustments of
the Common Shares for which this Warrant is exercisable which shall be as
nearly equivalent as practicable to the adjustments provided for in this
Section 4. For purposes of this Section 4.8 "common shares of the successor or
acquiring corporation" shall include shares of such corporation of any class
which is not preferred as to dividends or assets over any other class of shares
of such corporation and which is not subject to redemption and shall also
include any evidences of indebtedness, shares or other securities which are
convertible into or exchangeable for any such shares, either immediately or
upon the arrival of a specified date or the happening of a specified event and
any warrants or other rights to subscribe for or purchase any such shares. The
foregoing provisions of this Section 4.8 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.
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4.9. OTHER ACTION AFFECTING COMMON SHARES
In case at any time or from time to time the Company shall
take any action in respect of its Common Shares, other than the payment of
dividends permitted by Section 4.2(a) or any other action described in this
Section 4, then, unless such action will not have an adverse effect upon the
rights of the Holders, the number of Common Shares or other shares for which
this Warrant is exercisable and/or the purchase price thereof shall be adjusted
in such manner as may be equitable in the circumstances.
4.10. CERTAIN LIMITATIONS
Notwithstanding anything herein to the contrary, the Company
agrees not to enter into any transaction which, by reason of any adjustment
hereunder, would cause the Current Warrant Price to be less than the par value
per share of the Common Shares.
5. NOTICES TO WARRANT HOLDERS
5. 1. NOTICE OF ADJUSTMENTS
Whenever the number of Common Shares for which this Warrant
is exercisable, or whenever the price at which a Common Share may be purchased
upon exercise of the Warrants, shall be adjusted pursuant to Section 4, the
Company shall forthwith prepare a certificate to be executed by the chief
financial officer of the Company setting forth, in reasonable detail, the event
requiring the adjustment and the method by which such adjustment was calculated
(including a description of the basis on which the Board of Directors of the
Company determined the fair value of any evidences of indebtedness, shares,
other securities or property or warrants or other subscription or purchase
rights referred to in Section 4.2 or 4.7(a)), specifying the number of Common
Shares for which this Warrant is exercisable and (if such adjustment was made
pursuant to Section 4.8 or 4.9) describing the number and kind of any other
shares or Other Property for which this Warrant is exercisable, and any change
in the purchase price or prices thereof; after giving effect to such adjustment
or change. The Company shall promptly cause a signed copy of such certificate
to be delivered to each Holder in accordance with Section 14.2. The Company
shall keep at its office or agency designated pursuant to Section 12 copies of
all such certificates and cause the same to be available for inspection at said
office during normal business hours by any Holder or any prospective purchaser
of a Warrant designated by a Holder thereof.
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5.2. NOTICE OF CERTAIN CORPORATE ACTION
The Holder shall be entitled to the same rights to receive
notice of corporate action as any holder of Common Shares.
6. NO IMPAIRMENT
The Company shall not by any action including, without
limitation, amending 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 actions as may be necessary or appropriate to protect the
rights of Holder against impairment. Without limiting the generality of the
foregoing, the Company will (a) take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable Common Shares upon the exercise of this Warrant, and (b) use
its best efforts to obtain all such authorizations, exemptions or consents from
any public regulatory body having jurisdiction thereof as may be necessary to
enable the Company to perform its obligations under this Warrant.
Upon the request of Holder, the Company will at any time
during the period this Warrant is outstanding acknowledge in writing, in form
reasonably satisfactory to Holder, the continuing validity of this Warrant and
the obligations of the Company hereunder.
7. RESERVATION AND AUTHORIZATION OF COMMON SHARES: REGISTRATION WITH OR
APPROVAL OF ANY GOVERNMENTAL AUTHORITY
From and after the date hereof, the Company shall at all
times reserve and keep available for issue upon the exercise of Warrants such
number of its authorized but unissued Common Shares as will be sufficient to
permit the exercise in full of all outstanding Warrants. All Common Shares
which shall be so issuable, when issued upon exercise of any Warrant and paid
for in accordance with the terms of such Warrant, shall be duly and validly
issued and fully paid and nonassessable, and not subject to preemptive rights.
Before taking any action which would cause an adjustment
reducing the Current Warrant Price below the then par value per share of the
Common Shares issuable upon exercise of the Warrants, the Company shall take
any corporate action which may be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Common Shares at such
adjusted Current Warrant Price.
- 15 -
<PAGE> 17
Before taking any action which would result in an adjustment
in the number of Common Shares for which this Warrant is exercisable or in the
Current Warrant Price, the Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction in respect thereof.
If any Common Shares required to be reserved for issuance
upon exercise of Warrants require registration or qualification with any
governmental authority in the United States or any other jurisdiction
(otherwise than as provided in Section 9) or any stock exchange before such
shares may be so issued, the Company will in good faith and as expeditiously as
possible and at its expense endeavor to cause such shares to be duly
registered.
8. TAKING OF RECORD: SHARE AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by the
Company to the holders of its Common Shares with respect to which any provision
of Section 4 refers to the taking of a record of such holders, the Company will
in each such case take such a record as of the close of business on a Business
Day. The Company will not at any time, except upon dissolution, liquidation or
winding, up of the Company, close its stock transfer books or Warrant transfer
books so as to result in preventing or delaying the exercise or transfer of any
Warrant.
9. RESTRICTIONS ON TRANSFERABILITY
This Warrant shall not be transferred or assigned, in whole
or in part, without the prior written consent of the Company, except to a
direct or indirect subsidiary of Holder. In addition to obtaining such consent,
no transfer or assignment of this Warrant or the Warrant Shares shall be made
before satisfaction of the conditions specified in this Section 9, which
conditions are intended to ensure compliance with the provisions of the
Securities Act with respect to the Transfer of any Warrant and the Warrant
Shares. Holder, by acceptance of this Warrant, agrees to be bound by the
provisions of this Section 9.
9. 1. RESTRICTIVE LEGEND
Except as otherwise provided in this Section 9, each
certificate for Warrant Shares initially issued upon the exercise of this
Warrant, and each certificate for Warrant Shares issued to any subsequent
transferee of any such certificate, shall be stamped or otherwise imprinted
with a legend in substantially the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act"),
or
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<PAGE> 18
any state securities laws and cannot be offered, sold or transferred in
the absence of registration or the availability of an exemption from
registration under the Act, applicable state securities laws and
regulations promulgated thereunder."
9.2. PROPOSED TRANSFERS
Prior to any Transfer or attempted Transfer of any Warrants
or any Restricted Common Shares, the holder of such Warrants or Restricted
Common Shares shall obtain from counsel to such Holder an opinion reasonably
satisfactory to the Company and upon which it may rely that the proposed
Transfer of such Warrants or such Restricted Common Shares may be effected
without registration under the Securities Act. Each certificate, if any,
evidencing such Restricted Common Shares issued upon such Transfer shall bear
the restrictive legend set forth in Section 9.1, and each Warrant issued upon
such Transfer shall bear the restrictive legend set forth on the first page
hereof unless in the opinion of Holder's counsel, which opinion shall be
reasonably satisfactory to the Company and upon which it may rely, such legend
is not required in order to ensure compliance with the Securities Act.
9.3. REGISTRATION.
The Holders of the Warrants and Warrant Shares have rights to
request and obtain registration of such Warrant Shares as provided for in a
Registration Rights Agreement made at even date herewith between the Company
and CORESTAFF, Inc. to which reference is hereby made.
10. SUPPLYING INFORMATION
The Company shall cooperate with each Holder of a Warrant and
each holder of Restricted Common Shares in supplying such information as may be
reasonably necessary for such holder to complete and file any information
reporting forms presently or hereafter required by the Commission as a
condition to the availability of an exemption from the Securities Act for the
sale of any Warrant or Restricted Common Shares.
11. LOSS OR MUTILATION
Upon receipt by the Company from any Holder of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and indemnity reasonably satisfactory
to it (it being understood that the written agreement of CORESTAFF, Inc. shall
be sufficient indemnity) and in case of mutilation upon surrender and
cancellation hereof, the Company will
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<PAGE> 19
execute and deliver in lieu hereof a new Warrant of like tenor to such Holder;
provided, in the case of mutilation, no indemnity shall be required if this
Warrant in identifiable form is surrendered to the Company for cancellation.
12. OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the
Company shall maintain an office or agency (which may be the principal
executive offices of the Company) where the Warrants may be presented for
exercise, registration of transfer, division or combination as provided in this
Warrant and shall advise the holders of the Warrants of any change in such
office or agency.
13. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by
Holder to purchase Common Shares, and no enumeration herein of the rights or
privileges of Holder hereof, shall give rise to any liability of such Holder
for the purchase price of any Common Shares or as a stockholder of the Company,
whether such liability is asserted by the Company or by creditors of the
Company.
14. MISCELLANEOUS
14.1 NONWAIVER AND EXPENSES
No course of dealing or any delay or failure to exercise any
right hereunder on the part of Holder shall operate as a waiver of such right
or otherwise prejudice Holder's rights, powers or remedies. If the Company
fails to make, when due, any payments provided for hereunder, or fails to
comply with any other provision of this Warrant, the Company shall pay to
Holder such amounts as shall be sufficient to cover any costs and expenses
including, but not limited to, reasonable legal fees, including those of court
proceedings, incurred by Holder in collecting any amounts due pursuant hereto
or in otherwise enforcing any of its rights, powers and remedies hereunder.
However, if such court proceedings are unsuccessfully instituted by Holder
against the Company, then Holder shall pay to the Company such amount as shall
be sufficient to cover the costs and expenses, including reasonable legal fees,
of the Company in its defense in such court proceedings.
14.2. NOTICE GENERALLY
Any notice, demand, request, consent, approval, declaration,
delivery or other communication hereunder to be made pursuant to the provisions
of this Warrant shall be sufficiently given or made if in writing and either
delivered in
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<PAGE> 20
person with receipt acknowledged or sent by registered or
certified mail, return receipt requested, postage prepaid or by telecopier or
other form of facsimile transmission, addressed as follows:
(a) If to the Company:
Citadel Computer Systems Incorporated
3811 Turtle Creek Boulevard, Suite 600
Dallas, TX 75219
Facsimile number: (214) 520-0034
Telephone number: (214) 520-9292
Attention: Steven B. Solomon,
President and Chief Executive Officer
With a copy to:
Wood, Exall & Bonnet, L.L.P.
12222 Merit Drive, Suite 880
Dallas, TX 75251
Facsimile number: (972) 991-9261
Telephone number: (972) 991-8510
Attention: David Wood, Esq.
If to Holder:
CORESTAFF, Inc.
4400 Post Oak Parkway, Suite 2000
Houston, TX 77027
Facsimile number: (281) 602-3430
Telephone number: (713) 548-3485
Attention: Kenneth R. Johnsen
- 19 -
<PAGE> 21
With a copy to:
Peter T. Dameris, Esq.
CORESTAFF, Inc.
4400 Post Oak Parkway, Suite 1130
Houston, TX 77027
Tel No.: (713) 548-3400
Fax No.: (713) 627-1059
or in either case at such other address as may be substituted by notice given
as herein provided. The giving of any notice required hereunder may be waived
in writing by the party entitled to receive such notice. Every notice, demand,
request, consent, approval, declaration, delivery or other communication
hereunder shall be deemed to have been duly given or served on the date on
which personally delivered, with receipt acknowledged, or three (3) Business
Days after the same shall have been deposited in the United States mail or on
the day on which received if given by telecopier or other form of facsimile
transmission or on the next Business Day if received after normal business
hours of the recipient party. Failure or delay in delivering copies of any
notice, demand, request, approval, declaration, delivery or other communication
to the person designated above to receive a copy shall in no way adversely
affect the effectiveness of such notice, demand, request, approval,
declaration, delivery or other communication.
14.3. REMEDIES
Each holder of Warrant and Warrant Shares, in addition to
being entitled to exercise all rights granted by law, including recovery of
damages, will be entitled to specific performance of its rights under this
Warrant.
14.4. SUCCESSORS AND ASSIGNS
Subject to the provisions of Section 3.1, this Warrant and
the rights evidenced hereby shall inure to the benefit of and be binding upon
the successors of the Company and the successors and assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant, and shall be enforceable by any such Holder.
14.5. AMENDMENT
This Warrant and all other Warrants may be modified or
amended or the provisions hereof waived with the written consent of the Company
and the Majority Holders, provided that no such Warrant may be modified or
amended to reduce the number of shares of Common Shares for which such Warrant
is exercisable (before giving effect to any adjustment as provided therein)
without the prior written consent of the Holder thereof.
- 20 -
<PAGE> 22
14.6 SEVERABILITY
Wherever possible, each provision of this Warrant shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Warrant shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Warrant.
14.7. HEADINGS
The headings used in this Warrant are for the convenience of
reference only and shall not, for any purpose, be considered in the
interpretation of this Warrant.
14.8. GOVERNING LAW
This Warrant shall be governed by the laws of the State of
Delaware, without regard to the provisions thereof relating to conflict of
laws.
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<PAGE> 23
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed and attested by its Secretary or an Assistant Secretary.
Dated: October 6, 1997 CITADEL COMPUTER SYSTEMS
INCORPORATED
By: /s/ Steven B. Solomon
---------------------------------
Steven B. Solomon
President and Chief
Executive Officer
Accepted and Agreed To:
CORESTAFF, INC.
By: /s/ Peter T. Dameris
--------------------------
Peter T. Dameris
Senior Vice President, General Counsel
and Secretary
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<PAGE> 24
EXHIBIT A
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for the purchase of Common Shares of Citadel Computer Systems
Incorporated, and herewith makes payment therefor, all at the price and on the
terms and conditions specified in this Warrant and requests that certificates
for the Common Shares hereby purchased (and any securities or other property
issuable upon such exercise) be issued in the name of and delivered to
_________________________ whose address is ___________________________________.
--------------------------------
(Name of Registered Owner)
--------------------------------
(Signature of Registered Owner)
--------------------------------
(Street Address)
--------------------------------
(City) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with the name as
written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE> 25
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this
Warrant hereby sells, assigns and transfers unto the Assignee named below all
of the rights of the undersigned under this Warrant, with respect to the number
of Common Shares set forth below:
Name and Address of Assignee No. of Common Shares
- -------------------------------------------------
and does hereby irrevocably constitute and appoint attorney-in-fact to register
such transfer on the books of Citadel Computer Systems Incorporated maintained
for the purpose, with full power of substitution in the premises.
Dated:
----------------------- Print Name:
--------------------------------
Signature:
----------------------------------
Witness:
-------------------------------------
NOTICE: (1) The signature on this assignment must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
(2) The sale, transfer or assignment of this Warrant shall not be
effective, unless made in full compliance with Section 9 hereof.
<PAGE> 1
EXHIBIT 99(d)
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is made as of October 6, 1997, by and among
CITADEL COMPUTER SYSTEMS INCORPORATED, a Delaware corporation (the "COMPANY")
and CORESTAFF, INC., a Delaware corporation (the "INVESTOR").
RECITALS
A. The Company and the Investor are parties to a Purchase
Agreement of even date herewith (the "PURCHASE AGREEMENT"). In order to induce
the Investor to enter into the Purchase Agreement, the Company has agreed to
provide the registration rights set forth in this Agreement. The execution and
delivery of this Agreement is a condition to the Closing under the Purchase
Agreement.
B. Unless otherwise provided in this Agreement, capitalized
terms used herein shall have the meanings set forth in Section 8 hereof.
AGREEMENT
The parties hereto agree as follows:
1. DEMAND REGISTRATIONS.
(a) REQUESTS FOR REGISTRATION. At any time
after the first anniversary of the date hereof, the holders of a majority of
the Registrable Securities may request registration under the Securities Act of
all or any portion of their Registrable Securities on Form S-1, SB-2 or any
similar long-form registration ("LONG-FORM REGISTRATIONS"), and the holders of
a majority of the Registrable Securities may request registration under the
Securities Act of all or any portion of their Registrable Securities on Form
S-2 or S-3) or any similar short-form registration ("SHORT-FORM REGISTRATIONS")
if available. All registrations requested pursuant to this Section 1(a) are
referred to herein as "DEMAND REGISTRATIONS". Each request for a Demand
Registration shall specify the approximate number of Registrable Securities
requested to be registered and the anticipated per share price range for such
offering. Within ten days after receipt of any such request, the Company shall
give written notice of such requested registration to all other holders of
Registrable Securities and shall include in such registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion therein within 15 days after the receipt of the Company's notice.
(b) LONG-FORM REGISTRATIONS. The holders of
Registrable Securities shall be entitled to request (i) one (1) Long-Form
Registration in which the Company shall pay all Registration Expenses
("COMPANY-PAID LONG-FORM REGISTRATIONS") and (ii) an unlimited number of
Long-Form Registrations each in which the holders of Registrable Securities
shall pay
<PAGE> 2
their share of the Registration Expenses as set forth in Section 5 hereof. Each
such Long Form Registration shall be for at least $1,000,000 of the Registrable
Securities or 25% of such Registrable Securities. A registration shall not
count as one of the permitted Long-Form Registrations until it has become
effective and no Company-paid Long-Form Registration shall count as one of the
permitted Long-Form Registrations unless the holders of Registrable Securities
are able to register and sell at least 75% of the Registrable Securities
requested to be included in such registration (unless such registration is a
shelf registration, in which event the holders of Registrable Securities have
been able to register at least 75% of the Registrable Securities requested to
be included in such registration); provided that in any event the Company shall
pay all Registration Expenses in connection with any registration initiated as
a Company-paid Long-Form Registration whether or not it has become effective
and whether or not such registration has counted as one of the permitted
Company-paid Long-Form Registrations.
(c) SHORT-FORM REGISTRATIONS. In addition to
the Long-Form Registrations provided pursuant to Section 1(b), the holders of
at least 40% of the Registrable Securities shall be entitled to request an
unlimited number of Short-Form Registrations in which the Company shall pay all
Registration Expenses. Demand Registrations shall be Short-Form Registrations
whenever the Company is permitted to use any applicable short form.
(d) PRIORITY ON DEMAND REGISTRATIONS. The
Company shall not include in any Demand Registration any securities which are
not Registrable Securities without the prior written consent of the holders of
a majority of the Registrable Securities included in such registration. If a
Demand Registration is an underwritten offering and the managing underwriters
advise the Company in writing that in their opinion the number of Registrable
Securities and, if permitted hereunder, other securities requested to be
included in such offering exceeds the number of Registrable Securities and
other securities, if any, which can be sold in an orderly manner in such
offering within a price range acceptable to the holders of a majority of the
Registrable Securities to be included in such registration therein, without
adversely affecting the marketability of the offering, the Company shall
include in such registration prior to the inclusion of any securities which are
not Registrable Securities (i) first, the number of Registrable Securities
requested to be included held by the Investor or its permitted transferees
which in the opinion of such underwriters can be sold in an orderly manner
within the price range of such offering, pro rata among the respective holders
thereof on the basis of the amount of Registrable Securities owned by each such
holder and (ii) second, other registrable securities of the Company included
therein, pro rata among such holders on the basis of the amount of Registrable
Securities owned by each such holder. Without the consent of the Company and
the holders of a majority of the registrable securities included in such
registration, any Persons other than holders of Registrable Securities who
participate in Demand Registrations which are not at the Company's expense must
pay their share of the Registration Expenses as provided in Section 5 hereof.
(e) RESTRICTIONS ON LONG-FORM REGISTRATIONS.
The Company shall not be obligated to effect any Long-Form Registration within
180 days after the effective date of a previous Long-Form Registration or a
previous registration in which the holders of Registrable Securities were given
piggyback rights pursuant to Section 2 and in which there was no reduction
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<PAGE> 3
in the number of Registrable Securities requested to be included.
Notwithstanding the foregoing, in the event that all Registrable Securities are
eligible for immediate resale under Rule 144(k), the holders shall sell such
Shares under Rule 144 and shall not be entitled to any Long-Form Registration.
The Company may postpone for up to 180 days the filing or the effectiveness of
a registration statement for a Demand Registration if the Company and the
holders of a majority of the Registrable Securities agree that such Demand
Registration would reasonably be expected to have a material adverse effect on
any proposal or plan by the Company or any of its Subsidiaries to engage in any
acquisition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer, reorganization or similar transaction;
provided that in such event, the holders of Registrable Securities initially
requesting such Demand Registration shall be entitled to withdraw such request
and, if such request is withdrawn, such Demand Registration shall not count as
one of the permitted Demand Registrations hereunder and the Company shall pay
all Registration Expenses in connection with such registration. The Company may
delay a Demand Registration hereunder only once in any twelve-month period.
(f) SELECTION OF UNDERWRITERS. The holders of a
majority of the Registrable Securities included in any Demand
Registration/Long-Form Registration shall have the right to select the
investment banker(s) and manager(s) to administer the offering.
(g) OTHER REGISTRATION RIGHTS. Except as
provided in this Agreement, the Company shall not grant to any Persons the
right to request the Company to register any equity securities of the Company,
or any securities convertible or exchangeable into or exercisable for such
securities, without the prior written consent of the holders of a majority of
the Registrable Securities.
2. PIGGYBACK REGISTRATIONS.
(a) RIGHT TO PIGGYBACK. Whenever the Company
proposes to register any of its securities under the Securities Act (other than
pursuant to a Demand Registration) and the registration form to be used may be
used for the registration of Registrable Securities (a "PIGGYBACK
REGISTRATION"), the Company shall give prompt written notice (in any event
within three business days after its receipt of notice of any exercise of
demand registration rights other than under this Agreement) to all holders of
Registrable Securities of its intention to effect such a registration and shall
include in such registration all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within 25 days
after the receipt of the Company's notice.
(b) PIGGYBACK EXPENSES. The Registration
Expenses of the holders of Registrable Securities shall be paid by the Company
in all Piggyback Registrations.
(c) PRIORITY ON PRIMARY REGISTRATIONS. If a
Piggyback Registration is an underwritten primary registration on behalf of the
Company, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in an orderly manner in such
offering within a price range acceptable to the Company, the Company shall
include in such
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<PAGE> 4
registration (i) first, the securities the Company proposes to sell, (ii)
second, the Registrable Securities requested to be included in such
registration, pro rata among the holders of such Registrable Securities on the
basis of the number of shares owned by each such holder, and (iii) third, other
securities requested to be included in such registration; provided, however,
that in any Piggyback Registration other than the Initial Public Offering of
the Company's Common Stock, the holders of Registrable Securities shall be
permitted to include in any such registration on pro rata basis not less than
25% of the number of shares of Common Stock proposed to be sold in such
offering, unless the holders of a majority of the Registrable Securities
requesting such Piggyback Registration agree in writing to reduce such position
or to waive their rights under this proviso.
(d) PRIORITY ON SECONDARY REGISTRATIONS. If a
Piggyback Registration is an underwritten secondary registration on behalf of
holders of the Company's securities, and the managing underwriters advise the
Company in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in an
orderly manner in such offering within a price range acceptable to the holders
of a majority of the Registrable Securities to be included in such
registration, the Company shall include in such registration (i) first, the
securities requested to be included therein by the holders requesting such
registration, (ii) second, the Registrable Securities requested to be included
in such registration, pro rata among the holders of such Registrable Securities
on the basis of the number of shares owned by each such holder, and (iii)
third, other securities requested to be included in such registration.
(e) SELECTION OF UNDERWRITERS. If any Piggyback
Registration is an underwritten offering, the selection of investment banker(s)
and manager(s) for the offering must be approved by the holders of a majority
of the Registrable Securities included in such Piggyback Registration. Such
approval shall not be unreasonably withheld or delayed.
(f) OTHER REGISTRATIONS. If the Company has
previously filed a registration statement with respect to Registrable
Securities pursuant to Section 1 or pursuant to this Section 2, and if such
previous registration has not been withdrawn or abandoned, the Company shall
not file or cause to be effected any other registration of any of its equity
securities or securities convertible or exchangeable into or exercisable for
its equity securities under the Securities Act (except on Form S-4, Form S-8 or
any successor form), whether on its own behalf or at the request of any holder
or holders of such securities, until a period of at least 180 days has elapsed
from the effective date of such previous registration, unless a shorter period
of time is approved by the holders of a majority of the Registrable Securities
included in such previous registration, or unless such registration is a "shelf
registration" on Form S-3 that the holders of Registrable Securities have
requested to be kept effective for a period of more than 180 days.
- 4 -
<PAGE> 5
3. HOLDBACK AGREEMENTS.
(a) Each holder of Registrable Securities shall
not effect any public sale or distribution (including sales pursuant to Rule
144) of equity securities of the Company, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days prior to
and the 180-day period beginning on the effective date of any underwritten
Demand Registration or any underwritten Piggyback Registration in which
Registrable Securities are included (except as part of such underwritten
registration), unless the underwriters managing the registered public offering
otherwise agree.
(b) The Company (i) shall not effect any public
sale or distribution of its equity securities, or any securities convertible
into or exchangeable or exercisable for such securities, during the seven days
prior to and during the 180-day period beginning on the effective date of any
underwritten Demand Registration or any underwritten Piggyback Registration
(except as part of such underwritten registration or pursuant to registrations
on Form S-4, Form S-8 or any successor form), unless the underwriters managing
the registered public offering otherwise agree, and (ii) shall cause each
holder of its Common Stock, or any securities convertible into or exchangeable
or exercisable for Common Stock, purchased from the Company at any time after
the date of this Agreement (other than in a registered public offering) to
agree not to effect any public sale or distribution (including sales pursuant
to Rule 144) of any such securities during such period (except as part of such
underwritten registration, if otherwise permitted), unless the underwriters
managing the registered public offering otherwise agree.
4. REGISTRATION PROCEDURES. Whenever the holders of
Registrable Securities have requested that any Registrable Securities be
registered pursuant to this Agreement, the Company shall use its best efforts
to effect the registration and the sale of such Registrable Securities in
accordance with the intended method of disposition thereof, and pursuant
thereto the Company shall as expeditiously as possible:
(a) prepare and file with the Securities and
Exchange Commission a registration statement with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become effective (provided that before filing a registration statement or
prospectus or any amendments or supplements thereto, the Company shall furnish
to the counsel selected by the holders of a majority of the Registrable
Securities covered by such registration statement copies of all such documents
proposed to be filed, which documents shall be subject to the review and
comment of such counsel);
(b) notify each holder of Registrable Securities
of the effectiveness of each registration statement filed hereunder and prepare
and file with the Securities and Exchange Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for a period of not less than 180 days and comply with the provisions
of the Securities Act with respect to the disposition of all securities covered
by such registration statement during such period in accordance with the
intended methods of disposition by the sellers thereof set forth in
- 5 -
<PAGE> 6
such registration statement; provided, however, that if the Company is eligible
to use Form S-3, the holders of Registrable Securities may require the Company
to keep such registration effective as a "shelf registration" for a period of
up to two (2) years;
(c) furnish to each seller of Registrable
Securities such number of copies of such registration statement, each amendment
and supplement thereto, the prospectus included in such registration statement
(including each preliminary prospectus) and such other documents as such seller
may reasonably request in order to facilitate the disposition of the
Registrable Securities owned by such seller;
(d) use its best efforts to register or qualify
such Registrable Securities under such other securities or blue sky laws of
such jurisdictions as any seller reasonably requests and do any and all other
acts and things which may be reasonably necessary or advisable to enable such
seller to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller (provided that the Company shall not be
required to (i) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this subparagraph, (ii)
subject itself to taxation in any such jurisdiction or (iii) consent to general
service of process in any such jurisdiction);
(e) notify each seller of such Registrable
Securities, at any time when a prospectus relating thereto is required to be
delivered under the Securities Act, of the happening of any event as a result
of which the prospectus included in such registration statement contains an
untrue statement of a material fact or omits any fact necessary to make the
statements therein not misleading, and, at the request of any such seller, the
Company shall prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus shall not contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be
listed on each securities exchange on which similar securities issued by the
Company are then listed and, if not so listed, to be listed on the NASD
automated quotation system and, if listed on the NASD automated quotation
system, use its best efforts to secure designation of all such Registrable
Securities covered by such registration statement as a NASDAQ "national market
system security" within the meaning of Rule 11Aa2-1 of the Securities and
Exchange Commission or, failing that, to secure NASDAQ authorization for such
Registrable Securities and, without limiting the generality of the foregoing,
to arrange for at least two market makers to register as such with respect to
such Registrable Securities with the NASD;
(g) provide a transfer agent and registrar for
all such Registrable Securities not later than the effective date of such
registration statement;
(h) enter into such customary agreements
(including underwriting agreements in customary form) and take all such other
actions as the holders of a majority of the Registrable Securities being sold
or the underwriters, if any, reasonably request in order to
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<PAGE> 7
expedite or facilitate the disposition of such Registrable Securities
(including effecting a stock split or a combination of shares);
(i) make available for inspection by any seller
of Registrable Securities, any underwriter participating in any disposition
pursuant to such registration statement and any attorney, accountant or other
agent retained by any such seller or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors, employees and independent accountants to
supply all information reasonably requested by any such seller, underwriter,
attorney, accountant or agent in connection with such registration statement;
(j) otherwise use its best efforts to comply
with all applicable rules and regulations of the Securities and Exchange
Commission, and make available to its security holders, as soon as reasonably
practicable, an earnings statement covering the period of at least twelve
months beginning with the first day of the Company's first full calendar
quarter after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act
and Rule 158 thereunder;
(k) permit any holder of Registrable Securities
which holder, in its sole and exclusive judgment, might be deemed to be an
underwriter or a controlling person of the Company, to participate in the
preparation of such registration or comparable statement and to require the
insertion therein of material, furnished to the Company in writing, which in
the reasonable judgment of such holder and its counsel should be included;
(l) in the event of the issuance of any stop
order suspending the effectiveness of a registration statement, or of any order
suspending or preventing the use of any related prospectus or suspending the
qualification of any common stock included in such registration statement for
sale in any jurisdiction, the Company shall use its best efforts promptly to
obtain the withdrawal of such order;
(m) use its best efforts to cause such
Registrable Securities covered by such registration statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to enable the sellers thereof to consummate the disposition of such
Registrable Securities;
(n) obtain a cold comfort letter from the
Company's independent public accountants in customary form and covering such
matters of the type customarily covered by cold comfort letters as the holders
of a majority of the Registrable Securities being sold reasonably request
(provided that such Registrable Securities constitute at least 10% of the
securities covered by such registration statement); and
(o) If the offering is underwritten and at the
request of any seller of Registrable Securities, use its best efforts to
furnish on the date that Registrable Securities are delivered to the
underwriters for sale pursuant to such registration an opinion dated such date
of counsel representing the Company for the purposes of such registration,
addressed to the
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<PAGE> 8
underwriters and to such seller, stating that such registration statement has
become effective under the Securities Act and that (i) to the best knowledge of
such counsel, no stop order suspending the effectiveness thereof has been
issued and no proceedings for that purpose have been instituted or are pending
or contemplated under the Securities Act, (ii) the registration statement, the
related prospectus and each amendment or supplement thereof comply as to form
in all material respects with the requirements of the Securities Act (except
that such counsel need not express any opinion as to financial statements
contained therein) and (iii) to such other effects as reasonably may be
requested by counsel for the underwriters or by such seller or its counsel.
5. REGISTRATION EXPENSES.
(a) All expenses incident to the Company's
performance of or compliance with this Agreement, including without limitation
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery
expenses, fees and disbursements of custodians, and fees and disbursements of
counsel for the Company and all independent certified public accountants,
underwriters (excluding discounts and commissions) and other Persons retained
by the Company (all such expenses being herein called "REGISTRATION EXPENSES"),
shall be borne as provided in this Agreement, except that the Company shall, in
any event, pay its internal expenses (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit or quarterly review, the
expense of any liability insurance and the expenses and fees for listing the
securities to be registered on each securities exchange on which similar
securities issued by the Company are then listed or on, the NASD automated
quotation system.
(b) In connection with each Demand Registration
and each Piggyback Registration, the Company shall reimburse the holders of
Registrable Securities included in such registration for the reasonable fees
and disbursements (up to $5,000) of one counsel chosen by the holders of a
majority of the Registrable Securities included in such registration for the
purpose of rendering a legal opinion on behalf of such holders in connection
with any underwritten Demand Registration or Piggyback Registration.
(c) To the extent Registration Expenses are not
required to be paid by the Company, each holder of securities included in any
registration hereunder shall pay those Registration Expenses allocable to the
registration of such holder's securities so included, and any Registration
Expenses not so allocable shall be payable by all sellers of securities
included in such registration in proportion to the aggregate selling price of
the securities to be so registered.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify, to the
extent permitted by law, each holder of Registrable Securities, its officers
and directors and each Person who controls such holder (within the meaning of
the Securities Act) against all losses, claims, damages, liabilities and
expenses caused by any untrue or alleged untrue statement of material fact
contained in any registration statement, prospectus or preliminary prospectus
or any amendment
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<PAGE> 9
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by such holder expressly for
use therein or by such holder's failure to deliver a copy of the registration
statement or prospectus or any amendments or supplements thereto after the
Company has furnished such holder with a sufficient number of copies of the
same. In connection with an underwritten offering, the Company shall indemnify
such underwriters, their officers and directors and each Person who controls
such underwriters (within the meaning of the Securities Act) to the same extent
as provided above with respect to the indemnification of the holders of
Registrable Securities.
(b) In connection with any registration
statement in which a holder of Registrable Securities is participating, each
such holder shall furnish to the Company in writing such information and
affidavits as the Company reasonably requests for use in connection with any
such registration statement or prospectus and, to the extent permitted by law,
shall indemnify the Company, its directors and officers and each Person who
controls the Company (within the meaning of the Securities Act) against any
losses, claims, damages, liabilities and expenses resulting from any untrue or
alleged untrue statement of material fact contained in the registration
statement, prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but only to the extent that such untrue statement or omission is
contained in any information or affidavit so furnished in writing by such
holder; provided that the obligation to indemnify shall be individual, not
joint and several, for each holder and shall be limited to the net amount of
proceeds received by such holder from the sale of Registrable Securities
pursuant to such registration statement.
(c) Any Person entitled to indemnification
hereunder shall (i) give prompt written notice to the indemnifying party of any
claim with respect to which it seeks indemnification (provided that the failure
to give prompt notice shall not impair any Person's right to indemnification
hereunder to the extent such failure has not prejudiced the indemnifying party)
and (ii) unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist with
respect to such claim, permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified party. If
such defense is assumed, the indemnifying party shall not be subject to any
liability for any settlement made by the indemnified party without its consent
(but such consent shall not be unreasonably withheld). An indemnifying party
who is not entitled to, or elects not to, assume the defense of a claim shall
not be obligated to pay the fees and expenses of more than one counsel for all
parties indemnified by such indemnifying party with respect to such claim,
unless in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim.
(d) The indemnification provided for under this
Agreement shall remain in full force and effect regardless of any investigation
made by or on behalf of the indemnified party or any officer, director or
controlling Person of such indemnified party and
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<PAGE> 10
shall survive the transfer of securities. The Company also agrees to make such
provisions, as are reasonably requested by any indemnified party, for
contribution to such party in the event the Company's indemnification is
unavailable for any reason.
7. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No
Person may participate in any registration hereunder unless such Person:
(a) in the case of a registration which is
underwritten, agrees to sell such Person's securities on the basis provided in
any underwriting arrangements approved by the Person or Persons entitled
hereunder to approve such arrangements; provided, however, that no holder of
Registrable Securities included in any underwritten registration shall be
required to make any representations or warranties to the Company or the
underwriters (other than representations and warranties regarding such holder
and such holder's intended method of distribution) or to undertake any
indemnification obligations to the Company or the underwriters with respect
thereto, except as otherwise provided in Section 6 hereof;
(b) as expeditiously as possible, notifies the
Company, at any time when a prospectus relating to such Person's Registrable
Securities is required to be delivered under the Securities Act, of the
happening of any event as a result of which such prospectus contains an untrue
statement of a material fact or omits any fact necessary to make the statements
therein not misleading;
(c) complies with all reasonable requests made
by the Company or its counsel with respect to the registration of such Person's
Registrable Securities, including, without limitation, providing access to all
relevant books and records; and
(d) completes, executes and delivers all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other usual and customary documents necessary or appropriate with respect to
the offering of such Person's Registrable Securities, and in the case of a
registration which is underwritten, necessary or appropriate under the terms of
such underwriting arrangements (subject to the provision in paragraph (a)
above).
8. DEFINITIONS.
(a) The term "INITIAL PUBLIC OFFERING" shall
mean the first registered public offering of the Company's Common Stock by the
Company after the date hereof under the Securities Act with net proceeds to the
Company of not less than $5 million.
(b) "REGISTRABLE SECURITIES" means (i) any
Common Stock issued to the Investor pursuant to the Purchase Agreement or upon
exercise of the Warrants, (ii) any other Common Stock issued or issuable with
respect to the securities referred to in clause (i) by way of a stock dividend
or stock split or in connection with an exchange or combination of shares,
recapitalization, merger, consolidation or other reorganization, and (iii) any
other shares of Common Stock held by the Investor. As to any particular
Registrable Securities, such securities shall cease to be Registrable
Securities when they have been distributed to the public pursuant to
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<PAGE> 11
a offering registered under the Securities Act or are eligible to be
immediately sold to the public through a broker, dealer or market maker in
compliance with Rule 144(k) under the Securities Act (or any similar rule then
in force). For purposes of this Agreement, a Person shall be deemed to be a
holder of Registrable Securities whenever such Person has the right to acquire
such Registrable Securities (upon conversion or exercise in connection with a
transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually be effected.
(b) Unless otherwise stated, other capitalized
terms contained herein have the meanings set forth in the Purchase Agreement.
9. MISCELLANEOUS.
(a) NO INCONSISTENT AGREEMENTS. The Company
shall not hereafter enter into any agreement with respect to its securities
which is inconsistent with or violates the rights granted to the holders of
Registrable Securities in this Agreement.
(b) ADJUSTMENTS AFFECTING REGISTRABLE
SECURITIES. The Company shall not take any action, or permit any change to
occur, with respect to its securities which would adversely affect the ability
of the holders of Registrable Securities to include such Registrable Securities
in a registration undertaken pursuant to this Agreement or which would adversely
affect the marketability of such Registrable Securities in any such registration
(including, without limitation, effecting a stock split or a combination of
shares).
(c) REMEDIES. Any Person having rights under
any provision of this Agreement shall be entitled to enforce such rights
specifically to recover damages caused by reason of any breach of any provision
of this Agreement and to exercise all other rights granted by law. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in
its sole discretion apply to any court of law or equity of competent
jurisdiction (without posting any bond or other security) for specific
performance and for other injunctive relief in order to enforce or prevent
violation of the provisions of this Agreement.
(d) AMENDMENTS AND WAIVERS. Except as otherwise
provided herein, the provisions of this Agreement may be amended or waived only
upon the prior written consent of the Company and holders of at least 75% of
the Registrable Securities.
(e) SUCCESSORS AND ASSIGNS. All covenants and
agreements in this Agreement by or on behalf of any of the parties hereto shall
bind and inure to the benefit of the respective successors and assigns of the
parties hereto whether so expressed or not. In addition, whether or not any
express assignment has been made, the provisions of this Agreement which are
for the benefit of purchasers or holders of Registrable Securities are also for
the benefit of, and enforceable by, any subsequent holder of registrable
Securities.
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<PAGE> 12
(f) SEVERABILITY. Whenever possible, each
provision of this Agreement shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this
Agreement is held to be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Agreement.
(g) COUNTERPARTS. This Agreement may be
executed simultaneously in two or more counterparts, any one of which need not
contain the signatures of more than one party, but all such counterparts taken
together shall constitute one and the same Agreement.
(h) DESCRIPTIVE HEADINGS. The descriptive
headings of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
(i) GOVERNING LAW. The corporate law of the
State of Delaware shall govern all issues and questions concerning the relative
rights of the Company and its stockholders. All other issues and questions
concerning the construction, validity, interpretation and enforcement of this
Agreement and the exhibits and schedules hereto shall be governed by, and
construed in accordance with, the laws of the State of Texas, without giving
effect to any choice of law or conflict of law rules or provisions (whether of
the State of Texas or any other jurisdiction) that would cause the application
of the laws of any jurisdiction other than the State of Texas.
(j) NOTICES. All notices, demands or other
communications to be given or delivered under or by reason of the provisions of
this Agreement shall be in writing and shall be deemed to have been given when
delivered personally to the recipient, sent to the recipient by reputable
overnight courier service (charges prepaid) or 48 hours after deposited in the
United States mail, first class, to the recipient by postage prepaid or by
facsimile. Such notices, demands and other communications shall be sent to the
Investor and each other holder at the addresses indicated on the Schedule of
Holders and to the Company at the address of its corporate headquarters or to
such other address or to the attention of such other person as the recipient
party has specified by prior written notice to the sending party.
(k) NEW PARTIES. During the term of this
Agreement, the Company may, with the consent of the Company's Board of
Directors and the holders of more than 60% of the Registrable Securities, add
new Persons as parties to this Agreement by executing a supplemental signature
page hereto, and the Schedule of Holders attached hereto as Exhibit A shall be
revised and updated accordingly.
(l) TERMINATION OF REGISTRATION RIGHTS. All
registration rights granted hereunder will expire at such time as 75% of the
Registrable Securities originally issued by the Company to the Investor
(including those issuable upon exercise of the Warrants) have been sold to the
public (either in an offering registered under the Securities Act or pursuant
to Rule 144 promulgated under the Securities Act), and the average daily
trading volume of the Common Stock over the six-month period immediately
preceding the termination is at least one-quarter of one percent (1/4%) of the
Company's outstanding Common Stock.
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<PAGE> 13
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
CITADEL COMPUTER SYSTEMS
INCORPORATED
By: /s/ Steven B. Solomon
----------------------------------
Name: Steven B. Solomon
Title: President and Chief Executive Officer
CORESTAFF, INC.
By: /s/ Peter T. Dameris
----------------------------------
Name: Peter T. Dameris
Title: Senior Vice President
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<PAGE> 14
EXHIBIT A TO
REGISTRATION RIGHTS AGREEMENT
SCHEDULE OF HOLDERS
INVESTOR:
CORESTAFF, INC.
4400 Post Oak Parkway
Suite 1130
Houston, Texas 77027
Attention: Peter T. Dameris
Senior Vice President, General Counsel
and Secretary
